FCA Business Plan: data-led regulator to “appropriately evolve” for innovation

The UK’s Financial Conduct Authority (FCA) has set out its Strategy for the next three years, highlighting key commitments that “focus on results rather than processes” in order to drive the regulator, and the UK wholesale markets, forward.

For the last few years, the FCA has vowed to become “more innovative, more assertive, more adaptive”. This Strategy – and the accompanying FCA Business Plan – sets out just how the FCA will look to become these things, as well as the areas that they will focus their efforts. In particular, the FCA highlights three main areas aimed at “protecting consumers from harm that authorised firms can cause”. These are:

• Reducing and preventing serious harm. The FCA will endeavour to assess problems and act quicker to prevent harm by adopting a data-led approach to regulation.
  
  
• Through setting and testing higher standards. The FCA will focus on the harm that firms’ actions can have on both consumers and markets. They will increase their expectations of all firms to adopt high standards and have an “open and cooperative approach”.
  
  
• Promoting competition and positive change. The UK regulator is keen to see competition as a springboard through which better consumer outcomes can be achieved. It will aim to support UK growth and innovation through regulation.

For first time ever, the FCA will look to hold itself accountable against published outcomes and performance metrics too.

Commenting on the new Strategy, FCA Chief Executive, Nikhil Rathi, said:

“Our new strategy enables the FCA to respond more quickly to the rapidly changing financial services sector. It will give us a foundation to continuously improve for the benefit of our stakeholders and respond swiftly to economic and geopolitical developments.”

The first 12 months of the strategy will be determined by action taken according to the FCA’s Business Plan for 22/23, which was published alongside the strategy. While the FCA Business Plan will be widely regarded as setting a blueprint for the next 12 months, the FCA notes that it is being published during a turbulent time in which the “external environment is changing rapidly” owing to covid, inflation, rising living costs and other risk factors. With this in mind, the FCA will continue to monitor the emerging landscape and will adapt plans where necessary.

In particular, the FCA’s Business Plan goes into more detail about how the FCA will meet the three key priorities this year, with a few highlights:

The FCA is becoming data-led

The FCA notes that “the markets we oversee are changing rapidly”, as such it is transforming the way in which it operates and responds so that it can effectively deliver its commitments. In order to be a more innovative, assertive, and adaptive regulator, the FCA is sharpening its focus on becoming a ‘data led’ regulator. In order to keep up with the financial landscape around it, the FCA understands that it must keep up to date with global challenges including in technology, innovation, and climate change.

What does the FCA’s Business Plan mean by being data-led?

In a bid to establish itself as ‘data led’ the FCA is turning to self-built analytical tools that will “provide key indicators about firms to help identify risks”. As well as this, it has a new cloud-based data infrastructure which is enabling the regulator to deal with data at a speed and scale that it was not able to previously. According the the FCA’s Business Plan, this means that it can now glean insights for monitoring markets and better understanding how firms are functioning in relation to its market integrity objective.

What next for data and the FCA?

The FCA will publish a Data Strategy in the coming months, which will set out how the FCA aims to become more effective by “harnessing data, converting it into actionable intelligence and improving our real time understanding of what’s currently happening and, crucially, of emerging risks”. The FCA Business Plan also sets out that it will be working with the Bank of England – through the AI Public-Private Forum – on how to better understand how AI is changing financial markets. It will publish a discussion paper on the topic later in the year.

Strengthening UK’s position in global wholesale markets

The UK is currently a leading market choice for financial institutions, owing to a number of factors. In particular, the UK is often seen to uphold standards while “appropriately evolving” to support innovation – both essential elements in an increasingly digital industry. The FCA’s priorities aim to strengthen the UK’s position in wholesale markets as part of its focus of “promoting competition and positive change”.

How will the FCA boost the UK’s position?

In order to do this, over the next 12 months the regulator will look to enhance its capacity to approve listed issuers in UK capital markets and will start the transfer of the UK’s regulatory framework from legislation into FCA rules through HM Treasury’s Future Regulatory Framework. As well as this, the FCA aims to support innovation moving forward by creating a flexible regulatory approach – which will include the launch of a financial market infrastructure (FMI) sandbox.

Positive change through ESG

Environmental, Social and Governance (ESG) has been top of the regulatory agenda at the FCA for some time, and over the coming year it will continue to pursue ESG goals. In particular, it wants to tackle the practice of greenwashing and general misleading marketing and disclosures around climate-related products. Over the course of the year it aims to develop ESG-based metrics that will measure whether the quality of disclosures for ESG improves (presumably alongside emerging disclosure rules).

While it doesn’t make any firm commitment, the FCA does say that it intends to “imbed consideration of ESG issues into how we authorise firms and individuals” – potentially meaning that it will take firms ESG credentials into account when looking at their registrations and authorisations. Over the course of 2022, the FCA will aim to publish a report covering the recommended disclosures of the Task Force on Climate-related Financial Disclosures.

As well as these key areas, the FCA’s Business Plan also makes broader commitments to innovation in the financial space, including working with the FinTech community to “solve global problems through innovation”. It will also be doubling down on firms to ensure operational resilience – ensuring that firms are “able to prevent, respond to, recover and learn from operational disruptions”. It is likely that this will tie in with the UK’s new operational resilience rules (SS1/21).

CUBE comment

As we learnt at the recent Innovate Finance Global Summit, the financial services landscape is innovating and changing at speed – from Web 3.0 to embedded finance to climate to crypto. This ultimately means that the FCA’s remit is growing, so too are the challenges it faces. With that in mind, the FCA’s Business Plan notes that it needs a robust strategy over the coming years that can manage and content with emerging risks. As well as being robust, the FCA will need to be flexible. If you consider that topics such as climate-risk and crypto were mere murmurings 3 years ago, the FCA would have struggled if it had rigidly stuck to its plans and perimeters.

That being said, it is fair to say that the FCA (alongside other regulators and governments) are on the back foot with emerging tech. As Lord Chris Holmes of Richmond recently said of embedded finance, “the government needs to understand this stuff a lot more”. The same can be said for regulators. The FCA wants to “stay up to date” with global changes “particularly those driven by technology, innovation and climate change.” However, it could be said that an “innovative, assertive, adaptive” regulator would not only keep up to date, but lead the charge or be one step ahead. If the FCA is only keeping up to date, the regulatory perimeter will lag behind innovation – meaning confusion and loopholes.

Moving forward, it is encouraging to see a regulator that is keen to embrace technology – not be afraid of it. Indeed, the FCA’s commitment to developing the skills of its employees to better understand innovation is a silver lining. Hopefully in the future we will see a regulator that is not only “up to date” but leading the way.