Financial Conduct Authority encouraged by Covid-19 response and sector resilience

Written on 28 Jul 2020

UK regulator stresses the importance of contingency planning for the industry, including wealth managers and advisors, and hints that more outcome-based regulation lies ahead

The wealth management and advisory sector responded well to the onset of the Covid-19 crisis, according to Megan Butler, executive director of supervision (investment, wholesale and specialists) for the Financial Conduct Authority (FCA).

In a speech on 4 June 2020 to The Personal Investment Management and Financial Advice Association's (PIMFA) Virtual Festival, Butler told the PIMFA audience: "In operational terms, this industry has responded well."

The FCA's praise of the sector's performance during the pandemic came alongside a detailed self-assessment of the UK financial regulator's own response to the crisis and an outline of its priorities and areas of focus.

Continuity and resilience

The FCA believes there had been no significant erosion of clients’ access to services and business continuity arrangements appear to be working. Butler observed: "Overall it feels as if firms are coping and adapting to this new normal."

She drew attention to the FCA's own work to provide immediate relief, such as on mortgages and unsecured lending products, as well as the inevitable delay to other planned regulatory activities to allow firms to focus on their response to the crisis.

The regulator has begun to transition from the immediate response to the crisis towards a focus on its longer-term impacts and future strategy. The FCA's response to the pandemic is designed to ensure:

  • a good level of operational resilience among firms;
  • an understanding of the financial resilience of firms so that where they fail they can do so in an orderly manner;
  • the fair treatment of customers; and
  • that customers are aware of the risk posed by scams and are sufficiently protected against them.

Contingency plans

The FCA expects all firms to be able to deal with major events by having in place properly tested contingency plans. To ensure strong operational resilience, the FCA points to the findings of its operational resilience consultation paper. In summary, firms should:

  • identify important business services by considering how disruption to the services they provide could have impacts beyond their own commercial interests;
  • set a tolerance for disruption in each business service and make sure that they can stay within the parameters of these tolerances during severe but foreseeable scenarios; and
  • map and test critical business services to show weakness in their operational resilience, which can then be improved if necessary.

It also emerged that the FCA will review the contingency plans of a range of firms. Although a majority have made positive changes quickly during the initial stages of the Covid-19 pandemic, firms will need to be flexible as changing circumstances continue to challenge their operational resilience.

However, Butler acknowledged the significant pressure on firms and their financial resilience as a result of the Covid-19 pandemic. Loss of income for firms could give rise to harm to customers if firms are tempted to economise on their internal systems and controls, as this increases the risk of financial crime and market abuse taking place.

The preservation of client assets and money were presented as central to the FCA's focus on the wealth management sector. The regulator has identified a set of outcomes in relation to the wealth management sector, in a bid to be clearer with firms about what it expects them to achieve and how it is targeting its own work to achieve them. These comprise:

  • the maintenance of adequate arrangements to protect client money and custody assets;
  • the suitability of advice and discretionary investment decisions;
  • the centrality of firms acting with integrity, including by charging appropriate fees for services delivered and preventing fraud; and
  • the prevention of financial crime and market abuse through adequate controls and governance.

The future of regulation

The financial services industry continues to evolve, given changing consumer attitudes and the emergence of new products and services, said Butler. Technology and data have become increasingly central to how financial services are consumed by customers. The future of regulation needs also to be seen in the context of the UK's new position in Europe, coinciding with the drawing to a close of more than a decade of post-financial crisis regulatory change.

A more outcomes-based approach to regulation lies ahead, she said, and the regulator will start from the standpoint of financial services end users. She acknowledged "the present number and complexity" of potentially applicable rules.

She concluded: "However, there is a strong case for taking a step back and assessing whether the regulatory framework is delivering against more than just rules, but rather against ultimate outcomes for users of financial services."

OC Comment

Although it is difficult to foresee how such a change in approach might play out in practice, a greater focus on outcomes for firms may be welcome in terms of the flexibility it could bring, but there is also likely to be wariness that this may come at the cost of certainty.