October 2012 JOURNEY TO THE FCA. What should we expect?

Transcription

1 October 2012 JOURNEY TO THE FCA What should we expect?

2 Introduction On 15 October 2012 the Financial Services Authority (FSA) published a document entitled 'Journey to the FCA' (the document). In the foreword to the document John Griffith-Jones, FCA Chairman-Designate, comments that it sets out how the Financial Conduct Authority (FCA) will approach its regulatory objectives and how it intends to 'ensure firms put consumers at the heart of their business'. The document forms a consultation and comments are invited until 14 December The document produced is interactive so comments can be made directly online. Feedback will be summarised and communicated back in early Although this document provides clarity on the current plans for the FCA, other more detailed consultative documents are also being produced and must be considered to fully understand the future proposed role of the FCA. Currently CP12/24 on Regulatory Reform: PRA and FCA regimes relating to aspects of authorisation and supervision and CP12/26 on Regulatory Reform: the PRA and FCA regimes for approved persons are live and open for comment. The document gives detail on new FCA powers; the 'clear and straightforward' authorisation process; the plan for structured supervision work; the agenda of credible deterrence within the enforcement approach; focus on the new Policy, Risk and Research Division; maintaining effective relationships with stakeholders such as the PRA and Bank of England; and the structure for accountability and measuring success. Overview In his speech accompanying the launch of the document, Martin Wheatley, FCA Chief Executive-Designate, commented that 'today is a big step forward on the road to becoming the new regulator'. He goes on to focus on the launch of the FCA being an opportunity for firms and the regulator to start afresh. In his corresponding introduction to the document he focuses on the FCA objectives and the outcomes the FCA wants to achieve. Relevant markets should 'work well so consumers get a fair deal'. Structure of the document The creation of the FCA new FCA powers The Financial Services Bill currently states that the FCA statutory objective is to ensure that relevant markets work well. The underlying operational objectives focus on the integrity of the market, consumer protection and competition. The document outlines that any decision made by the FCA will be taken in consideration of these factors. In terms of accountability the FCA will be accountable to both HM Treasury and Parliament. In using its macro -prudential tools to protect and enhance financial stability, the Financial Policy Committee (FPC) will be able to give the FCA directions. The FCA has a mandate to deliver good market conduct and the document outlines that there will be three key priorities to assist in achieving this; a renewed focus on wholesale conduct, trust in the integrity of the markets and the prevention of market abuse. In relation to product governance and intervention, it is stated that lessons have been learned from previous market failures and it can be much more effective to intervene earlier. We are already seeing a trend of early intervention from the FSA and it is clear that this is set to continue under the new regime. In terms of new powers, it is clearly stated that one of the new powers will be the ability to ban misleading financial promotions. Comment is also made regarding the new power to publicly announce that disciplinary action has been begun against a firm or individual. This particular power is one of concern for the market as it could potentially cause reputational damage where no inappropriate behaviour has actually occurred. In regard to the transfer of responsibility for consumer credit regulation from the Office of Fair Trading to the FCA, the final Government decision is expected in If the transfer is confirmed, the FCA is likely to take over the regulator role during 2014, taking on in the process a whole new population of firms to regulate. Protecting the perimeter the 'clear and straightforward' authorisation process The Authorisations Division is billed as the 'gateway' to regulated activities in the UK. The document states that only firms who are correctly run by competent people will be approved to do business. Those approved must sell the right products to the right consumers. This is a significant task which the FCA intends to do using processes that are clear and straightforward. Once dual regulation is in force both the FCA and PRA will have authorisation functions. There will however be a single administrative process for dual-regulated firms and those firms that are dual regulated will generally apply to the PRA. A new element of the authorisation process under the new regime is the Business Model Threshold Condition. Firms will have to demonstrate how their particular business model meets the needs of clients and customers as well as not placing at risk the wider financial services system. If evidence is not provided on how this threshold condition will be met refusal of an application is likely to occur. A consultation paper on the application of the threshold is expected in November

3 A risk based approach will continue in regard to approving individuals for significant influence functions. Ensuring firms continue to meet standards the plan for structured supervision work The FCA will be conduct supervisor for all regulated firms across all sectors. It will also prudentially regulate all firms not under the remit of the PRA. There will be a new approach to supervision which will see in-depth structured supervision work with firms who have the greatest potential to cause risk to FCA objectives. Firms who have been used to an FSA supervisor are likely to find under the new regime that they don t have a specific allocated contact. Reviews will instead be focussed on products and issues on a sector basis, allowing for faster action and hopefully a reduction of conduct risk. Fair treatment of customers is expected to underpin business models and culture and any departure from this priority will be considered an issue. The document does however say that alongside this it will encourage growth and innovation in the sector. In terms of wholesale markets regulation it is clear that the FCA does not see a clear divide between retail and wholesale markets. Activities between the two sectors are connected and any risks caused by poor conduct can affect both. It is apparent from the document that conduct in wholesale markets will be taken very seriously and not diluted as the participants are sophisticated. A more assertive and interventionist approach will be employed in regard to risks caused by wholesale markets. Prudential supervision by the FCA will be focussed on managing failure rather than reducing its probability. This approach is justified by the fact that failure of most FCA prudentially regulated firms would not present a risk to the integrity of the financial system. The few firms whose failure could affect stability will be prudentially regulated in a way that reduces their probability of failure. For the majority of firms the focus will be on reducing the impact on customers and ensuring protection of client assets. Cooperation between the FCA and PRA is not covered in detail in the document but reference is made to the draft Memorandum of Understanding. Action to be taken against firms that don't meet standards the agenda of credible deterrence within the enforcement approach 'The agenda of credible deterrence will remain central to our enforcement approach'. It is made very clear in this chapter that the FCA is committed to bringing more enforcement cases and pressing for tougher penalties. More cases will be brought against individuals and senior management will be held accountable for their actions. Criminal prosecutions will be sought, especially where appropriate for market manipulation and insider dealing. Compensation for customers will be prioritised. This is all currently familiar under the FSA but with this clear restatement of aim in this area it is certain that enforceme nt actions will grow in number and prominence under the FCA. One significant development from the current status is the ability to publicly announce the commencement of disciplinary action (see above). This will no doubt result in increased transparency. Another clearly outlined priority is the stopping of firms being used to facilitate financial crime. This links back to the policy to only authorise firms that have an appropriate business model. Building understanding of the markets focus on the new Policy, Risk and Research Division The newly formed Policy, Risk and Research Division will be the 'radar' of the FCA, combining research into what is happening in the market and to consumers with analysis of risks as they appear. This will be achieved through data collection and market analysis. Liaison with external consumer organisations and professional firms will be key in achieving the appropriate level of research and data collection. Any actions will be informed by the risk-based approach which means in practice that decision making and actions taken will be based on the risk to objectives not being met. The aim is to identify issues sooner, step in earlier and act faster than the current regime. This will hopefully reduce harm to consumers and the integrity of the market

4 Maintaining effective relationships with stakeholders such as the PRA and Bank of England This chapter focuses on maintaining effective relationships with stakeholders, primarily the PRA and Bank of England, as well as the Financial Ombudsman Service, EU and international bodies, financial services firms, consumer organisations, audit and law firms. The collective term 'the Regulatory Family' is used to describe the group of stakeholders and the collective aim is the protection of financial consumers. It is stated that constructive relationships with key EU and International stakeholders will assist in shaping policies and drive the consumer protection agenda. The Retail Distribution Review is noted as an example of the UK addressing a domestic issue despite the likelihood of European standards being developed in the future. This will continue as a policy if needed. Communication with consumer groups and financial services firms is set to improve through looking at regulation from the consumer point of view and introducing more regional workshops and roadshows for firms. Enhanced communication should in turn clarify for the regulator the subjects where help is needed by the market and consumers. Accountability, transparency and measuring success how the structure will work The final chapter in the document sets out how the FCA will be held accountable through its Board, practitioner panels, the formal process for dealing with complaints about the FCA and investigations into regulatory failure that must be reported to the Treasury. Detail is also given on how it will be funded by the fees it charges to the firms it regulates. Thought is also given to how the FCA will measure regulatory success. Conclusion In conclusion, while the key messages, including that we will see a continuation of trends, and direction of travel are clear, there are a number of important issues that require further clarification, especially as regards the approach to the use of new powers. Presumably there will shortly be more detailed consultations on important issues such as the publication of warning notices, the use of the new skilled persons tool, the suspension of individuals and the streamlined decision making process for enforcement action. Contacts David Ellis david.ellis@addleshawgoddard.com Amanda Hulme amanda.hulme@addleshawgoddard.com Chris Brennan chris.brennan@addleshawgoddard.com

5 Rosanna Bryant

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