Radar warning – a bad time to appear on the FCA radar



1st April saw the introduction of the new regulatory structure comprising the FCA, PRA and Bank of England. It has, thus far, passed off fairly quietly. Most of the rules in the FCA Handbook have remained the same or very similar and the new regulators have not yet had time to flex their muscles to exercise any new powers or even impose their regulatory stamp on the sectors for which they have assumed responsibility.

My consistent advice to my own regulated clients has been that the next year or so will be a particularly bad time to appear on the regulatory radar – like any new broom the new regulator will be keen to make its mark and possibly make an example of any miscreants to show that it means business. So a good time to keep your head down and your nose clean.

Shortly before 1 April the FCA, the most relevant regulator to the advice sector, published its Risk Outlook and Business Plan for the coming year – this is always an opportunity to see what is taxing the mind of the regulator and what it is likely to be focussing on in the year ahead. In this case it is also an opportunity for the new regulator to set out it stall and how it may do things differently.

There is a lot for the FCA to improve upon. The FSA has lurched from one crisis to another with the latest blow being the Banking Commission report on HBOS which pointed out the obvious – that the FSA, with Sir James Crosby on its board, was hopelessly conflicted during the period when HBOS was setting itself up for later spectacular failure, as well as being asleep on the job.

The FCA Risk Outlook and Business Plan do throw up a few interesting items indicating its priorities and approach in  the year ahead:

Product Intervention – this features heavily in both documents. The FCA are talking a good game on early intervention where they see “toxic” products being launched by firms. The plans are however a little short on detail. Leading up to 1 April the message on product intervention has been confused and it remains to be seen whether the FCA can make this work. If it can then early intervention may be a largely positive development for the advice sector which too often seems to be left carrying the can for the failures of others;

Supervision – the FCA is promising to be a “…more proactive regulator, acting earlier and decisively….allowing us to address them [risks] before they cause harm.”.  It refers to the “Firm Systematic Framework” (FSF) that it will use to focus supervision on the key conduct risks in firms. At the heart of the FSF is the question of whether the interests of customers and market integrity are central to how the firm is run. Does this sound familiar to anyone? It appears to be TCF repackaged. The FCA also states that business model and strategy analysis will be included within the FSF – as the FSA never demonstrated a clear understanding of financial adviser business models, let us hope that the FCA gets a firmer grasp of those issues before implementing the FSF;

Consumer Protection  – as ever this will be a key priority. An issue taxing the FCA is that in a low interest rate environment consumers can have a “Poor understanding of risk and return.. and be tempted to “..take on more risk than is appropriate..”. This should sound a clear warning to advisory firms that the FCA is likely to continue to expect firms to put a lot of effort into ensuring that the recommendations made to clients are suitable. A low yield environment can provide a great opportunity for firms to show clients the value of taking proper financial planning and investment advice but firms must remain vigilant, ensuring that clients have a proper understanding of any risk assumed and that the client’s capacity for loss has been properly considered by the firm (and indeed understood by the client themselves). As ever when it comes to mitigating the risk of giving advice a focus on suitability will remain key. One danger if the FCA go in too hard on this issue (and indeed on product intervention) is that innovation in the market is stifled and firms are continually pushed towards a narrow band of advice that they fell able to give safely (and which is insurable) which overall would not be a desirable market outcome.

Enforcement – there doesn’t appear to be much that is genuinely new in the FCA’s enforcement priorities. It does however state that “..removing from the industry the firms or individuals who do not meet our standards..” will be one of those priorities. Again the FCA will have to match its tough talk with similarly tough actions. The multi billion pound industry-wide PPI misselling scandal did not result in the FSA pursuing any individual executives at the firms concerned whilst the FSA was always prepared to take on small IFA firms and their principals. The FCA will have to show that it is capable of taking a more balanced approach and be prepared to take on individuals at the highest level in the biggest firms when the conduct of those firms falls so far short of what is expected that the executives must take responsibility.

In summary the FCA is talking a good game but the acid test will be whether it can match that talk with the appropriate actions. A more effective and accountable regulator would be a positive thing for the financial services sector. Whether some structural tweaking resulting in largely the same staff implementing much of the same rules and legislation through several new and different bodies can achieve the real cultural change required at the regulatory level remains to be seen. We will all be watching closely over the months and years to come.

Alan Hughes


Foot Anstey Solicitors


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