What the FCA’s Business Plan and Strategy really means: digital markets

This is the first in a series of blog posts looking behind the headlines to understand the broader points of regulatory focus. We will consider how firms can adapt to keep pace with the FCA and PRA’s latest ambitions and the rapidly changing regulatory landscape. 

FCA sees new risks and new opportunities (but mostly risks)

The FCA’s plan is to “proactively shape the digitisation of financial services”. This ambition aligns with the UK government’s plan to build and nurture a pro-active and competitive regime for digital markets.  

For example, the FCA will be feeding into developing crypto policies. This will include initiatives such as the legislative amendments trailed in HM Treasury’s recent response to its consultation on the UK regulatory approach to cryptoassets, stablecoins and distributed ledger technology (DLT). The FCA will be consulting on the regulatory regime for stablecoins later this year and clearly considers further regulation of crypto will be necessary.

Before the FCA can realise this ambition, it considers it needs to understand better the emerging risks and opportunities. However, reading the latest business plan and strategy, the FCA seems to be far more concerned with risks than opportunities. The PRA seems equally concerned, promising to monitor developments in key products and the emergence of new banking models that have payments as a core component. 

For example, the FCA will be pro-actively identifying the competition risk and benefits from Big Tech entry into financial services. Something the PRA is also concerned about, particularly with regard to the systemic risks stemming from concentrations of third party services provision to firms, created through increased digitalisation of financial services.

In keeping with this concern, the FCA has said that it will begin to “robustly investigate” digital consumer journeys. This aligns with much of the FCA’s commentary around the introduction of the new Consumer Duty, final rules for which are expected in a couple of months. In particular, the FCA wants to see a reduction in ‘sludge’ practices and other harmful design features. 

Firms should look to match the regulators’ proactive approach to identifying both new opportunities and new risks. This expectation is already coming through in regulatory communications and is not to be overlooked. For example, the FCA’s recent custody and fund portfolio strategy letter refers to the importance of firms thinking about new technologies, including DLT, in the context of their CASS responsibilities. Meanwhile, the PRA plans to ask firms to report their cryptoasset exposures, treatments and future investment plans. 

Challenge of upskilling the regulator

Like any large organisation, the FCA must deliver its ambition through its staff. As digital markets evolve and new risks materialise, there is also the challenge of upskilling the FCA workforce. To help with this, the FCA is bringing on board more staff dedicated to enforcing the threshold conditions and removing “problem firms”.  

The FCA considers the biggest causes of consumer harm to be online. Consequently, it has developed a new specialist team to oversee firms whose business is primarily online products. It has also established a new early oversight team. Firms who manage to squeeze through the authorisations gateway and are new to financial services can expect to receive enhanced supervision from this new team.  

But recruiting more staff will not necessarily achieve the same benefits as upskilling the workforce. The FCA’s position that firms are responsible for assessing the risks to their business and consumers if they interact with or are exposed to cryptoassets, and recent enforcement decisions, do nothing to dispel the feeling that larger firms are expected to fill the skills gap and share the risk of “regulating” new and emerging risks.  

Finfluencers, marketing and financial promotions 

The FCA’s approach to digital markets is well illustrated in the financial promotions and marketing space.  

Working with HM Treasury, the FCA is planning to strengthen the financial promotions regime, with particular focus on the digital customer journey for high-risk investments. Final rules expected this summer. 

At the same time, the FCA is increasing its resources dedicated to intervening on non-compliant financial promotions by authorised firms. This includes enhancing its capability to identify, alert and request that platforms take down unauthorised promotions, associated websites and social media accounts.

The regulator promises to take swift and assertive action and hopes to see an increase in FCA interventions over the next two years. There is even a suggestion that the FCA might be working towards automated interventions, perhaps linking these to its web-scraping monitoring.  

Be prepared

The FCA and PRA are alive to and concerned about new risks arising out of the digitisation of financial services. Firms need to be alive to these concerns and prepared to explain how they are monitoring and mitigating these risks. For example:

• analysing consumer digital journeys and the associated conduct and compliance risks; 
• maintaining a proactive and open regulatory dialogue;
• considering your firm’s risk appetite framework in light of emerging digital products and services; and
• for new entrants, seeking early expert advice on the authorisations process.