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Changing Conduct Regulation in the UK
October 2013
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The Financial Conduct Authority (FCA)
Strategic objective
• ensuring the relevant markets function well
Operational objectives
• promoting effective competition in the interests of
consumers;
• securing an appropriate degree of protection for
consumers; and
• protecting and enhancing the integrity of the UK
financial system.
New regulatory system
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FCA Statutory Objectives
• Securing an appropriate degree of protection for consumers
• Promoting effective competition in the interests of consumers:
o
the needs of different consumers
o
the ease with which consumers can change providers
o
the ease of new entry
o
how far competition is encouraging innovation
• Protecting and enhancing the integrity of the UK financial system
(including):
o
soundness, stability and resilience
o
orderly operation of markets
o
financial crime
o
market abuse
o
transparency of price formation
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Supervision of firms
Aim of Supervision
To ensure firms have the interests of their customers and the integrity of the market at
the heart of how they run their business.
How will we do this?
By influencing, persuading and, where appropriate, using formal powers to achieve a
significant transformation in firms’ conduct behaviours.
For what population of firms?
• The FCA is responsible for the retail and wholesale conduct supervision of c.25,000
firms
•
The FCA is also responsible for the prudential supervision of c.23,000 firms (i.e.
those that are not prudentially regulated by the PRA).
Custodian
Banks
Fund
Managers
Insurance
Intermediaries
Credit Unions
Mortgage
Intermediaries
Mortgage
Lenders
Retail Banks
Financial
Advisors
Building
Societies
Life Insurers
Platforms and
SIPPs
Wealth
Managers
London
Markets
Retail GI
Wholesale
Firms
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Supervision of firms – Prudential Supervision
Although primarily a conduct regulator, the FCA is the solo regulator for firms not
prudentially regulated by the PRA.
Approach
•
Starting principle is that firms should be allowed
to fail, therefore, our focus is on mitigating the
impact on retail customers and market integrity
of firms failing or under financial strain.
•
Our approach is to ensure that any failure is
orderly by ensuring that customers assets and
money are protected.
•
Prudential supervision is graduated according to
prudential significance.
•
On-going dialogue with PRA where we both
have prudential responsibilities for a group.
Key Features
Prudential Classification – based on the impact
that the disorderly failure of a firm could cause in
terms of market disruption and market failure.
Setting Capital & Liquidity Financial Resource
Requirements – assessing financial resources
requirements for our most prudentially significant
firms.
Regulatory Return Monitoring – pro-actively
reviewing returns for the most significant firms and
acting on alerts for other firms.
Thematic Work – cross-firm capital / liquidity
work (including smaller firms)
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The FCA aims to be a judgement based, forwardlooking and pre-emptive regulator
The FCA’s approach emphasises 5 elements:
• be forward-looking in assessment of potential problems – looking at how we can tackle
issues before they start to go wrong;
• intervene earlier when we see problems and before they cause consumer detriment or
damage to market integrity;
• tackle underlying causes of problems, not just the symptoms, as this will be more
effective and efficient in the longer term for consumers and firms;
• secure redress for consumers if failures do occur; and
• take meaningful action (credible deterrence) against firms that fail to meet our
standards, including levels of fines that have a deterrent effect.
To do
•
•
•
•
this, in addition to the powers inherited from the FSA, we are able to:
Temporarily ban products or restrict sales for up to 12 months;
Stop misleading financial advertising;
Impose requirements on firms; and
Subject to consultation, tell the market earlier about enforcement action.
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Overview of FCA model
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How will we achieve our objectives?
Firm Systematic Framework – Key judgements
Framework for
identifying
and managing
risks
Adequate
arrangements
for client
money
How the firm affects
consumers, markets or
competition
Business
Model & future
strategy
Key judgements
Does the firm
have the
interests of its
customers and
the integrity of
the market at
the heart of how
the business is
run?
Cultural tone
set by senior
management
Control &
Governance
arrangements
Sales /
Transaction
lifecycle
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Co-ordination with the PRA
The FCA and PRA operate under different sets of objectives, although there is a
Memorandum of Understanding in place between the two setting minimum coordination standards, including:
• Domestic supervisory colleges, with frequency depending on categorisation of
firm;
• Regular exchange of information, including material conduct risks, internal
models, and capital and liquidity requirements (e.g. coverage of conduct risks in
ORSA);
• Notification of findings of Pillar 3 work;
• Consultation on SIF applications;
• Expressing independent views on Part VII transfers; and
• Specific requirements for with-profits businesses.
The supervisory teams will strive to co-ordinate where possible.
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Focus on retail consumers
The FCA’s statutory objective is to secure an appropriate degree of
protection for consumers.
Customers do not always behave rationally and firms can exploit consumer
biases. The FCA is using Behavioural Economics (eg. randomised control
trials) to better understand these and inform our supervisory approach.
We expect firms to:
•
Evidence how their consumers receive appropriate outcomes, throughout the
product lifecycle
•
Implement targets that are aligned with consumers actual cover requirements
•
Understand the difference between customers being satisfied and customers being
treated fairly
•
Identify, capture and mitigate the risks to their customers receiving inappropriate
outcomes
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Enhanced focus on Wholesale/Commercial Conduct
The FCA’s focus is to ensure the integrity and resilience of
wholesale/commercial insurance markets, rather than seeking to introduce
concepts of detriment and redress that we use in retail markets.
Firms should recognise, however, that activities in retail and commercial
markets are interconnected and that risks caused by poor conduct can be
transmitted and undermine both markets.
The FCA places more emphasis (and takes a more
interventionist approach) in particular on three areas:
assertive
and
• where commercial products filter down or are distributed to retail consumers;
• where certain behaviours in commercial markets can cause damage to market
integrity; and
• where market structures can result in participants being disadvantaged or the
market being inefficient.
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Issues & Products work (1)
Examples of current or recent thematic work affecting insurers
– by sector:
Life
Insurance
Annuities
Inducements
& Conflicts of
Interest
Unit-linked
fund
governance
Investment
Advisors &
Platforms
Asset
Management
Non-advised
sales &
simplified
advice
investment
sales
GI Claims
handling
Fund charges
How firms are
implementing
the RDR
General
Insurance
Crosssectoral
Financial
Incentives
Motor Legal
Expenses
Mobile phone
insurance
Complaints
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Issues & Products work (2)
Current and completed reviews covering general insurance
Current
Completed
Sales Incentives
Premium finance
General insurance add-ons
Mobile phone insurance
Private investigators
Motor legal expenses
Claims handling
Telematics
Conflicts of interest
Complaints handling
Third party payments / financial crime
controls in wholesale brokers
Referral fees