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Full steam ahead at the FCA

Michael Sicsic
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FCA CEO Nikhil Rathi broke form in 2022 when he set out the regulator’s three-year business plan.

Previous regimes had used the annual publication as a ‘big reveal’ of new initiatives or interventions.

This FCA has a long-term plan and has stuck to it. It set out to become a more assertive, innovative and adaptive regulator, led by data and technology, putting customers front and centre.

It has done just that. The FCA can point to many interventions where it will perceive that it has stopped harm.

It was therefore no surprise to see no surprises in the 2024/25 plan, but rather the continuation of overarching themes and priorities. And it is full steam ahead in the final year.

Our webinar with Sicsic Advisory Partner Nadege Genetay, Senior Adviser Clive Gordon and Managing Partner Michael Sicsic discussed the highlights, and looked at where firms should be turning their focus over the coming weeks and months.

Here are some key insights and advice:

You cannot think about the Consumer Duty enough

    The Consumer Duty remains high on the regulatory agenda. The FCA itself describes it as ‘game changing’.

    It is indeed game changing for the industry – but it’s also worth remembering that it’s game changing for the regulator, too. Consumer Duty signals a marked evolution in terms of how the FCA views the world – turning the onus back on firms to review their own products and services through a Consumer Duty lens.

    Interventions are gaining pace

    The FCA has made several recent interventions. While they relate to specific products or issues, the manner of the intervention and the use of the Consumer Duty lens is relevant to them all.

    As key examples, the FCA gave the industry an ultimatum on GAP insurance that resulted in a number of firms stopping sales while they make the case that the product is appropriate. It also paused complaints on discretionary commission on motor finance following FOS decisions while it considers what to do about sales prior to its earlier ban.

    The issue of low total loss settlements in general insurance is another ongoing issue, with firms receiving specific feedback – and in some cases S166 reviews.

    S166s have ballooned in general insurance. More will follow

    The number of S166 reviews in general insurance has, in fact, rocketed, from just 1 in the year to 31 March 2023 to 12 in the 9 months to 31 December 2023. More are in the pipeline, such as those on total loss.

    With this direction of travel, the stakes are higher in every interaction and information request. Firms across the sector should be taking note.

    No regulator is an island

    The FCA is an independent regulator, but it operates in a broader environment and is not immune to political influence from the Treasury, to which it is accountable.

    That means the current political focus on cost-of-living, financial inclusion, fraud and scams may continue to rise up the FCA’s list of priorities. Be aware and be ready.

    We’re not done on vulnerable customers

    The FCA doesn’t seem satisfied with the outcomes for vulnerable customers. They are consistently mentioned in the same breath as Consumer Duty.

    Vulnerable customers remain high on the agenda whenever Consumer Duty is mentioned. The fact the FCA has decided to review the way its guidance is implemented is an interesting element to note.

    5,000 is a big number

    That’s how many people the FCA has grown to, up from 3,800 at the beginning of 2022.

    The regulator has turned a corner on recruitment and has the resources it needs to deliver on its increasingly ambitious plans. In short, there are more hands on deck to get hands-on with interventions.

    Benchmarking is not enough

    The FCA is using data to spot outliers and is increasing its scrutiny of those firms spotted lagging behind peers. Ultimately, they’re low hanging fruit and easy wins for the regulator, and it’s therefore really important for firms to know where they sit against their peers.

    However, riding in the middle of pack isn’t enough. The FCA wants to know that senior managers and boards have thought deeply about their products and practices and whether they can justify that they offer fair value.

    The regulator is still challenging firms on the quality of their fair value assessments – including on failures to consider the impact of distribution and remuneration on end customers.

    “But that’s the way we’ve always done it” is an inadequate response. Firms need to show MI, data, and that they have set and challenged their own approach. To be safe, it is essential to start organising your business according to the spirit of regulation, not to the letter.

    Think about every engagement

    We’ve seen firms getting really intensive scrutiny from the regulator, with detailed requests as it seeks to understand approaches to fair value assessments, complaints data and MI related to the Consumer Duty.

    Every interaction with the regulator is important, and it’s worth firms taking the time to craft a high-quality response. Providing context to your answers, rather than just responding with the bare minimum of information requested, can make a big difference to how it will be received.

    Have someone play devil’s advocate and review your responses with a regulator’s mindset and demonstrate proactively that you have asked yourself tough questions.

    Because if YOU don’t, the FCA will.

    There is a level of control on pricing

    Nikhil Rathi has said the Consumer Duty is “not a Trojan horse for price regulation”.

    However, there are different levels of price regulation…

    The FCA certainly doesn’t want to set prices and calculate reasonable capital returns. But by talking about fair value, it will have more control and direct conversations on pricing than we have seen before.

    In practice, when the FCA looks at fees or commissions, it’s as if the burden of proof has shifted. It’s now up to firms to demonstrate they’re providing fair value.

    The quality of firms’ fair value assessments is the first thing the FCA will look at. Providing a weak assessment is like sending your opening batter into a cricket match with a broken bat. You’ll be starting the conversation on the back foot.

    Wealth Managers should think more about crime prevention

    The FCA wants firms to do more to prevent financial crime and they are asking more questions about how they’re preventing their customers from becoming victims of fraud, and adding new questions on financial crime and KYC (know your customer) checks in annual surveys to wealth managers.

    Remember the longer-standing hygiene factors

    We have reviewed the known areas for regulatory attention across various sectors. There are also some basics that need to be in place: governance, risk and control framework, financial resources and wind-down plan and financial crime (if relevant). We consider them as the four hygiene factors that firms should review regularly to ensure they are fit for purpose in the context of their operations. The FCA may ask about these during a conversation on a completely different topic, and use firms’ answer as an indication of good management.

    Catch up on the full discussion and more advice from the Sicsic Advisory team by watching the full webinar here.