The first six months of the FCA's new approach of 'regulating for growth'?

At the start of this year, the Financial Conduct Authority (FCA) responded to the government's calls to remove regulatory barriers to economic growth with a swathe of existing and new proposals to "regulate for growth".

In the past six months, the FCA has published its five-year strategy, its annual work programme, and a long list of consultation papers, policy statements, and announcements – all heavily cloaked in the language of lifting the regulatory burden on firms, taking a more flexible approach to supervision and doing what the FCA can to encourage growth.

Many in the financial services sector are asking whether these indicate meaningful change that will ease the cost of compliance or whether the reality is that these proposals fail to address the real difficulties facing the industry. Could their proposals increase uncertainty and costs, limiting innovation and undermining the government's policy ambitions?

To help answer these questions, Osborne Clarke hosted an invite-only roundtable in June held on a Chatham House rules basis for compliance stakeholders from across the industry. The discussion on the first six months of the FCA's new agenda explored the UK financial regulator's recent promises and proposals, assessed whether a lift in the regulatory burden would be felt and what the FCA has not yet addressed.

Key FCA Themes

FCA culture and approach to supervision

There is concern that the FCA's internal culture does not match its policy agenda and it asks firms to lean into risk in order to innovate and promote growth while not changing its own approach. An unwillingness among the FCA's more junior staff to accept risk and a high staff turnover means some firms have found it difficult to forge effective supervision relationships.

Similarly, the FCA has indicated it will streamline authorisations.  But without staff that are familiar with relevant market activity or products, the authorisation process can involve rounds of follow-up questions for clarity on matters on which there is a lack of expertise and insight.

The FCA has promised more dedicated contact points for more firms, including a 50% increase in dedicated supervisors for early and high-growth firms.   The FCA also wants a more flexible approach with less intensive supervision for those seeking to "do the right thing". However, a lack of dedicated points of supervision and no opportunities for "no names" conversations to check matters makes it difficult for firms to assess whether they are doing the "right thing".  As a result many firms are uncomfortable to make changes that might expose them to '"intensive" supervision or enforcement action.

The lack of regular dialogue underpins a wider feeling of a lack of trust that is necessary for effective and efficient relationships. The FCA wants to rebuild this trust but that will be forged through actions and regular engagement rather than public statements.

Less prescriptive rules and more flexibility

The FCA has promised more flexibility in its rulemaking so that firms can innovate and tailor their approach to suit their business, customers, and risk profile. However, the removal of prescriptive rules may actually increase the administrative burden on firms, requiring them to create new policies to document their decision-making to justify any new measures, without any certainty that they meet the FCA's expectations.

For example, proposals to replace a requirement on insurance firms to review their products annually with the "flexibility" of periodic reviews determined by the "risks and characteristics" of each product, could, in principle, provide flexibility. However, again, firms will need to justify their decisions, with the risk that the FCA subsequently disagrees on the appropriateness with the benefit of hindsight.

This "permissive" approach to compliance also has the potential for misalignment between the FCA's policy intentions and the Financial Ombudsman Service's (FOS) approach after the event. Proposals to allow customers to remortgage more easily and for firms to discuss options outside a regulated advice process not only introduce the additional burden of ensuring that customers understand they are not receiving regulated advice and preventing employees from inadvertently providing advice but, should that customer later complain to the FOS, the ombudsman might well take a different view on whether a "consultation" was advice or the re-mortgage was affordable on a "fair and reasonable" basis. 

Shrinking the FCA Handbook and retiring old guidance

The FCA will remove a number of reporting requirements and a large volume of related handbook material. In many cases, announcements that it intended to strip out "hundreds" of pages of FCA Handbook material are in reality a reshuffle: For example, the suggested 250-page reduction of the enforcement guide will largely be achieved by moving some guidance onto the FCA website and removing material that duplicates primary legislation and supervision materials, meaning firms will need to refer to multiple sources to obtain the same information. Similarly, the FCA's proposals on capital rules promise to simplify and consolidate the rules to "reduce the volume of legal text by 70%". However, substantively, there is no change: the complexity of the regulation remains, and the replacement rules are still 80 pages in length.

The FCA has committed to reviewing all Dear CEO and portfolio letters and withdrawing the "historic" guidance from pre-April 2022, while keeping them publicly accessible. The FCA has said they do not expect firms to refer to this material, but the fact they are being kept public raises uncertainty as to their status and whether they remain indicative of good practice or not.

Proportionate compliance obligations, no longer one-size-fits-all

In its call for input and CP25/16 on asset managers, the FCA proposed tailoring requirements to the nature of firms' activities to allow risk-management frameworks to be more meaningful, proportionate, and operationally effective. However, this may require additional supervision and rulemaking and introduce additional "cliff edges". Some of these changes will benefit larger firms at the expense of smaller or newer firms. The FCA has promised to publish a "smaller firm guide". These proposals are welcome and we await publication with interest.

Positive changes of direction

Alongside the FCA's specific promises, there was discussion of whether there was a trend of the FCA taking more account of market feedback in deciding where and how to regulate.

Market engagement

Move from a culture of fear to a culture of trust. In the FCA's annual work programme, it indicated that it would focus on fewer regulatory priorities, applying resources where the risk of harm is greatest, which would lead to a reform of how they regulate and supervise firms. The FCA has also committed to insight sharing from supervisory work to help firms learn from each other.

More engagement with industry. Before announcing its annual strategy, the FCA engaged with consumer and industry organisations and firms' boards. This approach to engagement is reflected heavily in the FCA's most recent consultations: for example, the recent discussion papers on the FCA's approach to regulating digital assets strongly leaned into an approach of requesting industry engagement to explain and educate the FCA on why the industry operates in the way it does. Moreover, there were repeated questions asking "Are there alternative approaches [to prescriptive regulation] that could equally mitigate the risks?"

Non-financial misconduct

The FCA's recent climbdown on announcing investigations, following a significant backlash from the market and the government, suggests a clear misalignment between the FCA's position and the market's tolerance, participants noted. They expressed the hope that the FCA might take a step back on non-financial misconduct (NFM) as well in light of significant pushback on the appropriateness of the FCA involving itself in diversity, equality and inclusion (DEI) issues.

Many questioned whether regulation on NFM is necessary in light of the existing regulation in the FCA's "fitness and propriety" test and conduct of business sourcebook, of the forthcoming Employment Rights Bill and of the fact that the regulator has proven itself more than capable of taking action against individuals under the existing regime.

A further consultation and policy paper was published subsequently on 2 July by the FCA on rules in banks and non-banks for serious non-financial misconduct.

ESG and DEI

The FCA's approach to environmental, social, and governance (ESG) regulation was another area of significant discussion. The FCA is currently considering additional regulation on matters currently outside the regulatory perimeter. Attendees said that their board members were already complying or would be happy to comply with DEI and ESG rules, as they fitted with their culture, their investors' requirements and their client base; in these circumstances, they said there was no need for regulation in these areas and significant flexibility in any rules would allow those "seeking to do the right thing" to do so in their own way.

Discussions focused on the potential impact of the current approach to regulation in the US and how it was a more attractive market for financial services firms. Concern was expressed as to how the UK could make itself a centre for financial services, when it continued to have higher standards  - particularly around ESG, non-financial misconduct and anti-money laundering (AML) compliance.

Elephants in the room

One of the challenges with the FCA's new approach is that it does not tackle some of the most burdensome aspects of compliance: the Consumer Duty, combatting financial crime and authorised push payment (APP) redress, and the FOS.

Consumer Duty compliance

The FCA has promised more predictability in its regulation but has also committed not to introduce new rules where it feels that the existing impact of the Consumer Duty will already provide the consumer protection necessary. The FCA has also promised to remove some of its long-standing prescriptive rules to simplify and streamline regulations to allow firms to deliver "better consumer outcomes with greater flexibility". In reality, that approach is likely to reduce certainty and may even reduce consumer protection.

Discussion focused on the requirement for price transparency. There were concerns that the FCA's focus on "cost plus margin" was too narrow and did not reflect the complexity of the overall price of products or the value being offered. This has led to a clustering of products, with firms unwilling to be "outliers" on the products offered or pricing, stifling innovation, and effective competition. There were concerns that further reliance on the Consumer Duty would have a similar effect – promoting a race to the middle as firms were unwilling to take the risks required to innovate and promote the growth the government is seeking to achieve.

Financial crime and APP fraud

The legislative and regulatory approach to AML compliance is supposed to be based on proportionality, with firms taking a risk-based approach. It was noted that, in reality, the "minimum requirements" imposed by the FCA in the Financial Crime Guide and various Dear CEO letters and market reviews set the administrative burden of compliance very high. While tackling financial crime rightly remains a government and FCA priority and is unlikely to undergo any deregulation in the near future, some firms' procedures could well be adequate at a lower level of investment and administration – and simplification and more flexibility on the route to compliance would be welcome.

Equally, the new regime of mandatory APP fraud reimbursement has shifted the cost burden of fraud via Faster Payments. Again, firms accept that that burden will not be lifted in the near future, but it remains a significant cost – particularly to the "innocent" recipient payment service provider that bears 50% of the reimbursements costs under the Payment Systems Regulator's mandatory reimbursement scheme – and puts the UK out of alignment with other international markets. While the FCA's proposal to remove the contactless limit was to "give firms greater choice, flexibility, and smoother purchases", contactless fraud represents around £42 million per year. Contactless payments require firms to have advanced fraud detection and prevention measures to mitigate those risks, and raising the contactless limit might increase the risks and the burden on firms.

Financial Ombudsman Service reform

The cost of engaging with the FOS is significant: not just in the £650 per case referral fee but also the administrative and time costs of engaging with a process that is often uncertain and involves a large number of meritless claims by disgruntled clients or claims management companies.

The FOS has grown far beyond its original remit of providing "quick and dirty" decisions on redress for customers who would otherwise be unable to be heard – there was a broad agreement that the FOS needed to be quicker, more efficient and should only deal with proportionately sized individual claims. The FOS needs to apply the law and regulatory framework and move away from the "fair and reasonable" framework. It needs to lose the quasi-regulator precedent-setting effect of FOS decisions or at least for there to be an appeal mechanism introduced to avoid the need to meet the current high bar of judicial review.

Further developments

There have been a number of developments since the roundtable was held, including the publication of the FCA's most recent consultation paper CP25/18 on NFM in financial services that drops its proposed changes to the threshold conditions and senior management arrangements, systems and controls sourcebook rules.

FOS reform: Emma Reynolds, the City minister, announced plans on 27 June to overhaul the FOS, including potentially by giving companies the ability to appeal ombudsman decisions to the FCA – limiting its current role as a quasi-regulator and providing greater predictability and clearer expectations on redress scenarios. This would be a welcome development, and we await publication of the precise scope of these reforms.

Curb on meritless FOS claims? On 25 June, the High Court rejected a strike-out application in Vanquis Bank Limited v TMS Legal Limited. TMS is a claims management company that had referred 17,500 mis-selling complaints to the FOS on behalf of former customers of Vanquis Bank (which represented a cost to Vanquis of around £11 million in FOS referral fees alone). Vanquis sued TMS on the basis it had failed to conduct appropriate checks on whether the claims were properly arguable before they were submitted, in order to cause loss to Vanquis by enriching itself with the fees from the small number of claims that were successful with minimal effort. The judge accepted that the claim was novel but described TMS's alleged conduct as "egregious" and that there was no reason Vanquis' claim could not succeed in principle. The claim is still at an early stage and relates to conduct preceding the introduction of the £250 professional representative FOS referral fee but could prove a useful deterrent to the submission of unmeritorious mass claims.

Osborne Clarke comment

There was a broad consensus among the roundtable attendees that many of the FCA's proposals to date – particularly, those suggesting "simplifying" the regulations or "streamlining" the regulatory journey – are largely window-dressing or avoid confronting the largest barriers to innovation and growth. However, there was optimism that better industry engagement and a genuine demonstration in a change in culture in the FCA could provide a platform for a better relationship between the regulator and the financial sector.