The FCA’s Strategy 2022/2025 and Business Plan 2022/23 - ZISHI

The FCA’s Strategy 2022/2025 and Business Plan 2022/23

Isn’t it funny? You wait all year for the FCA’s annual Business Plan (or perhaps not!) and then not only do 2 come along in the space of 9 months  (admittedly the publication of the one for 2021/22 was postponed for 3 months until July due to the on-going Covid-19 pandemic), but also an accompanying three-year Strategy Document. The latter has been fundamentally revisited and revised to include a more holistic and outcomes-focused approach than has ever been seen previously. 

The strategy – fixed and in place for the next three years – is intended inter alia to enable the FCA to assess how well it is performing against its own areas of strategic focus. A closer inspection of the details reveals that the FCA has repackaged its existing commitments rather than introduce a sea-change in terms of a change of focus. The key step change is the degree of accountability and the granularity of the metrics that the FCA will use to measure its progress (source: KPMG).

But there have also been criticisms that the FCA should perhaps first get its house in order before embarking on its odyssey of data-led regulation – especially as its budget appears out of kilter with its appetite for change and ambitious plans for reform. However, procrastination is the thief of time and given the unforeseeable duration of Covid and residual adjustments to working patterns for everyone in the financial services sector, the FCA has perhaps no other choice than to crack on with its plans and reforms.

Business Plan 2022/23 – FCA’s programme of work for the coming year

The worst of Covid has passed (we hope), but in its place, new emerging macroeconomic and geopolitical challenges such as the Russia/Ukraine conflict and further anticipated inflation increases (plus hikes in interest rates, petrol and energy prices etc.) amply fill the void. This is a challenging time for consumers and the market as a whole and the FCA’s Business Plan sets out, perhaps too boldly(?), how the regulator intends to deliver on its proposed three-year strategy regardless of the external pressures.

On the agenda, strategic policy challenges include delivering a regulatory Brexit dividend, becoming a world thought leader on ESG-related matters and moving forward on recently announced Government ambitions for the UK to become the world-leading centre for Fintech innovation, including crypto-assets. Indeed, the rapid expansion of crypto-assets and digitalisation of financial services create opportunities and risks which demand a cautious and considered approach. Against such a complex and challenging agenda, the FCA is seeking to be better placed to continue responding to these challenges and opportunities by focussing on outcomes across all sectors and markets. 

Following on from its 2021/22 Business Plan, the categorisation and definitions of the FCA’s consumer priorities have changed, albeit slightly (see below) with the essence of the priorities defined in the 2022/23 plan following similar themes; “Ensuring consumer credit markets work well” and “making payments safe and accessible” are aligned to the FCA’s commitment in the 2022/23 plan of “putting consumers’ needs first”; “Delivering fair value in a digital age” is in line with the commitment of “shaping digital markets to achieve good outcomes” and “Enabling effective consumer investment decisions” is in line with the commitment of “enabling consumers to help themselves”.

The 2022 / 2025 Strategy? Results, not process

The Strategy Document re-emphasises the directional shift that was introduced within the FCA’s 2021/22 Business Plan, which initiated a move away from detailed plans for each financial services sector, in favour of focusing on the outcomes that the FCA is seeking across all of the sectors that it regulates (source: Latham Watkins). Thereby “improving outcomes for [its] consumers” (The Daily Telegraph, 08.04.2022). In his foreword to the strategy, the FCA Chief Executive Nikhil Rathi said, “we are now focusing on results rather than being driven by processes” and added, as per his introductory message: “prioritisation is inevitable” in line with FCA’s broad and growing remit (Source: Latham Watkins)

The FCA has defined four “consistent top-line themes” that cut across both consumers and wholesale markets. They are as follows:

1Fair valueConsumers should receive fair prices and quality. Markets
sufficiently enable participants to make well informed assessments of value and risks.
2Suitability and treatmentProducts and services sold to consumers are to be suitable for
them and they receive good treatment.
3ConfidenceMarkets are resilient to firm failure, operate fairly so that consumers will have sufficient confidence to participate in these markets.
4AccessMarkets should be resilient, diverse and inclusive.

The FCA’s Strategy Document also introduces three key commitments as its area of focus.

Reducing and preventing serious harm– Complete the ‘Cancellation of Firm Authorisation Project’ to speed up processes for removing authorisation

– Develop an automated approach for identifying simple Threshold Condition breaches

– Finalise rules on increased obligations of Principal firms in relation to their Appointed Representatives

– Increased Supervision activity on Principal firms 
– The FCA has committed to “dealing with problem firms,” which will result in their removal from the market if they don’t reach the regulator’s minimum standards

– Improving the redress framework so that it is fairer for consumers and firms from a global perspective

– Improving oversight of Appointed Representatives, following previous communication

– Reducing and preventing financial crime via a holistic, “whole system” response

– Being assertive in relation to detecting market abuse and taking decisive action
Setting and testing higher standards– Finalise rules for the new Consumer Duty

– Increased Supervision targeting of financial promotions

– Delivering the FCA’s ESG strategy, particularly promoting trust in ESG product marketing and disclosures

– Increased Supervision of operational resilience by the FCA Technology, Resilience and Cyber Department

– Issue a discussion paper on managing the risk of critical third parties, with consultation on proposed new rules to follow in 2023
– Putting consumers’ needs first, starting with the progression of the proposed new Consumer Duty

– Enabling consumer self-service through ensuring promotions are clear, fair and not misleading

– Further developing the FCA’s ESG strategy, including developing a sustainability taxonomy and consulting on regulatory expectations relating to diversity and inclusion

– Minimising operational disruption through operational resilience expectations of firms
Promoting competition and positive change– With HM Treasury (HMT), as part of the FRF process, start the transfer of rules from legislation into the handbook

– Work with Government on a new regime for digital markets

– Study digital consumer journeys to understand if they empower customers to act in their best interests

– Issue a discussion paper on artificial intelligence in financial services
– Future proofing the financial services sector by tailoring rules to benefit UK markets globally and thus strengthening the UK’s position in global markets

– Shaping digital markets to achieve good outcomes.

How the FCA intends to deliver on these commitments

In keeping with the FCA’s shift towards an outcomes-based focus through cross-sector responses, its Business Plan includes common regulatory tools and activities to cross each of the above three commitments, which are:

  • Authorisation of firms and individuals
  • Setting rules and standards
  • Supporting competition and innovation
  • Empowering consumers and firms
  • Recognising and reducing harm
  • Taking quick and effective action

Crucial activities over the next 12 months

Strengthening the UK’s Position in Global Wholesale Markets

The FCA wants to develop a metric to measure market participants’ views on its effectiveness in order to maintain the UK’s position as one of the world’s leading financial markets; not only because of its encouragement of innovation and “appropriately evolving” ability to address new opportunities and risks, but also, because its regulatory framework is proportionate in terms of speed and cost. 

The FCA’s activities over the next 12 months will include: 

  • enhancing its capacity to approve listed issuers onto UK capital markets and starting the transfer of the regulatory framework from legislation into FCA rules through HM Treasury’s Future Regulatory Framework
  • updating the wholesale markets regulatory framework working with Treasury on the review and development of the overseas firms’ regime 
  • supporting innovation through a flexible regulatory approach, including the launch of the financial market infrastructure (FMI) sandbox 

Market Abuse

The FCA:

  • will set out to improve its perceived effectiveness in promoting market integrity and increase the number of interventions for failure of publicly traded issuers to disclose properly 
  • will strive to find the best way to measure market abuse/misconduct enforcement cases and outcomes
  • plans to provide guidance through Technical Notes in 2022/23 (which are consulted on through the Primary Markets Bulletin publications)
  • plans to deliver the Market Surveillance Refresh project (allowing efficiency improvements in FCA alerting/enquiry analytic tools) and the Markets Data Processor refresh project (delivering market data to the FCA’s alerting and analytic tools)
  • intends to increase its detection capability 

Operational Resilience and Disruptions

  • The FCA wants to ensure that important business services provided by firms are resilient to operational disruption. During 2022/23, it plans to ensure that the authorisation process takes into consideration how firms subject to the Operational Resilience Policy have ensured they meet the expectations of the policy.
  • Plans are under way for the launch of a new oversight regime to test and monitor Operational Resilience. A Discussion Paper is planned with the Bank of England and the PRA on the uses of Critical Third Parties (CTPs) which proposes introduction of resilience standards to be met as well as a testing methodology and enforcement powers of CTPs in the event of a firm’s  failures. Responses to the Discussion Paper later in 2022 will inform the consultation which is expected to take place in 2023.
  • From 31 March 2022 to 31 March 2025, the FCA will assess the capability of firms to remain within their impact tolerances so that by 31 March 2025, they can demonstrate that they are meeting these requirements.

The challenges facing FCA’s internal transformation

The FCA has made it clear there needs to be significant investment in its own technology, infrastructure and data analysis to enable it to fulfil its ambition as a data-led regulator. Several its outcome measures depend on the FCA being able to deliver this transformation agenda and also significant investment. The Business Plan sets out four key areas of focus for its internal transformation: 

  • Investing in the development of analytical tools, leveraging its new cloud-based data infrastructure and exploring the use of machine learning and AI to identify risks at firms. A data strategy on this to be published later this year
  • Streamlining Regulatory decisions to increase the range of cases the executive can decide without referral to the Regulatory Decisions Committee
  • Making the FCA more diverse, with a target of 50% of its senior leadership identifying as female and 20% as ethnic minorities by 2025
  • Developing a national location strategy with a Leeds office of c.100 staff and a doubling of the Edinburgh office to c.200 staff

The budget set aside for transformation is modest, raising questions on how much can be achieved given such an ambitious programme to become a data-led regulator. The last two years of reports and accounts for the FCA show a spend of about 60% on people and about 13% on technology. The 2022/23 Business Plan sets out a budgetary increase of 7.3% which is only inflationary and does not reflect changes to new FCA responsibilities or changes to national insurance contributions. Equally, there’s no mention this year of the FCA’s 2021/22 commitment to be more aggressive in testing the limits of its powers – which at the time did not seem to give rise to any discernible differences in practice. 

As a further part of ongoing reforms and changes, the FCA plans to bolster its enforcement division (by recruiting some 80 staff) to better police the markets with a focus on “shutting down” the problem firms that do not meet basic regulatory standards and in so doing, crack down on serious fraud in a bid to repair its “bruised reputation” (Telegraph).

What else is on the horizon?

There are three key FCA policy initiatives to watch out for:

Consumer Duty – a feedback statement covering the most recent consultation, along with final rules and guidance are due to be published during July 2022. The FCA expects firms to take steps to implement these over the course of the year and for this process to be completed by April 2023. 

It is important to note that the Consumer Duty is not merely a rehash of the Treating Customers Fairly initiative and it will be more attuned to the digital marketplace.

“Recent Discussion Papers by the CMA ‘Online Choice Architecture’ emphasises the importance of digital architecture in consumer protection and in driving effective competition, as well as highlighting some of the challenges” (source: BDO). 

The Consumer Duty is to be embedded at each stage of the regulatory lifecycle (authorisation, supervision, and enforcement) and will become an “integral part” of the FCA’s regulatory approach.
The regulator’s supervisory strategies will be amended to focus initially on the highest priority issues and portfolios and the FCA will continue to participate in the Financial Inclusion Policy Forum, working closely with the Government and other bodies to support consumer access to products and services under its consumer protection and competition objectives.

ESG – this area is developing quickly and outpacing the global regulatory thinking around it. The FCA published its ESG Strategy in November 2021, but there is still much room for development in this space and the FCA is engaged with industry and regulators domestically and internationally. The FCA wants to combat misleading marketing and disclosure around ESG-related products. For consumers, the focus will be on minimising the risks of misleading advertising relating to ‘green’ products. For markets, the focus is on improving the quality and quantity of climate and sustainability-related disclosures and promoting accurate market pricing to help with investor decision-making. The FCA hopes to develop metrics to measure the incidence of misleading marketing in ESG products and thus improve quality/quantity of available information.

Stakeholders have expressed a desire to see more active investor stewardship that positively influences companies’ sustainability strategies.
The FCA will work with other regulators and industry leaders to develop indicators for the effectiveness of stewardship. In its Business Plan the FCA states that it intends to “embed consideration of ESG issues in how we authorise firms and individuals,” which seems to expand the ESG integration mind-set into the general authorisation process.

In terms of rules and standards, the FCA plans to continue delivering its thought leadership internationally through, for example, its role as cochair of the IOSCO Sustainable Finance Taskforce and the ongoing work on issuers’ sustainability disclosures. (Source: Latham Watkins).

The FCA will take monitoring and enforcement action “as needed” on how firms manage the impacts, risks, and opportunities arising from ESG issues, including how they ensure customers are treated fairly. The regulator states that it “will develop new interventions, as necessary.” 

Given the previously noted 2022/23 plans for metric development (i.e. disclosure quality/quantity, misleading product marketing and the use of active investor stewardship for positive ESG outcomes), the scope for this intervention will be one of the ways in which the FCA aims to use emerging information.

Brexit – HM Treasury will be expecting the FCA to use its regulatory powers to help create a competitive advantage for the UK (London predominantly) as a global financial centre, whilst maintaining market cleanliness and standards.

Closing Thoughts

Considerable change lies ahead, as set out by HM Treasury in its proposed Future Regulatory Framework that will transfer greater powers to the FCA to set rules and regulate in a way that is tailored to the needs of UK firms, markets, and consumers. The FCA will work with the Treasury to design and deliver the new regulatory framework, which supports all of the regulator’s desired outcomes. The FCA intends to measure its success by how effectively it responds to changes in its remit and accountability arrangements, as well as how it embeds firms facing requirements from legislation into FCA rules.

The FCA acknowledges that it has published its Business Plan 2022/23 at a time when the “external environment is changing rapidly”, referring to the risks associated with the uncertainty around existing low levels of financial resilience, rising costs and the spectre of Covid — all of which is set against a backdrop of rising inflation and interest rates and major geopolitical uncertainty. The impact on consumers and firms is expected to be felt over the coming year and beyond. With this in mind, the FCA emphasises that it will monitor emerging issues and “adapt our plans where necessary.”

The FCA’s desire to be a more innovative, assertive and adaptive regulator and to “continuously improve for the benefit of our stakeholders and, respond swiftly to economic and geopolitical developments” [Nikhil Rathi] follows hard on the heels of Dame Elizabeth Gloster’s deep criticism for regulatory failings in ensuring consumer protection when Neil Woodford’s investment firm hit trouble – swiftly followed by the collapse of London Capital & Finance (LCF) in 2019. In her report (published in December 2021) she stated that the “FCA missed at least 6 red flags”.

Simon Morris – Partner at City Law firm CMS remains optimistic as regards to Nikhil Rathi’s plan to put the FCA firmly on the front foot stating that the UK’s leaving the EU offers the FCA “unprecedented scope to change the day-to-day rules that businesses must follow.” However, the FCA is believed to be in the midst of real crisis over its high staff turnover and staff-revolt over pay reforms which could yet lead to strike action and derail its best-laid plans. We shall see.

Magazine cover

Source: Article “The FCA’s Strategy 2022/2025 and Business Plan 2022/23” was written by The ZISHI Cornerstone experts, and published in the Advice Matters Magazine | 2022 | Vol 03 | Edition 02

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