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Investigations Insight

Our top ten enforcement takeaways from the FCA Business Plan 2024/25

Senior Knowledge Lawyer

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Litigation, Arbitration and Investigations
Financial Services Regulation

Strategic focus

The Business Plan reiterates the FCA’s strategic themes of protecting consumers, ensuring market integrity, and fostering competition and innovation within the financial sector. It details actions to address the immediate challenges posed by the economic landscape, such as enhancing operational resilience, promoting sustainable finance, shaping digital markets and improving access to financial services.

The increase in budget for 2024/25 (£755 million) reaffirms the FCA’s support of their operational activities and exceptional projects, the transition to a more flexible regulatory framework, and initiatives aimed at promoting competition and innovation in financial services.

Critical commitments

The FCA has outlined a number of commitments under three strategic pillars:

Reducing and preventing financial crime : The FCA aims to leverage data and technology to identify and mitigate financial crime risks, emphasising collaboration with national and international partners to enhance systemic resilience against fraud and money laundering.
Putting consumers’ needs first : The implementation of the Consumer Duty is highlighted as a transformative step towards ensuring firms act in the best interests of consumers. The FCA plans to rigorously enforce this duty, focusing on fair treatment and good outcomes for consumers, especially in the context of the current economic challenges.
Strengthening the UK’s position in global wholesale markets : The FCA is committed to maintaining the UK’s attractiveness as a global financial hub through regulatory reforms that encourage innovation, ensure market integrity, and protect investors.

Other commitments

In addition to the three “critical commitments”, there are 10 additional commitments:

Commitment 4: Preparing financial services for the future

The FCA is set to further implement the Treasury's Future Regulatory Framework (FRF) , now referred to as the Smarter Regulatory Framework (SRF), a pivot away from the EU's retained law towards a regime designed to better suit the UK market. This transition is crucial for aligning firm-facing requirements with the strategic interests of the UK, promising a more tailored regulatory approach. Highlights are as follows:

Firms will be pleased to know the FCA is tempering its changes to the regulatory framework, measuring the costs against the perceived benefits.
Whilst the work to implement the SRF will continue in 2024/25, this is evidently an area in which the FCA has taken great strides since the 2023/24 Business Plan was published, so much so that the FCA feel it no longer needs to be as highly prioritised as it was in previous years. This is reflected in the 11% drop in the allocated budget for the SRF implementation from £12.7 million last year, to an estimated £11.3 million for 2024.

Commitment 5: Dealing with problem firms

The regulator continues with a proactive stance on detecting and mitigating the risks posed by problem firms and individuals with an emphasis on enhancing “auto-detection” capabilities and the efficient cancellation of non-compliant firms. This focus should ensure the protection of consumers and the integrity of financial markets through the vigilant oversight of firm conduct.

As set out in consultation paper CP 24/2 , in which the FCA proposes to name firms under investigation, the FCA will be more transparent about its enforcement actions to increase the deterrent effect of such actions. The FCA has also stated its desire to carry out its investigations more promptly to deter further misconduct by other firms. If, following the consultation, these changes come to fruition, the FCA’s new focus on public transparency will assist its objective of dealing with problem firms.

Commitment 6: Taking assertive action on market abuse

Increasing capabilities to tackle market abuse, particularly through advanced analytics and cross-asset class market surveillance, marks a commitment by the FCA to uphold market integrity. The development of a proportionate regulatory framework for emerging sectors, such as crypto assets, underscores the FCA's dedication to innovation while safeguarding against abuse. Key elements of this approach to be aware of are:

The FCA has adopted an extensive data-led supervisory approach to the European Market Infrastructure Regulation (EMIR), Securities Financing Transactions Regulation (SFTR) and Orderbook regimes. Consequently, we expect to see robust scrutiny of firms’ controls and processes in these areas.
The FCA has enhanced its technological capabilities relating to data-capture for the purpose of detecting market abuse. This enhanced data set will be introduced in the FCA’s market cleanliness statistics that will be published in the third quarter of 2024. More detailed information about anomalous trading will be provided compared to the metrics used in the FCA’s previous publications. This is a welcome advancement by the FCA and a demonstration of its enhanced detection capabilities for supervising the market more effectively.
Market abuse continues to be a key priority for the FCA this year as evidenced by its Market Watch 77 and 76, which both focus on market abuse and how firms can mitigate the risks of these activities. Market Watch 77 relates to trading by organised crime groups and Market Watch 76 to the prohibited activities of ‘fly’ and ‘printing’ to mislead the market. We expect to see more regular public correspondence from the FCA about market abuse to continue for the rest of the year.

Commitment 7: Reducing harm from firm failure

Efforts to minimise the adverse effects of firm failures by the FCA have intensified with the use of data and horizon-scanning to pre-emptively identify at-risk firms. This approach is integral for protecting consumers and ensuring market integrity amidst a landscape marked by corporate insolvencies and severe market shocks.

The FCA’s emphasis on adequate wind-down planning has been carried forward from last year’s Business Plan. The FCA is clearly sensitive to the implications of the continuing possibility of severe shocks to the market and a prevalence of corporate insolvencies. The FCA’s emphasis on financial resilience was prominent in a recent Dear CEO Letter to corporate finance firms.

Commitment 8: Environmental, social, and governance (ESG) priorities

The FCA continues to support the financial sector's transition to net zero and address wider sustainability issues through the integration of the Sustainability Disclosure Requirements (SDR) and Investment Labels . This commitment to ESG priorities is pivotal to the FCA for driving positive change and aligning financial practices with sustainability goals.

Firms should make sure they are familiar with SDR and the impact that these requirements might have on their businesses. Some of the new measures, such as the new anti-greenwashing rule and the new investment labelling regime, might require firms to update their policies and procedures.

Firms should also expect an integration of the existing regime across the market as well as a ‘Nature’ regulatory principle that the FCA teased will be coming into force soon.

Commitment 9: Shaping digital markets to achieve good outcomes

Navigating the transformation brought about by digital technologies requires a balanced approach to managing risks and harnessing benefits for consumers and markets. The FCA aims to support innovation while ensuring digital finance serves the interests of all market participants by collaborating with stakeholders and regulatory partners.

This focus area demonstrates the consistency of the FCA’s focus on the role of data and technology. In line with this commitment, the FCA recently released the Reducing and preventing financial crime update where the regulator presented data and technology as one of its four focus areas in the fight against financial crime. Emphasis was placed on reminding firms that they should remain up-to-date with emerging artificial intelligence (AI) and technology trends to ensure they adequately foresee risks posed and can leverage potential benefits, such as in the areas of AML and fraud controls. This focus area also has further developments in the FCA’s approach to “big tech” and AI, as laid out in Nikhil Rathi’s speech to The Economist last summer.

Firms should ensure they remain up-to-date on the latest developments in the AI and technology space. Developments to look out for are:

The FCA’s outcome which will soon be published regarding its November 2023 “Big Tech Call for Inputs on data asymmetry between Big Tech firms and other financial services firms”
A report to be published by the Synthetic Data Expert Group , formed in March 2023, which will offer practical experiences of using synthetic data to aid practitioners and policymakers
Any updates on Project Guardian , which aims to foster digital innovation and is a collaboration with MAS, Singapore’s central bank, the Financial Services Agency of Japan, and the Swiss Financial Market Supervisory Authority

Commitment 10: Improving the redress framework

The FCA aims to ensure that “ consumers receive appropriate and efficient redress where things go wrong ”. ‘Redress’ is a consumer-centric topic which has been brought to the regulator’s attention through cases. The lengthy timeframes for redress to go to consumers has been highlighted by the Financial Services Compensation Scheme (FSCS), which wrote “ Our data clearly demonstrates the need for change ”. The FSCS has identified a lag in the system, with a significant proportion of the FSCS’s compensation paid out in relation to poor financial advice. 73% of that advice was given five years or more before the customer made their claim.

As set out in FS22/5: Compensation framework review response to feedback and next steps , the FCA’s aim to stabilise the FSCS levy by 2025 carries risk due to the delay in compensation payouts. The prevailing feedback from stakeholders was that the high cost of compensation liabilities falling to the FSCS is not a feature of the compensation framework itself, but is a consequence of the harms posed by certain markets that give rise to FSCS liabilities.

To improve the redress framework, the FCA Business Plan for 2024/2025 sets out the following initiatives:

Redress Guidance for Firms : Guidance will be enhanced to ensure firms provide appropriate redress to consumers.
Complaints Reporting : The process for reporting complaints will be improved to capture consumer feedback effectively.
Advice Guidance Boundary Review : The boundary between advice and guidance will be reviewed to help consumers make informed decisions.
Capital Deduction for Redress : A capital deduction for will be proposed for personal investment firms to cover potential redress costs.
Financial Ombudsman Service and Financial Services Compensation Scheme : Collaboration will be sought to ensure efficient practices in addressing consumer issues.

Commitment 11: Enabling consumers to help themselves

In its Financial Promotions Data 2023 publication, the FCA indicated that it saw a 16.6% increase in the number of financial promotions that were either amended or withdrawn by authorised firms in 2023 compared to 2022. This indicates a more aggressive approach to enforcing compliance with financial promotion rules. The purported intention to this approach being to ensure that firms correct or remove misleading, unfair, or unclear advertisements. The increase, from 8,582 promotions in 2022 to 10,008 in 2023, demonstrates the FCA's efforts to safeguard consumers by requiring firms to adhere to stricter standards. Similarly, in 2023, the FCA assessed approximately 140,000 websites and issued over 1,500 alerts to combat misleading financial promotions.

From 7 February 2024, the FCA requires firms that approve the financial promotions of other non-FCA authorised firms to have a new permission (as a `permitted approver`). This requirement follows the introduction of new rules in 2023 related to the promotion of high-risk investments, a ban on referral fees for debt packaging firms, and the establishment of a cryptocurrency financial promotions regime.

Going forward, the FCA’s emphasis on enabling consumers to help themselves results in the following focus areas:

Technological Developments : Technological advancements have made it easier and faster for consumers to engage in financial services activities. However, the FCA also recognises that consumers often encounter unclear, unfair, misleading or unlawful advertisements.
Robust Assessments : The FCA will continue to assess applications from firms that seek to approve financial promotions for unauthorised firms. The financial services register has been updated since February 2024 to include information about firms’ permissions to approve promotions.
Quick Actions : The FCA plans to use new data sources to quickly act against authorised firms that approve and issue non-compliant financial promotions and unauthorised firms whose activities could lead to mis-selling and financial losses.
Cryptoasset Supervision : The FCA will continue to supervise the financial promotions of cryptoasset firms. It also plans to increase its technological capability to detect harmful financial promotions and develop its InvestSmart and Consumer Awareness campaigns. It will also continue its work with social media platforms and search engines.
Online Safety Act : Following the enactment of the Online Safety Act , the FCA will continue its work with the Office of Communications (oFcom) to successfully implement legislation for financial services.
Advice Guidance Boundary Review : The FCA plans to publish a response following last year’s Advice Guidance Boundary Review discussion paper . This response will outline options for future legislative and regulatory reform to enable consumers to access the help and guidance they need at an affordable cost to make informed decisions.

Commitment 12: Minimising the impact of operational disruptions

The FCA aims to establish new operational resilience standards and mitigate systemic risks from critical third parties. It deems this crucial for ensuring market stability and uninterrupted consumer access to vital financial services. This focus area extends the FCA's prior efforts in operational and cyber resilience, including:

Cyber Security – Industry Insights : Released pre-March 2019, this document outlines the FCA's efforts to aid firms in bolstering their defences against cyber-attacks to decrease the likelihood and impact of disruptions and gathers insights from over 175 firms in various financial sectors.
Data Security : Initially published on 31 July 2015, and last updated on 21 February 2023, this resource offers guidance on safeguarding customer data against fraud, detailing firms' responsibilities and recommended security practices.
PS21/3 Building Operational Resilience : This policy statement provides the FCA's final rules and guidance for bolstering the financial services sector's operational resilience. Firms, including SMCR firms, banks, insurers, and other dual-regulated entities, are required to comply with SYSC 15A to identify, review, and manage the resilience of critical business services, set and revise impact tolerances, and maintain operational capacity during severe disruptions.
Operational Resilience : This page highlights the significance of operational resilience and outlines firms' requirements in this area.
Outsourcing and Operational Resilience : This resource discusses the impact of outsourcing and third-party service providers on a firm’s operational resilience.

Commitment 13: Improving oversight of Appointed Representatives

Enhancing the regulatory oversight of Appointed Representatives (ARs) to prevent misconduct and protect consumers from misleading and mis-sold financial products has been a key aim of the FCA in recent years. Strengthening the accountability and supervision of principal firms over their ARs to uphold market integrity and consumer trust continues to be a key objective of the FCA.

Key Takeaways

The FCA's Business Plan for 2024/25 maintains a consumer-centric approach, with a strong emphasis on adapting to and addressing evolving challenges within the financial sector. The plan showcases the FCA’s commitment to leveraging technological innovation and regulatory reform to safeguard consumers, ensure market stability, and enhance the UK’s global financial competitiveness. As the FCA navigates through the complexities of the current financial landscape, its focus on strategic investment, operational resilience, and collaborative regulation sets a clear path for its priorities in the coming year.

How we help

The compliance environment has never been more complex or demanding. We can help you to navigate the evolving regulatory landscape while considering the complexity of your firm’s unique compliance requirements. 

We help our clients with their FCA regulatory programme through a combination of compliance advisory ,   innovative technology , and  managed services . Our services and solutions include standard and customized compliance packages that address a variety of compliance needs, including cybersecurity , ESG , and training solutions for financial firms.

Reach out to your ACA consultant, or contact us to find out how ACA Signature can help transform your firm’s compliance program.

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Conduct Risk - is your framework compatible with the FCA's agenda?

In May 2019, the Financial Conduct Authority (FCA) published its third annual report on its 5 Conduct Questions Programme . Since its introduction, the FCA observed that firms have been investing substantial efforts in change programmes related to conduct and culture, a key cross-sector priority for the FCA .

In this Insight, Sushil Kuner, a Senior Associate within our Financial Services Regulatory team, identifies the 5 Conduct Questions, providing guidance on how firms can identify the conduct risks associated with their businesses. She also highlights key aspects of the FCA 's latest report, outlining examples of good and poor practices identified by the FCA during their Supervisory activities.

The FCA launched the 5 Conduct Questions Programme in 2015, initially as a Supervisory tool for the Wholesale Banking sector to help firms improve their conduct risk management and, ultimately, drive cultural change. The programme has been very successful to date, with the FCA observing that many firms have been making significant strides in improving their conduct risk frameworks.

On the basis of this success, the 5 Conduct Questions have now been incorporated into the FCA 's Approach to Supervision, applying to all firms in the financial sector, wholesale or otherwise.

What are the 5 Conduct Questions?

What proactive steps do you take as a firm to identify the conduct risks inherent within your business?
How do you encourage the individuals who work in front, middle, back office, control and support functions to feel and be responsible for managing the conduct of their business?
What support (broadly defined) does the firm put in place to enable those who work for it to improve the conduct of their business or function?
How does the Board and ExCo (or appropriate senior management) gain oversight of the conduct of business within their organisation and, equally importantly, how does the Board or Exco consider the conduct implications of the strategic decisions that they make?
Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct?

The first step in addressing the 5 Conduct Questions is for firms to understand what 'conduct risk' means. This is not an FCA defined term as the FCA expects firms to develop their own conduct risk definition and strategies and put in place a tailored conduct risk framework to address the specific risks that their business is exposed to.

However, at the very highest level, it is generally accepted that conduct risk means any action of a firm or an individual that has the potential to cause harm to consumers or market integrity.

How do I identify the key conduct risks associated with my business?

There are a number of conduct risk drivers stemming from firms' structures and behaviours which could create a risk of harm to consumers or market integrity. Firms that understand the drivers of conduct risk can better understand whether their conduct risk frameworks are robust enough to mitigate against the risk of harm stemming from its activities or individual behaviours. We set out below some examples of key conduct risk drivers.

Governance - a firm which has poor governance arrangements cannot effectively identify and mitigate risks of harm caused by its business activities. For example, if a firm has many layers of management and/or committees, which receive similar and overlapping Management Information ("MI"), how does it ensure that risks identified through reporting are being addressed? Is there effective oversight in terms of how issues are being handled and by whom?
Conflicts of interest - do you routinely review your business models and assess whether there are any potential conflicts of interest that may be present? For example, do you have a vertically integrated business model? Do you manufacture and distribute products? Are staff incentive schemes creating conflicts of interest?
Systems and controls - a firm which has inadequate systems and controls cannot effectively identify risks of harm caused by its activities. MI is a key form of control and, if not designed properly, can lead to risks not being properly identified. Is senior management keeping the design of MI under regular review and ensuring that it continues to be fit for purpose in highlighting risk areas? Training is another important form of control and rather than adopting a tick box approach, the FCA expects firms to develop training in order to embed awareness of conduct risk at all levels of the organisation. The Senior Managers and Certification Regime aims to strengthen accountability and provides firms with a great opportunity to roll out new conduct risk training programmes to all staff so that they truly understand the risks attached to their specific roles and how they should behave.
Business model - a firm's business model can itself be a driver for conduct risk, for example in the design and delivery of products/services. Taking the example of consumers' search for yield in a low interest rate environment, this often encourages firms to try and design more complex and risky products to try to meet this demand. But that may present key conduct risks, for example, consumers not fully understanding the products to which they are signing up and the products being wholly unsuitable for them.
Does senior management act in accordance with the firm's policies and procedures?
Does senior management still reward bad behaviour, through remuneration, for example because an employee is hitting their financial targets?
Is there a blame culture when things go wrong? This often discourages people from speaking up and admitting they have made a mistake, thereby preventing problems from being rectified.
Do people turn a blind eye to misconduct in the workplace for fear of speaking up? While firms may have great speaking up initiatives, are these truly embedded within the organisation?
Is there an element of indecision within the firm? Do difficult decisions tend to be put off? This could lead to long running failings at the firm not being addressed through prompt decisive action.

FCA 's Key Findings in its Third Annual 5 Conduct Questions Report

The FCA 's latest report covers supervisory activity and discussions with a sample of approximately 50 firms in the Wholesale sector but the content of the report is relevant for all firms in the financial sector. It builds on the previous two annual reports which we do not cover here in detail, but overall, since its launch, firms in the Wholesale sector have made significant strides in improving their policies, processes, training and identification of conduct risk through this programme.

Early firm initiatives concentrated on process flows and bad behaviour, leading to the creation of new policies and procedures, new training programmes and the use of technology for better surveillance. The FCA 's recent report highlights that the previous emphasis was on avoiding preventable breaches, addressing conflicts of interest and designing MI to help identify weaknesses. This work was often led by functions such as Compliance, Risk, HR and IT. While these strategies are supported by the regulator, the FCA is keen now for firms to consider conduct in its widest sense.

The FCA has observed firms implementing two or three year programmes that focus narrowly on regulatory adherence and avoiding rule breaches which they consider leads to conduct being narrowly defined and treated like a 'tripwire' with staff being more likely to respond with fear than forward-looking enthusiasm.

In contrast, firms integrating conduct with longer-term corporate goals and framing it as a component of a broader strategic effort are more likely to lead to a culture of positive behaviour and not just an environment of avoiding bad behaviour / rule breaches.

Those firms which have framed conduct as an integral part of larger corporate goals, have seen positive reactions from all stakeholders. Firms embedding good behaviours across the whole organisation have benefitted from better client engagement (clients like to deal with firms they can trust) which has also benefitted shareholders. Firms investing resource into developing their Purpose and Mission statements to underpin a meaningful social impact, are also more likely to engage the wider stakeholder community as well as staff, thereby securing the long-term sustainability of the business - a sense of individual purpose that aligns with corporate purpose has been demonstrated to drive superior performance.

Noticeably, the FCA has increasingly been emphasising the need for firms to focus on psychological safety in the workplace, whistleblowing, as well as non-financial misconduct. The FCA 's view is that where there is psychological safety at work, staff are comfortable sharing concerns and mistakes without fear of embarrassment or retribution. As such, they feel comfortable that they can speak up and won't be humiliated, ignored or blamed. As well as being vigilant to the well-being of staff, firms have been encouraged to develop training on a wide range of human development skills to support psychological safety. While senior management and junior employees have benefitted from training on conduct, the FCA 's view is that middle management (which is highly influential in providing day to day leadership on conduct) could benefit from more attention.

Regarding whistleblowing, the FCA reviewed whether staff could use firms' whistleblowing processes without fear of identification and reprisal. The FCA noted that, perhaps due to active promotional efforts, a greater than usual number of cases were being reported with firms being uncertain as to what a normalised volume would prove to be. The nature of the whistleblowing reports also varied significantly across firms, where similar cases handled in the normal course of business at one firm triggered a whistleblowing event at another. The FCA has concluded that the challenge for firms remains to fully embed the desired changes of mind-set across the whole organisation.

Despite this progress, the FCA is particularly concerned that the largest component of investigated cases in the whistleblowing channel were categories like 'Dignity at Work' or 'Non-Financial Misconduct', which captured bullying, favouritism, exclusion and sexual harassment. These cases seemed to be on the rise, although it is not yet clear whether this is due to more active reporting rather than a deterioration in behaviour.

The FCA is keen to understand how firms are dealing with non-financial misconduct; tolerating any form of misconduct is not indicative of a healthy culture and if this gives rise to failures or harm, the FCA is likely going to take an interest, especially where senior management is involved. Senior management positions within the financial services sector are positions of trust and the FCA expects holders of these positions to act appropriately both in and outside the workplace.

Examples of Good and Poor practices found by the FCA during Supervisory visits

In line with the FCA 's 2017 5 Conduct Questions Programme and 2018 5 Conduct Questions Programme annual reports, the FCA 's third annual report provides examples of good and poor practices within Wholesale firms, identified by the FCA during its Supervision activity. While these were identified within the Wholesale sector, the examples do apply to all firms in the financial services sector.

1. What proactive steps do you take as a firm to identify the conduct risks inherent within your business?

Examples of good practice.

Defining conduct risk as a separate category that sits sensibly alongside other major risk types such as Credit, Counterparty, Market and Operational risks;
widening the working scope of conduct risk, as framing it more narrowly potentially limits both the design of efforts to identify it and the outcomes;
raising the profile of, and actively promoting, competition concerns as a business as usual consideration where firms have a large market share;
taking action to reduce the conduct risk challenges from staff using smartphones and social media by creating short breaks and safe locations to step out and log on or connect;
assessing the impact and harm of potential events from the customer's point of view;
formalising a bottom-up approach as a monthly exercise for each key business unit;
introducing approaches that immediately feed newly identified risks or crystallised risk into the delivery of targeted training; and / or
clearly interweaving conduct topics with business discussions, rather than relegate them to more narrowly focused discussions in, for example, Operational Risk Committees.

Examples of Poor Practice

Firms showing little impetus to identify new risks through forward-looking proactive efforts;
reliance on a largely top-down approach where key risks are not comprehensively apparent or captured;
investing a lot of effort into identification exercises but then underinvesting in the steps to take action on the risks identified;
difficulties differentiating conduct risk from operational risk with the result being that the business line ownership of conduct risk being weak;
support services and second line of defence units not conferring with each other; and / or
firms approaching conduct risk in a diffused way instead of defining it as a category.

2. How do you encourage the individuals who work in front, middle, back office, control and support functions to feel and be responsible for managing the conduct of their business?

Holding CEO-led town hall sessions on conduct;
holding smaller town hall events hosted by desk or area heads, reflecting the fact that staff listen carefully to their more immediate line managers who are also able to actually observe their day-to-day behaviour;
carefully planning town hall sessions to ensure more junior staff and their management do not attend together in an effort to encourage discussion; and / or
openly communicating with staff the mistakes made by the firm in the past year, and inviting the staff to a session to discuss how those mistakes had happened and make sure they couldn't happen again.
Senior executives promoting the general importance of the firm's conduct messages without explaining what any of those messages were;
issues being escalated too rapidly, which risked bypassing key individuals who may be more directly accountable for managing and resolving the problem; and / or
undermining programme objectives by not ensuring that Desk Heads and other more senior managers attend open session Conduct Risk Forum meetings.

3. What support (broadly defined) does the firm put in place to enable those who work for it to improve the conduct of their business or function?

Framing risk appetite statements as a series of expectations of staff and developing metrics around those desired outcomes;
positive framing of key initiatives by strongly emphasising openness, transparency, accessibility and safety;
reframing initiatives to focus more on rewarding efforts such as identifying and resolving policy deficiencies, rather than solely punishing breaches as they happen;
repositioning 'zero tolerance for conduct risk' culture (which can make staff fearful and reluctant to disclose problems) as 'zero tolerance for unmanaged conduct risk' where staff are encouraged to be alert and respond to conduct risks;
participating in industry-led initiatives to address conduct issues;
looking beyond firms' own boundaries to assess conduct standards and risks from clients, counterparties, outsourced service providers and others;
not looking the other way if a client mistreats a member of the firm's staff;
introducing a reverse mentoring programme where staff significantly more junior than an executive meet regularly to share feedback;
introducing a one-off, tailored internal survey to assess conduct and culture and prevailing views among staff rather than use a more wide-ranging annual staff survey;
introducing a specific communication programme around disciplinary outcomes to provide transparency on how the firm decided and applied them;
specifically analysing the potential conduct risk in examining, preparing and implementing changes from EU withdrawal;
shifting beyond gender-based diversity by raising the importance of other aspects, such as race, educational background, economic background and other skills or experience; and / or
going beyond simply encouraging people to speak up by providing them with specific tools and training on how to raise a challenge with more senior staff. Correspondingly, providing related training for senior staff on how to receive and deal with a challenge.
Building a library of 'grey issue' scenarios for use across a wide range of businesses;
using notes from 'grey area' discussions to tailor additional targeted training and consider where revised policy and procedures may be helpful;
employing professional actors to role-play risk scenarios; and / or
extension of training to include the recruitment process to ensure that training includes conduct and behaviour assessments so that they are carried out consistently across all businesses.
Weighty, complex, centrally-led committees and programme management infrastructure - sometimes leading to fractured accountability in the firm, noticeably slower or stifled progress and less ability to summarise its position and progress.

4. How does the Board and ExCo (or appropriate senior management) gain oversight of the conduct of business within their organisation and, equally importantly, how does the Board or Exco consider the conduct implications of the strategic decisions that they make?

Greater investment in data design, creation aggregation and trend analysis leading to the creation of dashboards and MI that Managers and Boards can use to steer more effectively;
MI growing in depth and scope;
key risk indicators enabling firms to strengthen and reinforce more positive conduct and behaviours;
development of more focused and streamlined processes to collate and aggregate perceived risks, which are useful for management oversight;
introduction of a semi-formal 'Shadow Executive Committee' comprised of staff several levels below the actual Exco;
providing clear evidence that conduct risk is a key component of the review of strategic business initiatives, including business expansion (e.g. through committee papers and minutes);
evidence of challenge of new product approvals; and / or
better use of customer feedback, so while not a complaint, can alert firms to potential problems.
Key risk indicators being inwardly focused on misbehaviour, rule breaches or policy compliance.

5. Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct?

Horizon-scanning being formally included within strategic business planning, there being formal tipping point analysis for risks that appear to be growing;
new working groups being established to specifically address Question 5 and the conduct issues from new or evolving products or other business initiatives such as an acquisition; and / or
senior and middle-level executives actively participating in industry-wide initiatives. Engagements with industry peers acts as both a source and a delivery channel of progressive views.
No periodic horizon-scanning for the firm as whole involving business representatives; and / or
insufficient thought being given by firms to Question 5 as a whole.

If you are creating or reviewing the conduct risk framework within your firm, and would like a review or assistance, please contact us to discuss whether and to what extent you are capturing the key conduct risks relevant to your business.

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Understanding Conduct Risk: What the FCA Expects

Conduct Risk Overview: In the ever-evolving landscape of financial services, one constant focus for the Financial Conduct Authority (FCA) is conduct risk. While the term “conduct risk” may not be explicitly defined by the FCA, it holds a pivotal role in the regulatory framework. Firms operating under FCA regulation must grasp the essence of conduct risk, develop their unique definitions, and craft tailored strategies to address it effectively.

Conduct risk – the foundation: 5 conduct questions.

To help firms navigate the labyrinth of conduct risk, the FCA introduced the 5 Conduct Questions program in 2015. These questions serve as a compass for firms to align their practices with regulatory expectations:

1. Proactive Risk Identification: What steps does the firm take to identify conduct risks within its business?

2. Shared Responsibility: How does the firm instill a sense of responsibility for managing conduct across all functions?

3. Support for Improvement: What support mechanisms are in place to enhance the conduct of the firm’s business or functions?

4. Board Oversight: How does the firm’s board and executive committee oversee conduct, and how do employees contribute to this oversight?

5. Holistic Evaluation: Has the firm evaluated any business activities that undermine its efforts to improve conduct?

The FCA’s Wider Objectives

The FCA’s 2019/20 Business Plan highlights its overarching objective of improving the operation of financial markets concerning consumer protection, market integrity, and competition promotion. The 5 Conduct Questions program plays a vital role in advancing cross-sector efforts aimed at fostering a culture of good conduct and robust governance within firms.

Deciphering Conduct Risk

Conduct risk, in broad strokes, encompasses actions by regulated firms or individuals that harm customers, disrupt market stability, or hinder effective competition. These align with the FCA’s three statutory objectives:

1. Consumer Protection: Ensuring an appropriate level of consumer protection.

2. Market Integrity: Safeguarding and enhancing the integrity of the UK financial system.

3. Competition Promotion: Promoting effective competition in the interest of consumers.

However, conduct risk should not be confined to retail clients alone. Firms must apply a consistent definition across all organizational levels, even for overseas entities.

Identifying Key Conduct Risks

Understanding conduct risk begins with recognizing its drivers, which can stem from a firm’s structures and behaviours. Key steps include:

– Identifying specific risks (e.g., insider dealing, conflicts of interest, product design). – Implementing controls for ongoing risk monitoring. – Cultivating a culture of awareness and tracking cultural changes. – Regularly refreshing conduct risk assessments.

Consider conducting a gap analysis to identify additional controls necessary to mitigate risks effectively.

Conduct Risk in Strategy

A clear link between conduct risk and business strategy is essential. Firms must demonstrate how conduct risk considerations shape their strategies and decision-making processes.

Conduct risk – Risk Appetite

Aligning risk appetite with the outcomes of conduct risk assessments and the firm’s strategy is crucial. This linkage should reflect the FCA’s key objectives of achieving positive customer outcomes and maintaining market integrity.

Conduct risk – Governance and Accountability

Effective governance is paramount for risk identification and mitigation. Firms should streamline governance arrangements, avoid redundancy in management layers, and establish oversight mechanisms, possibly through a dedicated Conduct Risk Committee.

Addressing Conflicts of Interest

Scrutinizing business models for potential conflicts of interest is crucial. Key areas to examine include vertically integrated models, product distribution, staff incentives, and PA dealing policies.

Systems and Controls

Robust systems and controls are vital for risk identification. Management Information (MI) must be well-designed to highlight risk areas, and training programs should foster awareness of conduct risk at all organizational levels.

Business Model Impact

A firm’s business model can either mitigate or exacerbate conduct risk. Careful consideration of product and service design, especially in response to market demands, is essential to avoid conduct risks associated with complex or unsuitable products.

Nurturing a Positive Culture

A culture that promotes good behaviour is fundamental. It should involve senior management adhering to policies, discouraging bad behaviour, fostering openness, and addressing issues decisively.

Conduct Risk: Resources for Further Exploration

For a deeper understanding of the FCA’s perspective on conduct risk, you can explore these resources:

Industry Feedback on the 5 Conduct Questions 2018/19 https://www.fca.org.uk/publication/market-studies/5-conduct-questions-industry-feedback-2018-19.pdf Conduct Risk during LIBOR Transition: Questions and Answers https://www.fca.org.uk/news/statements/conduct-risk-during-libor-transition-questions-and-answers FCA Conduct Rules https://www.fca.org.uk/firms/senior-managers-and-certification-regime/conduct-rules Dear CEO Letter: Non-Financial Misconduct in Wholesale General Insurance Firms https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-non-financial-misconduct-wholesale-general-insurance-firms.pdf Wholesale Conduct Risk – Speech by Megan Butler https://www.fca.org.uk/news/speeches/wholesale-conduct-risk Conduct Risk Briefing – Speech by Julia Hoggett https://www.fca.org.uk/news/speeches/conduct-risk-briefing FCA’s Business Plan 2019/20 https://www.fca.org.uk/publication/business-plans/business-plan-2019-20.pdf

How We Can Assist

If you are in the process of establishing or reviewing your firm’s conduct risk framework, we are here to help. our services encompass gap analysis, implementation of conduct risk frameworks, and the creation of management information packs. contact us to discuss how we can support your journey toward effective conduct risk management..

Disclaimer: This article serves as a general guide and should not be considered legal or regulatory advice. Always consult with appropriate professionals for specific guidance related to your firm’s conduct risk management.

Please select your interests

Culture and conduct: the FCA enforcement agenda

Culture and conduct have been at the top of the FCA’s agenda for the past few years.

Introduction

Culture and conduct have been at the top of the FCA’s agenda for the past few years, with a particular focus on non-financial misconduct and the importance of senior management in setting the tone for culture throughout firms. This article provides an update on the current landscape, then considers three areas in relation to culture and conduct which we expect will be particular points of focus for the FCA in 2022:

Culture, diversity and inclusion

Culture and conduct in a hybrid working environment.

Culture and ESG

Whilst these issues are explored by reference to the FCA’s agenda in particular, many of the themes are likely to be prevalent across jurisdictions.

What is non-financial misconduct (and is the category evolving)?

The scope of what the FCA considers to constitute non-financial misconduct appears to have expanded. In the past, enforcement action relating to non-financial misconduct was mostly limited to examples of criminal conduct, including dishonesty-type offences such as fare dodging, and tended to invoke the requirements of fitness and propriety. However, the scope of interest of the FCA appears to have extended to cover a large variety of areas, from sexual misconduct to favouritism.

As a result, firms are grappling with some very tricky questions as to whether such conduct should be considered as a conduct rule breach as well as an F&P issue – and trying to work out where to draw the line as regards non-financial misconduct. The implementation of Senior Managers & Certification Regime (SMCR) for investment managers in December 2019 has also added an additional layer of complexity. For instance, would catching an employee with drugs in the office, sending confidential emails to a personal email address or sharing answers to mandatory compliance training using instant messaging amount to a breach of a conduct rule? Would a failure to have mechanisms in place to manage these risks also mean that a Senior Manager would be held accountable? Should we be holding Senior Managers to a different standard of behaviour given that they carry the reputation of the firm?

These are difficult questions that are necessarily fact-dependent, and firms need to ensure that a consistent approach is taken both from a regulatory and employment law perspective.

Non-financial conduct risks may also be more pronounced for investment managers – which often have fairly flat hierarchies and where business owners/partners play an active role in the business and interact with staff at all levels on a regular basis. In these cases, the tone from the top is particularly important. For instance, it is important for investment managers to correct any perception that employees may have that speaking-up and raising concerns about potential misconduct by business owners/partners will not be fruitful or even be detrimental to their careers. Whistleblowing policies and procedures should be looked at carefully with that risk in mind.

The FCA’s most recent business plan makes plain the link between culture and diversity and inclusion (D&I). In particular, the FCA highlights that an inclusive culture in which all staff can speak up allows conduct risk to be managed and reduces the risks arising from 'groupthink'.

In March of this year, Nikhil Rathi, the FCA’s CEO, stated that improving D&I is both a matter of fairness and also a crucial way to strengthen consumer outcomes. In particular, Mr Rathi referred to the 5 Conduct Questions (5CQs) that the FCA has published to focus the minds of Senior Managers on conduct risk.

Mr Rathi said that he would like to add a sixth question: “is your management team diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up?”.

The proposed inclusion of this question on D&I, alongside the existing 5CQs, which go to fundamental aspects of how firms operate, shows the FCA’s resolve to improve diversity and inclusion. The FCA, the PRA and the Bank of England have also recently published a joint Discussion Paper on D&I in the financial sector. The Regulators ultimately aim to produce minimum regulatory expectations, monitored through the introduction of regular reporting requirements.

As a result, we expect that there will be a significant increase in scrutiny from the FCA as regards diversity, both in senior leadership teams and more generally across the industry. Investment managers should therefore be considering the diversity of their teams and ensuring that plans are in place for making necessary improvements, before being prompted by questions from the FCA.

The FCA’s focus on culture also comes at a time when the pandemic, through widespread working from home and the emergence of hybrid working arrangements, has been re-shaping culture and placing new stresses and strains on the control environment.

With an unprecedented shift to remote working, along with heightened stress and market pressures during the pandemic, it is inevitable that the culture and control environments of many investment managers has been stretched and tested to the limit, and perhaps beyond.

In recognition of this, in October 2021, the FCA set out its remote or hybrid working expectations for regulated firms . The FCA’s expectations include:

That there is a plan in place, which has been reviewed before making any temporary arrangements permanent and is reviewed periodically to identify new risks.
There is appropriate governance and oversight by Senior Managers under the SMCR, and committees such as the Board, and by non-executive directors where applicable, and this governance is capable of being maintained.
An appropriate culture can be put in place and maintained in a remote working environment.

The challenge for firms in response to this is ensuring that a good culture can be maintained despite staff working in different places, as well as making sure that the control environment can effectively mitigate the different risks associated with hybrid working arrangements, so as to identify misconduct no less effectively than for office-based employees.

In particular, we expect that some of the most significant challenges arising out of changing behaviours during the pandemic will be the handling of confidential information (including inside information) when working from home and the use of encrypted communication applications such as WhatsApp. It is likely that mishandling of confidential information, and misuse of communication tools such as WhatsApp, linked to home-working, are likely to be a focus point for FCA enforcement actions in the year ahead.

In fact, the use of WhatsApp and other similar messaging platforms has already attracted the attention of the FCA in its Market Watch newsletter; particularly the misconduct risks associated with the use of these tools as a result of them being difficult to monitor for firms.

These new risks serve to highlight the importance of setting the tone from the very top of the organisation and making sure expectations are made clear to all staff, through policies and procedures, formal training and regular reminders. The frequency of compliance spot-checks should be considered, with resources focused on any high-risk business areas.

Overlap between culture and environmental, social and governance (ESG)

ESG is also a real area of focus for firms and regulators alike and is likely to be considered a key barometer of a firm’s culture. The question of who takes responsibility for ESG within a given organisation is a real issue for firms given its immense scope. For many firms this will necessarily involve collective responsibility at senior levels for embedding ESG into the firm’s culture, across its business.

Firms should put in place appropriate oversight, for example through an ESG-focused committee. This may help to lower the risk of ESG-related issues, such as greenwashing, when it comes to product development, marketing and distribution. Firms may also wish to consider ESG through the 5CQ’s to ensure that ESG-related issues are being factored into all areas and levels of the business. Such consideration needs to look beyond the “E” in ESG, and take adequate account of social impacts and governance considerations.

We are already starting to see global regulators open enforcement investigations into investment firms on ESG issues. A key focus is on whether firms have misrepresented the extent to which their investment management processes take account of ESG factors. There is ample scope for regulators to link this issue back to culture, and to conduct rules (or principles) when imposing enforcement outcomes on firms.

The expansion of what constitutes relevant non-financial misconduct, the implementation of the SMCR and the stresses and strains of the pandemic are a particularly potent combination for investment managers. The FCA will undoubtedly be looking to take on enforcement cases in this area in order to set expectations – and to demonstrate that the SMCR has teeth.

Whilst culture and non-financial misconduct can be difficult areas for firms to grapple with, the regulatory risks of failing to do so far outweigh these difficulties. Firms should look to develop their risk mitigation strategies, through policies, training, and compliance monitoring, with specialist help as needed to ensure effective implementation.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.

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FCA Business Plan 2021/22

New approach, expanding priorities.

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The FCA’s Business Plan continues to be heavily outcomes-focused and there is less sector-specific detail, revealing a conscious change of approach. It notes that the digitalisation of financial services brings profound changes in the way consumers make decisions and global markets operate, that the transition to a net zero economy will require an entirely different approach to markets and investment products, and that persistently low interest rates may lead to consumers taking excessive financial risk or broader systemic risks in wholesale markets.

The plan continues the theme that the current regulatory framework is overly focused on rules and process, and not enough on principles and outcomes. This sentiment is echoed by the addition of Consumer Duty to its existing four consumer priorities. The FCA sees too many resources devoted to redress and remediation, and not enough to empowering consumers to take good decisions and regulatory action to prevent harm and safeguard consumers’ financial wellbeing. We see this driving principle featuring prominently as the FCA continues its transformation programme.

In wholesale markets, the FCA continues its focus on market integrity with the LIBOR transition and prevention of market abuse and financial crime. With more freedom post-Brexit for the UK to tailor rules in the wholesale markets, there is a new focus on effectiveness in primary and secondary markets. In investment management and pensions, the FCA wants fair value and products that meet investors’ needs. It continues to work with the Bank of England and international bodies on the framework to manage liquidity in open ended funds, including money market funds. The FCA also wants improved oversight by principal (regulated) firms over their appointed representatives (ARs).

Unsurprisingly, the priorities across all markets include fraud, financial resilience and resolution, and operational resilience. New and significant entries are diversity and inclusion (within both the FCA and regulated firms) and environmental, social and governance (ESG) issues. The FCA’s international aims have shifted away from Brexit – other than ensuring firms exit smoothly from transitional arrangements – to global standard-setting, open markets and effective cross-border supervision.

To ensure firms start with high standards and maintain them, the FCA will more intensively assess and scrutinise applicants’ financials and business models, but the application process will be more straightforward. It will also increase its oversight of newly authorised firms (a regulatory “nursery”) and of firms that are growing significantly.

The plan describes how the FCA’s role will change as it develops towards “a more innovative, assertive and adaptive approach”. Whilst these are laudable aims, it will represent a significant challenge for the FCA as it juggles a raft of other regulatory challenges. However, despite this, the FCA has also made a commitment to be more accountable with a promise to report on its progress against metrics to be determined.

The FCA’s budget will increase by 4%, with the costs of ongoing regulatory activity (ORA) up 4.9%. The FCA appears to have removed its freeze on the fees paid by the smallest firms – a concession that had been in place for the last two years. This is a signal that the FCA is seeking to transition out of its pandemic measures, where appropriate.

Highlights featured in this update:

Consumer priorities, wholesale markets priorities, cross-cutting priorities, transforming how the fca works and regulates.

Whilst the FCA continues the focus on its four strategic priorities from last year’s Business Plan, it acknowledges that the shape and scope of some of these priorities have changed to reflect changes in consumers’ finances and behaviour. Further, it has added the Consumer Duty initiative as a fifth priority, underlining the intended regulatory impact of the new duty, which is a “raising of the bar” in the treatment of customers. For further details, see KPMG’s paper on the potential impact of the new Consumer Duty.

1) Enabling consumers to make effective financial decisions

The FCA has broadened out this priority to all consumers (last year it was limited to just investment consumers). However, the outcomes the FCA seeks have not fundamentally changed.

The FCA has made some progress, such as in looking to strengthen financial promotion rules and awareness of ScamSmart. The FCA’s next near-term priorities are:

Publishing shortly its Consumer Investments Strategy (which will include how the FCA tackles firms and individuals who cause consumer harm) and a second data report, detailing the FCA’s work to protect consumers
Creating a “consumer investment coordination group” with the FSCS, the FOS and the Money and Pension Service (MaPS), to gather information on sharp practices and so better target interventions
Beginning a review of aspects of the rules on the scope and coverage of FSCS compensation

2) Ensuring consumer credit markets work well The underlying outcomes for this priority are unaltered. In order to achieve these outcomes, the FCA will focus on :

How firms are providing tailored support to borrowers in financial difficulty
Reviewing its approach to the debt advice rules to help over-indebted consumers get high-quality advice
Bringing “Deferred Payment Credit” into its regulatory remit
Considering possible future changes in credit information markets where consumers can choose to use credit information to make better-informed decisions

3) Making payments safe and accessible

The FCA has extended both the scope and remit of this priority, placing greater emphasis on consumer protection by ensuring access to payments services and the payments market being competitive and innovative – especially for smaller businesses. The FCA will:

Focus supervisory activity on ensuring payment services and e-money firms are financially robust and customers understand FCSC coverage
Seek to continue to protect access to cash – particularly for consumers in vulnerable circumstances
Work with HMT to develop policy and recommendations on payments, e-money and crypto-assets

4) Delivering fair value in a digital age

The underlying outcomes for this priority are unaltered and much of the FCA’s activity will be a continuation of existing work. However, as it builds its digital markets strategy, it will develop a framework to identify and assess potential harms and benefits arising from the increasing digitalisation of financial services markets. In the meantime, the FCA will focus on:

Assessing the implementation of the GI pricing practices requirements (January 2022) by using firms’ reporting data to measure success, track market changes and identify firms that continue to engage in price walking
Continuing to assess the impact that digitalisation can have on competition to help ensure that digital financial services markets operate effectively to generate good customer outcome
Investigating practices, such as “sludge practices”, which make it difficult for consumers to cancel a product or service online

5) Consumer Duty

This is a new priority driven from the FCA’s recent consultation on a New Consumer Duty, which signals a “paradigm shift in its expectations” of firms. Therefore, the impact of this publication cannot be under-estimated in terms of its regulatory intentions. The outcomes the FCA is seeking to achieve are that:

Communications equip consumers to make effective, timely and properly informed decisions
Products and services are specifically designed to meet consumers’ needs and sold to those whose needs they meet
Customer service meets the needs of consumers, enabling them to get the benefits of products and services and act in their interests without unnecessary barriers
The price of products and services represents fair value for consumers

The consultation closes on 31 July 2021 and the FCA will set the proposed new rules or guidance in a subsequent consultation at the end of 2021, with a view to finalising and introducing any new rules before end-July 2022.

The FCA’s focus in relation to wholesale markets is widening from market integrity to also include market effectiveness and efficiency. The FCA highlights the ”gamefication’ of finance due to the digital access consumers now have to wholesale markets. Given that retail consumers do not have the same protections when accessing wholesale markets directly, it is important that wholesale firms must meet conduct obligations around conflicts of interest, price manipulation and information.

1) Review of rules in primary and secondary markets

The rules framework supports the needs of investors and companies seeking to raise finance and manage risks through capital markets.

The focus is on improving the effectiveness of the markets. The FCA is consulting on amendments to the Listing rules, including recommendations for the Lord Hill’s UK Listing Review Report , and the proposed rules around special purpose acquisition vehicles (SPACs). The FCA is proposing to extend climate-related financial disclosures from premium listed companies to standard listed companies. In the secondary markets, the FCA is working with HM Treasury to simplify and improve the effectiveness of the on-shored MiFID II/ MIFIR regimes.

2) LIBOR Transition

Firms and markets complete an orderly transition away from LIBOR to alternative risk-free rates, with customers treated fairly throughout this transition.

With the cessation of non-USD LIBOR at end-2021, the FCA will focus on using its powers to support an orderly transition (i.e. finalising the framework around the use of synthetic LIBOR). Firms should also expect increased monitoring of their transition plans by both the FCA and the PRA.

3) Market abuse and financial crime

Firms effective in preventing market abuse and reducing the risks of financial crime

No new initiatives are announced, but the FCA will seek to measure the impact of its work in this area.

4) Asset management and non-bank finance

Firms to offer investors products that are fair value, meet their investment needs and offer an appropriate level of protection; marketing and disclosures to be fair, clear and not misleading

Asset managers should manage liquidity in funds to avoid unnecessary risks to investors and market integrity

Enable investment in less liquid assets for those with a long-term investment view who can cope with the risk of these investments

The FCA will continue to focus on how asset managers ensure value for consumers, increase its supervisory focus on whether disclosures on ESG properties of funds are fair, clear and not misleading, and continue to seek to identify funds that are outliers to their peers (e.g. due to high fees). It will follow up the findings in its June report on governance weaknesses in host Authorised Fund Managers and its work with the Bank of England on liquidity management in open-ended funds and reform of money market funds. It will introduce the new “LTAF” structure, designed to accommodate relatively illiquid assets, and will decide whether to proceed with requirements for notice periods for open-ended property funds.

5) Pension products

Pension providers offer good value products, and consumers use guidance and support to help them make effective choices.

The FCA will be working with the Pensions Regulator (TPR) on reviewing how to best drive value for money in pensions. The FCA wants pension providers to offer good value products and consumers to be able to make effective choices. The FCA will also be consulting on changes for non-workplace pension providers to help ensure consumers are offered an appropriate default solution where they need it.

6) Appointed Representatives regime

Principals and ARs that are competent, financially stable and ensure fair outcomes for consumers when selling products or giving advice.

The FCA is concerned that the oversight of principal firms (which have regulatory permissions) over their appointed representatives (ARs) is not strong enough and leading to unfair outcomes for consumers. The FCA will increase its supervision in this area and consult on cross-sector changes to improve and strengthen elements of the AR regime – this may include fundamental legislative change.

The FCA notes that the seven priorities in the Plan that are across all markets are not exhaustive. It points readers to the Regulatory Initiatives Grid for more information.

1) Fraud

The FCA’s focus will be on:

keeping fraudsters out of financial services at the gateway
stopping regulated firms from facilitating fraud
detecting and pursuing FCA-supervised and improperly unauthorised/ unapproved fraudsters
informing and empowering the public to protect themselves

It will conduct proactive surveillance and monitoring, use effective triage to prioritise, disrupt the work of fraudsters and identify the right intervention, remove FCA-supervised fraudsters from the financial system, and work closely with anti-fraud partners to maximise the collective fight against fraud.

2) Financial resilience and resolution

Firms to have appropriate capital, liquidity and reserves to cover outstanding redress liabilities, so they do not fail in a disorderly manner
Firms to hold financial resources proportionate to the potential harm caused if they do fail, reducing the level of FSCS pay-outs over time
Scale of compensation liabilities to stabilise in the medium-term and reduce longer-term as firms hold more capital and liquidity, and fewer cause misconduct that requires them to pay redress on a large scale

The FCA will support firms as they adapt to the new Investment Firms Prudential Regime (IFPR), strengthen its data-driven monitoring of the financial resilience of solo-regulated firms, target interventions at firms with weak financial resilience and those that are likely to cause material harm if they fail, continue work to automate and combine financial resilience data with other data on firms, review aspects of the compensation framework to ensure it remains appropriate and proportionate, and tackle the root causes of harm that create compensation liabilities.

3) Operational resilience

Firms should be operationally resilient against multiple forms of disruption to minimise the harm caused to consumers and markets. Over time, the FCA would expect to see a reduction in the number, type, duration of incidents and the level of harm they cause. The FCA will assess firms’ progress in implementing its 2021 Policy Statement. From April 2022, it will assess how able firms are to remain within their impact tolerances.

4) Diversity and inclusion

The FCA wants to improve its own diversity and inclusion so it has an inclusive working environment with diverse teams who are confident to share their experience and opinions, its people reflect the society it serves, and regulation supports improved outcomes for different groups in the population. For firms are:

Regulated firms and listed companies have more diverse representation at all levels
Regulated firms and listed companies foster cultures that are inclusive so that staff can share their diverse experiences and backgrounds
Firms design and deliver products that reflect the diverse needs of consumers, offer fair value and are delivered in a fair and accessible way

To support these three outcomes, the FCA expects to see better data collection by regulated firms. It will develop how it measures progress against these outcomes to ensure a consistent approach across financial services.

5) Environment, social and governance (ESG)

High-quality climate- and sustainability-related disclosures to support accurate market pricing, helping consumers choose sustainable investments and drive fair value
Promote trust and protect consumers from mis-leading marketing and disclosure around ESG-related products
Regulated firms have governance arrangements for more complete and careful consideration of material ESG risks and opportunities
Active investor stewardship that positively influences companies’ sustainability strategies, supporting a market-led transition to a more sustainable future
Promote integrity in the market for ESG-labelled securities, supported by the growth of effective service providers – including providers of ESG data, ratings, assurance and verification service
Innovation in sustainable finance, making use of technology to bring about change and overcome industry-wide challenges

The FCA will:

Continue its “world-leading” work on TCFD-aligned disclosures for listed companies and asset managers/owners
Work to address concerns about greenwashing
Promote standardisation of wider ESG-related disclosures
Collaborate domestically with the government and industry
Monitor the exercise of investor stewardship by institutional investors
Gather market intelligence to gauge how well firms are supported by service providers (such as ESG rating providers)
Encourage innovation in sustainable finance
Enhance its role as a facilitator of sustainability in financial markets and firms by acting as a convener, agent of change and role model

6) International

The FCA says it is committed to robust international standards, strong relationships with authorities around the globe and effective supervision of cross-border financial services. It will be an active member of international standard-setting bodies, participate in the IMF’s 2021 review of the UK, ensure smooth operation of the Temporary Permission Regime and engage with firms to ensure orderly exits from Brexit transitional arrangements.

7) Market access, equivalence and trade negotiations

Future trade relationships that support open markets in a way that respects and promotes our objectives and ensures regulatory and supervisory autonomy
A domestic market access regime that addresses regulatory and supervisory risks from cross-border access, operates effectively post EU-withdrawal and recognises the benefits of open markets

The FCA will provide technical advice to trade negotiations and engage with HMT on its work on the UK’s overseas framework.

Nikhil Rathi, Chief Executive says, “We operate in a world of rapid and disruptive change. To be an effective regulator, we can’t just respond to today’s challenges. We need to prepare for those of tomorrow.” The Plan says that the FCA will be:

More innovative – taking advantage of data and technology to increase its ability to act decisively in the interests of consumers
More assertive – testing the limits of its powers and engaging with partners to make sure they bring their powers to bear
More adaptive – constantly learning and always adjusting its approach as consumer choices, markets, services and products evolve

It expects its approach and delivery of work to exhibit six traits: purposeful, professional, partnering, proactive, pace and pride. The plan does not provide explicit feedback against the four outcomes the FCA set itself last year, but it has set out its first strategic overarching outcomes and metrics to align with its transformation programme:

Setting the bar high to support sustainable innovation for consumers: publish the aggregate amount by which consumers benefit from its policy work to improve market outcomes.
Setting the bar high to support market integrity in wholesale markets: continue to monitor, and expect improvements in, its suite of market cleanliness statistics
Ensuring firms start with high standards and maintain them: monitor. refusal/withdrawal/rejection rates (expected to increase initially) and complaints about newly authorised firms (expected to reduce).
Using new approaches to find issues and harm faster: monitor the value and volume of FSCS claims.
Tackling misconduct to maintain trust and integrity: expect an initial increase as firms’ permissions are removed.
Enabling consumers to make informed financial decisions: expect a reduced number and proportion of calls to the FCA that need to be directed elsewhere and increased effectiveness of its ScamSmart campaigns.
Diversity and inclusion across the industry: monitor and set targets for itself and drive stronger outcomes across the industry.

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The FCA Business Plan: What does it mean from a governance perspective?

United Kingdom | Publication | June 2022

Earlier this year the Financial Conduct Authority ( FCA ) published its latest Business Plan. The Business Plan itself took a different form when compared to previous incarnations by having a shorter summary of priorities and planned activities and cross referring to other documents including the three-year strategy and the regulatory initiatives grid. Notwithstanding this, the Business Plan contained, as usual, a number of nuggets for firms which will help guide them on the regulator’s expectations in certain areas. Governance is clearly an area of focus for the FCA and the Business Plan contains both explicit comments which firms should take on board and references to the FCA’s own governance arrangements which may be of assistance to firms considering potential enhancements in this area. In this article we will cover both these types of comments.

Appointed Representatives: One of the key reforms this year will be the changes to the Appointed Representatives Regime (AR). The FCA has already published a consultation paper outlining its proposed reforms, the catalyst of which has been a concern that principal firms are not adequately overseeing the activities of their ARs leading to a risk that consumers are being mis-led and mis-sold. Improving oversight of ARs was a topic mentioned in the Business Plan and principal firms were reminded in the consultation that they must effectively oversee their ARs and ensure that they have appropriate governance arrangements, effective risk frameworks, internal controls and adequate resources. Operational Resilience: The Business Plan also mentioned that whilst operational disruptions are inevitable, firms must be operationally resilient. An important part of any operational resilience strategy should focus on having effective governance arrangements in place. Having clear organisational direction, transparency over roles and responsibilities and effective internal co-ordination all lead to better resilience outcomes. Market Abuse: The Business Plan also spoke of the FCA delivering assertive action on market abuse and working to ensure that firms and issuers have robust controls in relation to inside information and to disclose it to the market in an accurate and timely way. Understanding what good governance over the control of market abuse risks looks like and implementing the requisite processes to manage this, is critical for senior managers. ESG: Unsurprisingly, the Business Plan referenced the FCA’s environmental, social, and governance (ESG) priorities and this included embedding consideration of ESG issues in the authorisation process. This includes considering factors such as D&I, the nature of the firm and the products and services to be offered and increasing supervisory focus on asset managers. Crypto-assets: In relation to crypto-assets, the FCA made the point in the Business Plan that the UK currently only regulates such assets for money laundering purposes but these assets are increasingly being adopted and incorporated into existing financial services. As per its statement in March the FCA reminded firms that when interacting with or exposed to crypto-asset services they remain responsible for assessing the risks to their business and consumers. As mentioned above, the FCA made a number of comments regarding its own governance arrangements which may also be applicable to firms. These include the FCA:

Noting that the Business Plan was being published when the external environment is changing rapidly and flagging its adaptive approach to allocating resources and monitoring performance to make it more agile and able to respond to market needs; respond to today’s challenges and prepare for those of tomorrow (such as by understanding the impacts of digital developments).
Recognising the need to use resources efficiently so the FCA has weighed the different outcomes it wants to achieve, looking at factors such as severity and probability of harm.
Framing its activities by reference to the outcomes they achieve rather than the processes it follows.
Committing to reporting publicly on outcomes and developing a set of metrics to be used to measure progress.
Investing in its capability to become a data-led regulator as part of its transformation programme and exploring how it can use technology such as AI and increasing resource in intelligence and analytics to help spot and track fraudulent activity.
Streamlining its decision-making process (so that the Regulatory Decisions Committee focusses on contentious enforcement cases) so it can act more decisively and swiftly.
Engaging with devolved administrations and having a Devolved Nations team, recognising that different areas of the UK often have different needs.
Challenging itself to find the limits of its powers.

Firms may find it useful to consider how they can incorporate and evidence similar approaches to governance in the context of their own businesses with a view to being in a better position to demonstrate compliance with the FCA’s expectations.

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Conduct Risk Framework – what the FCA expects

Conduct risk continues to be a focus for the FCA. As it is not an FCA defined term, firms need to understand what it means. The FCA expects firms to develop their own conduct risk definition and strategies and put in place a tailored conduct risk framework to address the specific risks that their business is exposed to.

The FCA introduced the 5 Conduct Questions programme in 2015 and the leading wholesale banking firms operating in the UK and subsequently published feedback papers in 2018 and 2019.

The five questions were:

What proactive steps does the firm take to identify conduct risks in its business?
How does the firm encourage people in front, middle, back office, control and support functions to feel responsible for managing conduct?
What support does the firm put in place to help its people improve the conduct of their business or function?
How does the firm’s board and executive committee get oversight of conduct in the organisation? And how do employees bring information into their discussions?
Has the firm looked at where there are any business activities it is engaged in that undermine its work to improve conduct?

The 2019/20 Business Plan sets out the FCA’s overall objective of how to improve the way financial markets operate with respect to the protection of consumers, the integrity of markets and the promotion of competition. Among other things, the 5 Conduct Questions programme clearly supports their cross-sector efforts on firms’ culture and governance.

What is conduct risk?

Conduct risk is broadly defined as any action of a regulated firm or individual that leads to customer detriment or has an adverse effect on market stability or effective competition, these are a reflection of the FCA’s three statutory objectives:

Protect consumers – securing an appropriate degree of protection
Protect financial markets – protect and enhance the integrity of the UK financial system
Promote competition – promote effective competition in the interests of consumers

Firms should seek good behaviour across all aspects of their organisation and develop a culture in which it is clear that there is no room for misconduct. Although treating customers fairly (TCF) has long been part of the retail regulatory framework, conduct risk should not be seen as merely an extension of this. Linked to this is the commonly held misconception that conduct risk is only a retail client issue.

Firms need to consider what conduct risk means and ensure that there is a consistent definition and understanding throughout all levels of the firm including overseas entities.

How should firms identify the key conduct risks within the business?

Conduct risk drivers stem from the firms’ structures and behaviours which could create a risk of harm to consumers or market integrity. Firms that understand the drivers of conduct risk can better understand whether their conduct risk frameworks are robust enough to mitigate against the risk of harm originating from its activities or individual behaviours. Firms need to consider:

The conduct risks that the firm is exposed to. Examples of key risks may include insider dealing, conflicts of interest, product design or mis-selling through inappropriate incentive and bonus schemes;
The controls in place to monitor and mitigate these risks on an on-going basis. How it will be ensured that these controls remain fit for purpose;
Changes needed to be made within the organisation from a cultural/values perspective and how these can be tracked: and
The periodic refreshment of the conduct risk assessment.

We recommend a gap analysis be conducted to assess any additional controls that need to be put in place, to ensure that all risks are mitigated prior to putting in place a conduct risk assessment. Conduct risks need to be treated separately from other types of risk such as market and operational risk.

A clear relationship between conduct risk and business strategy should be established. The FCA expects firms to be able to demonstrate and evidence how conduct risk matters are driving business strategy and decision making. Questions which need to be asked are:

What is the firm looking to achieve from a conduct risk perspective; and
What does success look like?

Risk Appetite

The overall risk appetite for conduct risk should be informed by the key outcomes from the conduct risk assessment and the firm’s conduct risk strategy. We recommend linking the risk appetite to the FCA’s key objectives of good customer outcomes and market integrity.

Governance and Accountability

A firm which has poor governance arrangements cannot effectively identify and mitigate risks of harm caused by its business activities. For example, if a firm has many layers of management and committees which receive similar and overlapping Management Information (MI), it may be difficult to ensure that risks identified through reporting are being addressed correctly. Additionally, effective oversight in terms of how issues are being handled and by whom need consideration Firms may want to appoint a specific Conduct Risk Committee.

Conflicts of interest

A review of the business models and the assessment of potential conflicts of interest that may be present should be carried out. Areas to focus on could be:

The existence of a vertically integrated business model;
The manufacture and distribution of products;
Staff incentive schemes; and
The firm’s PA dealing policy.

Systems and controls

A firm which has inadequate systems and controls cannot effectively identify risks of harm caused by its activities. MI is a key form of control and, if not designed properly, can lead to risks not being properly identified. Senior management needs to keep the design of MI under regular review to ensure that it continues to be fit for purpose in highlighting risk areas. Training is another important form of control and rather than adopting a tick box approach, the FCA expects firms to develop training in order to embed awareness of conduct risk at all levels of the organisation. The Senior Managers and Certification Regime aims to strengthen accountability and provides firms with a great opportunity to roll out new conduct risk training programmes to all staff so that they truly understand the risks attached to their specific roles and how they should behave.

Business model

A firm’s business model can itself be a driver for conduct risk, for example in the design and delivery of products/services. Taking the example of consumers’ search for yield in a low interest rate environment, often encourages firms to try and design more complex and risky products to try to meet this demand. But that may present key conduct risks, like consumers not fully understanding the products, which in themselves are wholly unsuitable.

A key indicator of culture is the tone from the top:

Senior management must act in accordance with the firm’s policies and procedures;
Senior management should not reward bad behaviour which can come about through employee remuneration set against financial targets only;
A blame culture when things go wrong can often discourage people from speaking up and admitting they have made a mistake, thereby preventing problems from being rectified;
Employees turning a blind eye to misconduct in the workplace for fear of speaking up; and
Elements of indecision within the firm, where difficult decisions are put off. This can lead to long-running failings not being addressed through prompt and decisive action .

Firms should seek to promote good behaviour across all aspects of their organisation and develop a culture in which it is clear that there is no room for misconduct. Although TCF has long been part of the retail regulatory framework, Conduct Risk should not be seen as merely an extension of this.

Further Resources

https://www.fca.org.uk/publication/market-studies/5-conduct-questions-industry-feedback-2018-19.pdf

https://www.fca.org.uk/news/statements/conduct-risk-during-libor-transition-questions-and-answers

https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-non-financial-misconduct-wholesale-general-insurance-firms.pdf

https://www.fca.org.uk/news/speeches/wholesale-conduct-risk

https://www.fca.org.uk/news/speeches/conduct-risk-briefing

https://www.fca.org.uk/firms/5-conduct-questions-programme

https://www.fca.org.uk/publication/business-plans/business-plan-2019-20.pdf

How we can help

If you are creating or reviewing the conduct risk framework within your firm and would like us to review or to assist, please contact us to discuss. We offer a number of services including gap analysis, implementation of conduct risk frameworks and management information packs.

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FCA Business Plan 2021-22: A faster future FCA

Author: Simon Treacy

In his first Business Plan since becoming Chief Executive of the Financial Conduct Authority, Nikhil Rathi promises to make the FCA a more innovative, assertive and adaptive regulator.

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FCA Handbook

PRIN 2.1 The Principles

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Neil Woodford smiling in front of a screen with analytics information on it

Neil Woodford’s understanding of risk ‘defective’, FCA says

Watchdog issues warning notice to former star stockpicker over collapse of his fund in 2019

The former star stockpicker Neil Woodford has been hit with a warning notice by the Financial Conduct Authority over the spectacular collapse of his fund five years ago, with the watchdog accusing him of having “defective understanding” of liquidity risks faced by the fund.

In the warning issued on Thursday, the FCA said it intended to take action against Woodford and Woodford Investment Management (WIM) in respect of their conduct in the management of the Woodford Equity Income Fund (WEIF) before its suspension in 2019.

The FCA said Woodford held “a defective and unreasonably narrow understanding of his responsibilities for managing the WEIF’s liquidity risks”, while also claiming that he had failed to ensure the company had appropriate liquidity when making investment decisions.

Lawyers representing Woodford and the firm rejected the findings, which they called “unprecedented and fundamentally misconceived”.

Woodford was forced to collapse the £3.7bn fund in June 2019 , with almost 300,000 investors affected. The fund was launched by Woodford in 2014 after a successful career working as a fund manager at Invesco.

However, after his initial success earned him the moniker of “Britain’s Warren Buffett”, a number of unsuccessful investments resulted in many investors withdrawing cash , prompting a liquidity crisis.

In the notice, the FCA said the investment decisions made by Woodford and WIM materially increased the risk of and resulted in the WEIF’s liquidity profile “becoming unreasonable and inappropriate”.

It added: “They also materially increased the risk that the WEIF would need to be suspended and thereby place those investors who did not redeem prior to the point of suspension at a disadvantage.”

In a separate final notice to Link Fund Solutions (LFS), the company in charge of the fund’s liquidity, the FCA said it “failed to act with due skill, care and diligence in its management”. It also stated that it failed to manage the liquidity of the fund and ensure that concerns about the liquidity position were acted upon.

In September 2022, the FCA said it could fine Link £50m because of its role in the collapse of the fund. However, the watchdog revealed in the final notice that it would not be pursuing the fine as this would reduce the amount out of pocket investors could receive back.

In February, the high court gave the green light for a £230m redress scheme, with those who invested in the fund when it was suspended to receive a share.

The warning notice marks the FCA’s intention to take action but Woodford will be able to make representations to its regulatory decisions committee before it decides what action to take. Woodford’s lawyers have said he will challenge the FCA decision.

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A statement issued on behalf of WilmerHale and BCLP, legal counsel to Woodford and WIM, said: “The FCA alleges that WIM and Mr Woodford failed to act with due skill, care and diligence during the 11 months from 31 July 2018 to 3 June 2019, when Link decided to suspend the fund.

“It is striking that the FCA’s only criticisms of Neil Woodford relate to his involvement in matters relating to the fund’s liquidity framework, which was, in fact, Link’s responsibility and supervised by the depositary (the depositary is responsible for the safekeeping of the fund’s assets and for overseeing the fund’s authorised corporate director) and the FCA.”

A spokesperson from LFS said: “As we have previously stated, LFSL [Link Fund Solutions Limited] entered into a conditional settlement agreement with the FCA and Link Group expressly on the basis that there is no admission of liability. If the scheme had not been approved, LFSL would have challenged the FCA’s findings and defended itself against any claims made against it by scheme investors.

“We are pleased the scheme has become effective and the initial payment has now been made to scheme investors. We have always believed the scheme was the best option to provide investors with a substantial level of redress.”

Neil Woodford
Financial Conduct Authority
Financial sector
Investment funds
Investments
Hargreaves Lansdown

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FCA's 2013/14 business plan and 2013 risk outlook

Practical law uk legal update 9-525-4025 (approx. 25 pages), fca's 2013/14 business plan and 2013 risk outlook.

Secure an appropriate degree of protection for consumers.
Protect and enhance the integrity of the UK financial system.
Promote effective competition in the interests of consumers.
A renewed focus on consumers. This will include helping to ensure that firms' strategies are aligned with producing appropriate outcomes for consumers (for example, through work on product governance and incentives structures in firms).
Tackling market abuse, by taking strong enforcement action to deter future misconduct. Focusing on wholesale conduct will be critical for the FCA, as will the new approach to the supervision of trading platforms.
Ensuring a competitive financial services industry. This is a significant change. It will involve the FCA building a new competition department to embed competition analysis across the organisation. The new department will take action, as appropriate.
Addressing ongoing misconduct, such as relating to the London Interbank Offered Rate (LIBOR), payment protection insurance (PPI) and interest rate swaps.
Carrying forward major policy initiatives, such as the mortgage market review (MMR), the changes to retail investment advice, and extensive engagement with the EU on important directives under consideration.

Risk outlook for 2013

Firms not designing products and services that respond to real consumer needs, or that are in consumers' long-term interests.
Distribution channels not promoting transparency for consumers on financial products and services.
Over-reliance on, and inadequate oversight of, payment and product technologies.
A shift towards more innovative, complex or risky funding strategies or structures that lack adequate oversight, posing risks to market integrity and consumer protection.
Poor understanding of risk and return, combined with the search for yield or income, which leads consumers to take on more risk than is appropriate.

Business plan 2013/14

Achieving objectives.

Firms meet its standards.
Markets operate with integrity.
Consumers are protected.

Conduct risk

Consumer protection, enhancing market integrity, building competitive markets, building a new regulator, action against firms that do not meet standards.

Reinforcing its expectations of wholesale markets by taking decisive action where firms fail to manage risks effectively, or observe proper standards of market conduct.
Removing from the industry the firms or individuals who do not meet FCA standards.
Continuing to pursue aggressively the firms or individuals who abuse UK markets by using its criminal and civil powers.
Taking tough action where firms fail to treat customers fairly, penalising those who are responsible and ensuring that effective redress is delivered quickly.
Continuing to pursue major investigations into LIBOR, working with other agencies in the UK and overseas.

Market abuse

Transaction reporting and market surveillance, financial crime, protecting the perimeter, challenging businesses and individuals, authorising dual-regulated firms, delivering the operational platform, estate and shared services.

Headcount. Staff costs are the largest component of the FCA's cost base. Just under a quarter of the FCA's headcount will be focused on supervision and supervisory oversight. 17% will be allocated to the enforcement and financial crime division. Ten percent will be allocated to the authorisations division, and the same to the markets division. Nine percent will be in the new PRR division. Overall, 70% of the headcount will be allocated to front-line divisions.
Ongoing regulatory activity (ORA). The total cost of the FCA's core operating activities.
Capital expenditure. Focused on the development of the FCA's IS capability to deliver new regulatory and operational requirements.
Annual funding requirement (AFR). The total amount the FCA will levy the industry to fund planned expenditure.
Appendix 1 Regulatory architecture, key stakeholders and international regulation. This gives an overview of the new regulatory structure introduced by the FS Act.
Appendix 2 Accountability and transparency. This sets out how the FCA will operate, both in general and through specific initiatives in 2013/14, in a way that helps it to be held accountable.
Appendix 3 Table of regulatory reform by market(s) affected. This goes from the second quarter of 2013 to 2018.
Appendix 4 Principal EU legislation. This sets out in table format the principal EU legislation that the FCA will be working to influence in 2013/14.
Appendix 5 Independent panels - strategy for 2013/14. From April 2013, the FCA will receive advice and guidance on its policies from four independent panels (the Financial Services Consumer Panel (FSCP), the FCA Practitioner Panel (PP), the FCA Smaller Business Practitioner Panel (SBPP) and the newly created FCA Markets Practitioner Panel (MPP)). The panels each develop their own strategic plans to enable them to set their own agendas, as well as responding to the FCA's priorities. The plans are reviewed annually, in summer, to ensure they are updated and reflect changing events. This Appendix highlights the key points in the plans as at the start of 2013.
Appendix 6 FCA organisation chart.
Appendix 7 Corporate responsibility. This outlines the FCA's corporate responsibility strategy.
Appendix 8 Reference table of strategic priorities. This outlines the FCA's strategic priorities in table format (including in relation to key forward-looking risks and crystallized risks).
Appendix 9 2013/14 milestones. This sets out the FCA's 2013/14 milestones in table format.
Authorisation - Financial Services
Mortgages and Home Finance Financial Services
Systems and controls
Investment Funds and Asset Management
Training and Competence - Financial Services
Financial Promotion and Marketing
Consumer Credit
Financial Crime
Prudential Regulation
FinTech and digital assets
Market abuse and market conduct
Conduct of Business Regime - Financial Services
Regulatory Regime - Financial Services
Investigations and Enforcement - Financial Services
Regulated Activities
Client Assets - Financial Services
Payment services
Individual accountability
United Kingdom

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