Central to the Financial Conduct Authority’s (FCA) recently released Approach Paper was its call for regulated firms to put the concept of a fair deal for consumers at the heart of their operations. This is underscored by its three operational objectives: to protect consumers, promote competition and enhance market integrity. In this, there are a number of areas of which advisers must take note.
Read more about the advice flaws FCA ‘mystery shoppers’ will be scouting for, and the five fixes you can make that are regulator ready…
Code of conduct
Broadly, the FCA will examine newly authorised firms’ business models and a new threshold condition will exist to reference risks that might be posed to a firm, its customers and the integrity of the UK financial system.
The FCA will also review wholesale conduct with an eye to consumer protection. The authority argues that poor behaviour in any part of the market undermines its overall integrity and will have a knock-on effect on retail consumers as charges and fees will be passed down.
Unsurprisingly, the FCA will take a tough stance on product governance, but this is where fault lines appear in its Approach Paper. Having identified the wholesale sector is in need of change, the language used is more familiar to retail supervision.
The FCA will intervene directly “by making product intervention rules to prevent harm to consumers – for example, by restricting the use of specified product features or the promotion of particular product types to some or all consumers…”
This is something the FSA is already doing with its current consultation to ban the promotion of unregulated collective investment schemes to retail clients. The FCA may ban products after consultation with the market or, where speed is important, for 12 months without consultation.
There is a potential risk for regulated wholesale firms under the FCA’s approach. Many professional and eligible counterparty relationships are based on caveat emptor; the FCA appears to be saying this can no longer be assumed and that all financial services firms need to operate on a basis of trust and act in the interests of their consumers.
The FCA will still view enforcement as key to its strategy and it will announce openly when it has begun disciplinary action against a firm or individual. This is likely to be met with some concern in the industry, but if the regulator is going to influence culture and conduct, it arguably needs to be transparent about what it considers are good and poor business practices more swiftly than it takes for information about enforcement cases to become publicly available.
Earlier this month the FSA issued a discussion paper on increasing transparency and providing more useful information from its supervisory actions in the FCA era. Find out the secrets it could reveal about your firm here.
Getting it right
Firms and individuals who are already regulated by the FSA will not need to reapply to become regulated by the FCA. Firms will be automatically transferred to the FCA from legal cut-over (expected to be April 2013) and will be supervised according to four FCA conduct supervision categories: C1, C2, C3 or C4.
The FCA will expect firms to observe high standards of operational risk management, having procedures in place to ensure continuity of critical services. This is likely to lead to more independent benchmarking and standard setting. The FCA also states that it will put responsibility on firms to do their own monitoring on some lower-risk areas and to self-attest that they have been addressed. Follow-up work will be undertaken by the firm with the FCA making greater use of its section 166 powers – find out more here.
Recent FSA guidance shines a light on what is ahead; thematic focus, stricter enforcement of conduct and integrity-based rules and principles, or, as it has been summarised in the much-trailed phrase, judgement-led supervision.
It is time for firms to ensure their current governance and conduct arrangements meet the standards the FSA expects and those that the FCA will apply.
This article was written by Jon Wilson, project director at IMS Group.
