The FCA’s Business Plan shows continuity and assertiveness – 12 things you need to know

There may not be any surprises in the Financial Conduct Authority’s (FCA) Business Plan 2023/24, but its consistency is itself a reason to pay more attention to the detail.  

There is no new theme of the day, but rather the reinforcement that it is serious about the strategy already set out. 

The overarching priorities are still to reduce and prevent harm, set and test higher standards, and promote competition and positive change – but there are clear warnings that regulation rhetoric is going to turn to assertive enforcement.

In Sicsic Advisory’s latest webinar held on the 27th April 2023, the team was joined by the ABI’s Charlotte Wightwick, Assistant Director and Head of Conduct Regulation to discuss what firms need to look out for, and why they shouldn’t be surprised to find themselves under direct FCA scrutiny… 

Here are 12 key takeaways:

1. Data capacity and manpower are increasing

The FCA is developing its data capacity – and that’s going to drive more direct contact with firms as they gather it, and use it to track and benchmark the industry. It is also recruiting 700 more people across more regional offices – and will have more capacity than ever to actually come knocking on doors.

2. Consumer Duty runs through everything

Consumer Duty is one of the biggest changes in regulation of the last two decades and is the lens through which the FCA will view everything, from authorisation to policy development, supervision to enforcement.

The business plan promises additional funding for Consumer Duty, including a new intervention team within Enforcement.  The FCA is set to concentrate on the highest priority issues and firms. Attention will also be paid to how firms are responding to the cost-of-living crisis.

We know already that the FCA was not happy with the quality of evidence provided in the first round of General Insurance Pricing attestations and fair value assessments, and is going to be looking for improvements in the proof of compliance supplied this year. Justifying decision-making and evidencing the impact across the entire internal and external value chain must be a top priority for all firms – including those who think they already passed muster.

Then at the end of last month, in its publication on multi-occupancy building insurance, the FCA was very clear that the fair value assessments of many brokers fell short of evidence that their own remuneration represented fair value. It also warned that increased commission that comes purely from increasing premiums might breach fair value rules. That’s a big message with implications well beyond leaseholders’ insurance.

The strong message is brokers do need a framework to justify their part in the value chain to a much greater standard than they have done to date.

3. Understanding your customers is key

It’s very easy to get distracted by the mechanics of regulation and miss the spirit. Central to the Consumer Duty is understanding customers, and then understanding the outcomes different customer groups are getting from your products and services. That means investing in gathering customer data and opinions, working through each, and making sure you’re comfortable to justify your decisions.

4. Underestimate Consumer Duty challenges at your peril

Firms are starting to see the road ahead in terms of what needs to be delivered by July 2023 and what will need to follow in terms of continuous improvements. But there are still some sticky challenges that shouldn’t be underestimated.

Outcome 3 – around communication and customer understanding – is a hard area for firms to grapple with, especially in life and pensions. With little direction, confusion remains over what good outcomes actually look like. If there’s a silver lining, it’s that being able to articulate that for your company is an opportunity to set the standard you wish to be measured by.

Meanwhile, those firms with the most complicated delivery chains and the least control over them may have serious decisions to make about the compliance and sustainability of their business models. Outsourcing operations does not allow you to outsource responsibility, and these firms will need to engage with suppliers and third-party partners more meaningfully.

Finally, those with closed books in the life sector shouldn’t view their year extension with complacency – the new deadline will come around quickly, and regulator’s expectations will continue to rise in the meantime.

5. ESG could get as big as Consumer Duty

When, not if, you hear from the FCA, Consumer Duty won’t be their only priority.

One of the areas to definitely not lose sight of is ESG. The regulator published a discussion paper in February which sees a strategic move to introduce another new Principle on sustainability – potentially making it as big a topic as Consumer Duty. If you haven’t read the paper you can find a summary of it in our guide. It should assist and inform your thinking, and you can join the discussion to help get the balance right in terms of innovation and regulation.

6. Operational resilience is omnipresent – but shouldn’t slip into the background

Operational resilience is referenced in all the FCA portfolio letters for the insurance industry, encouraging firms to minimise the impact of operational disruption and potential harm. It is also a key focus area of this year’s business plan. The rules aren’t new, in fact, we’re in Year 2 of the three-year transition period, but it’s not a ball you should take your eye off. It’s a significant topic for the regulator, and there’s still progress to be made before the 2025 deadline. Firms need to be confident they can respond and communicate appropriately in the event of operational disruption. A useful reminder was made that firms that will enter the regime due to their size would not benefit from the transition period and would also need to be ready by 31 March 2025.

7. Financial resilience needs your attention

The planned new regulatory return will require 20,000 solo regulated final services firms to provide a baseline level of information about their financial resilience and wind-down plans. This is a key activity for the FCA, following a thematic review last year which identified substantial gaps, with some firms having no wind-down plans. FCA remains focused on reducing harm from firm failure, so firms need to be ready to respond – either in this call for data or the inevitable next.

8. AR testing demonstrates what a proactive FCA looks like in action

The policy statement and final rules on enhancements to the AR regime were published last Summer and came into effect in December. The FCA Business Plan references testing to ensure firms are properly embedding the new rules – using new data and more assertive supervision in a way we’re likely to see replicated across their other priority areas.

Those operating on an AR business model need to be ahead of the requirements, gathering and returning quite intense and intrusive data on registration, activity, and revenue.

Those not directly affected need to take note of how an assertive, proactive FCA operates.

9. Focus on pricing and value reform isn’t over for General Insurance (GI)

For many firms General Insurance Pricing Practices (GIPP) has faded to a distant, and possibly slightly unpleasant, memory. It shouldn’t. It is integral to Consumer Duty, and those not offering fair value across their operations are not likely to be allowed to do so for long.

Our speakers have also reminded the audience of the importance of the ethical use of data in underwriting and pricing, and that the regulator also considers Consumer Duty as the response. In responding to the Citizens Advice call for action regarding the “ethnicity penalty” the FCA has been saying:

“Where distinct groups of customers experience different outcomes from a firm’s products or services, we would expect firms to investigate the causes of this. This is particularly important where groups sharing protected characteristics under the Equality Act 2010 may be disadvantaged.”

There was another important discussion around pricing practices including price walking and discount beyond the motor and home products and the need to review these practices considering Consumer Duty.

We’ve seen the FCA unafraid to raise the spectre of commission disclosure in multi-occupancy leasehold insurance. It’s an important precedent – and a warning all insurance firms should heed.

10. SM&CR is foundational

Individual accountability and attestation aren’t going anywhere either, and firms should continue to invest in SM&CR. There may be some changes as part of the planned reform (for example, in the certified regime), but at its core, the principle and practices are unlikely to alter very much.

11. Knowing your place in the pack could help you lead it

Understanding how you compare with your competitors has never been more important. Firms can no longer operate in isolation. If you are an outlier – whether that’s in your GI value measures, complaints data, or customer satisfaction scores – you’re highly likely to draw the FCA’s attention sooner rather than later.

12. Eat the biggest frog first

Do the things that have the most impact, even if they’re difficult -and always document your thinking around prioritisation.

It’s important to recognise that things are never going to be perfect, not least because regulation is a moving feast. At Sicsic Advisory we encourage firms to be critical and honest – for instance in their self-assessments – and recognise openly where improvements can be made.

Now is a great time to do a stock-take of where you are, where you want to be, and if you’ve got the right plans to get you there in the right timescales.

The FCA is evolving. It is growing, joining up, listening to the industry, communicating differently, becoming more assertive – and following through. Firms must evolve with it. Don’t underestimate the breadth of the FCA agenda or its determination. The integration between policy and supervision is being strengthened; vigilance will be necessary, agility key – and an awareness of regulatory expectations is absolutely essential.

You can now access the webinar recording in the members’ area: Don’t be surprised if the FCA knocks on your door.