Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and the Payment Systems Regulator (PSR) published their 2020/21 business plans for on 7 April 2020, 9 April 2020 and 31 March 2020, respectively. This update briefly explores the key themes identified by the regulators and explains how the approach set out in the business plan may affect financial services firms.

This Client Alert will be of particular interest the firms authorised and regulated in the UK by the FCA, the PRA and the PSR, as well as their clients and counterparties.

COVID-19

The impacts of the Covid-19 pandemic continue to be felt across the globe. The FCA, PRA and PSR all address the impacts of Covid-19 in their business plans, and detail the actions they are taking to respond to the pandemic.

The FCA, PRA and PSR business plans all emphasise the uncertainty of the current economic climate, and flag that an update to the business plans may be required at a later date. Each plan also highlights how it was prepared before the uncertainty caused by Covid-19 started to take effect, and as such the work described in the business plans will continue to the extent possible, but resources and priorities may well be shifted to respond to Covid-19 as necessary.

FCA

The FCA’s main priorities are to ensure that the support needed from financial services businesses is available, people don’t fall victim to scams and financial services businesses and markets know what the FCA expects of them.

The FCA’s actions so far have been based on five objectives, the general themes of which reflect the main priorities above. These actions have resulted in a number of measures being taken, including:

• Setting out clear expectations for general insurance providers, including home, travel and motor insurance.
• Requesting that firms delay announcements of preliminary results to ensure that information for markets is accurate and helpful, and giving firms an additional two months to complete and publish their audited financial statements.
• Confirming that the FCA is satisfied that markets are operating in an orderly way and that it does not see a need for a ban on short selling.

Finally, the FCA plans to “clamp down with all relevant force” on any poor practice it finds, highlighting that it will not look kindly on those who see these uncertain times as an opportunity for poor behavior and misconduct.

PRA

As a result of Covid-19, the PRA has cancelled the 2020 annual cyclical scenario and delayed the publication of the 2019 biennial exploratory scenario results. In addition, the PRA has postponed less critical elements of its supervisory work with individual firms, and has delayed certain skilled person reviews.

The PRA’s goal here is to allow firms to focus on their own response plans, and to ensure that its supervisory teams have the capacity to target key areas to support “financial stability, the safety and soundness of firms, and protection of policyholders”.

Generally, policy setting (and related consultation sessions) timescales have been extended so that immediately critical work does not suffer from a lack of resources. Of note, changes to internal ratings based models will be delayed until the beginning of 2022.

Finally, the PRA is pushing through its work towards establishing a regulatory initiatives forum. The PRA hopes that this will help co-ordinate the impacts that regulatory initiatives will have on firms, and help smooth any peaks in demand that they are likely to cause.

PSR

As at the date of publication of its business plan, the PSR’s immediate priority was to ensure that consumers were protected as well as possible, and that firms could serve their customers as well as possible.

The PSR’s focus is on ensuring that cash remains available, and that consumers remain vigilant to potential scams. The PSR extended certain deadlines it felt may distract firms from immediate priorities; for example, extra flexibility was granted around the implementation of “Confirmation of Payee” (which is the industry-agreed way of ensuring that names of recipients are checked before payments are sent).

Business Plans 2020/21

FCA

The FCA’s business plan identifies four external priorities that it plans to focus on over the next one to three years:

1. Enabling effective consumer investment decisions.
2. Ensuring consumer credit markets work well.
3. Making payments safe and accessible.
4. Delivering fair value in a digital age.

The FCA has also identified a fifth priority: transforming itself. The FCA states that its transformation is key to delivering on the four key areas above. As such, the FCA’s approach to its transformation is considered before the four external priorities.

Transformation of the FCA

The FCA plans to fundamentally change the way it works, with the end goal of becoming a more efficient and effective regulator – to deal with both long term and immediate challenges.

To transform itself, the FCA has identified four key outcomes.

1. Make faster and more effective decisions. The FCA will achieve this by investing in, growing and developing its capabilities so that it can move swiftly, and make confident, well-informed decisions in response to increasingly complex regulatory contexts.
2. Prioritise end outcomes for consumers, markets and firms. The FCA intends to be clearer with firms about the outcomes it expects them to achieve, and how it is itself targeting its own work to achieve those outcomes.
3. Intelligence and information. The FCA will take a more focused and coordinated approach in its responses to the information it receives about the markets, firms and individuals it regulates. The FCA also plans to streamline coordination among regulators, which will ultimately reduce the regulatory burden on firms.
4. Influence internationally on issues that affect UK markets and consumers. The FCA plans to build stronger global links to ensure an effective response to a post-EU withdrawal, tech-enabled world. The goal is to strengthen the UK financial system and better protect consumers.

Enabling effective consumer investment decisions

The FCA will target three outcomes to ensure consumers can make effective investment choices in a fair market:

1. Ensure that products are designed to meet the needs of consumers and deliver value for money and are marketed in a manner that is fair, clear and not misleading.
2. Ensure that consumers have access to high-quality advice and support and are aware of the protective measures they can take against scams and fraud, in particular in retail investment.
3. Ensure that the standard of governance in firms is higher, their distribution chains are closely monitored and the regulatory system is more able to address the significant cost of misconduct.

Ensuring consumer credit markets work well

The FCA intends to deliver four outcomes, which the Covid-19 pandemic will shape, to allow firms to exercise greater flexibility where it is for the benefit of their customers:

1. Make sure that consumers have access to clear and simple information to assist them in understanding the available products and the ranges and features of such products.
2. Ensure that consumers are not being given credit that they cannot afford, and then become over-indebted.
3. Continue to work with government and others to increase access to credit that is fair and affordable, with a focus on options to increase availability (and awareness) of alternatives to high-cost credit.
4. Ensure that borrowers are aware of, and benefit from, debt-advice before financial problems become too great. Firms will play a role by identifying, early, consumers at risk and giving them appropriate warning.

Making payments safe and accessible

To ensure that consumers and small and medium-sized enterprises (SMEs) can access payment services safely, the FCA intends to work with the PSR, the Government Bank of England (the Bank) and other regulators to deliver the three outcomes below:

1. Ensuring consumers can safely transact with payment firms. The FCA expects firms to safely handle and store data correctly and reduce any impact of fraud and operational outages. There will be increased scrutiny of firms’ systems and controls while monitoring emerging risks.
2. Increasing focus on payment firms meeting their regulatory requirements, with swift action against those firms that fail to meet them.
3. Ensuring that consumers have access to a variety of payment services, meaning market developments do not exclude consumer groups and consumers can make payments using their preferred method.

Delivering fair value in a digital age

Following greater digitisation of firms, the rate of which will likely be increased as a result of Covid-19, the FCA wants to ensure that it has the necessary skills and focus to supervise firms effectively, and that consumers are benefitting from digital innovation. The FCA will target three outcomes to achieve this:

1. Consumers should be able to choose from products that meet their needs, at a suitable quality and price, using available information to make informed buying decisions.
2. Ensure that digital markets benefit consumers by delivering fair value to them. Firms should be using data and algorithms to ethically price products, and have suitable controls to prevent undue bias or discrimination.
3. Ensure that vulnerable consumers are protected from poor-value products and services, and that there is fair access to key products and services. Proposed guidance on fair treatment of vulnerable consumers will clarify that extra care should be taken with such consumers.

Sector focus

The FCA’s business plan identifies five cross-sector priorities, and four sector priorities. Of the cross-sector priorities, EU Withdrawal, Innovation and Technology, Operational Resilience and Financial Crime all feature, following on from previous years. A new addition is Climate Change. The FCA highlights its recent consultation on new climate-related disclosure rules for some issuers, but flags that the consultation period has been extended to 1 October 2020.

The four sectors identified are Wholesale Financial Markets (in which there is a focus on an orderly transition from LIBOR), Investment Management, Retail Banking and General Insurance & Protection.

PRA

The PRA’s business plan sets out how it will achieve its strategic goals over the coming year. The business plan addresses each strategic goal in turn, as follows:

Robust prudential standards and supervision

The PRA wants to ensure that robust prudential standards are in place, and that regulated firms (and their operators) are held accountable for meeting these standards. This will be achieved by, among other things, focusing on key risks and prioritising higher-risk firms within each sector, continuing international co-operation and continuing to contribute to financial stability through policy development, implementation and evaluation.

Adapt to market changes and horizon scanning

The PRA will continue to adapt to changes in the markets in which it operates, and will seek to “scan the horizon” for any emerging and evolving risks to try to mitigate any risks to its objectives. Mitigation will include engaging with firms to remind them of their obligations, encourage prudent management and seek input on policies and frameworks. The PRA has identified climate change, FinTech and AI as areas of particular interest.

Financial resilience

The PRA seeks to promote the safety and soundness of PRA-regulated firms by ensuring that they have adequate capital and sufficient liquidity in relation to any risks that those firms are taking on. As noted above, the annual stress test has been cancelled due to Covid-19. The PRA will instead use a range of measures to assess capital and liquidity adequacy across the banking sector, and will continue to assess credit risk and asset quality.

Operational resilience

In December 2019, policy proposals for impact tolerances for important business services were published by the PRA, jointly with the FCA and the Bank. The new aspects of the policy proposals would require firms to: identify important business services; set impact tolerances for those important business services; and take action so they are able to deliver their important business services within their impact tolerances during severe but plausible disruptions. Firms should plan to operate on this basis.

Recovery and resolution

The PRA will continue to work to end “too big to fail”, and seeks to ensure that banks and insurers have solid plans in place that will let them recover from stress events. The PRA also wants to ensure that firms work towards removing barriers to their resolvability, i.e., if firms do fail, they do so in an orderly manner, which reduces risk to depositors, the financial system and public finances.

Competition

The PRA will try to enable effective competition by actively reviewing the proportionality of its approach, assessing the competition implications of its policies and ensuring that there are no unwanted adverse impacts on competition.

Brexit

The PRA’s goal in relation to Brexit is to ensure that the transition process is smooth, and the UK exits the EU with a sustainable and resilient financial regulatory framework.

Efficiency and effectiveness

To promote efficiency and effectiveness within itself, the PRA will ensure that resources are allocated to work that advances its strategies in the best manner, whilst also reducing the greatest risks to delivering its statutory objectives. It will seek to provide an inclusive working environment. The PRA will also endeavor to maintain a risk-aware, post-crisis culture in the firms it regulates.

PSR

The PSR’s business plan states an overall vision for “payment systems that are accessible, reliable and secure, and represent value for money”. The business plan sets out the key aims and activities for the next year. The focus of the business plan is on collaboration with other organisations to achieve the goals set out in the business plan.

The PSR identifies eight key projects that it is working on:

1. The New Payments Architecture (NPA). The NPA delivers a resilient way of making digital payments. The PSR will monitor procurement of central infrastructure services to ensure support of competition and innovation in the NPA.
2. Access to cash. The PSR will work to ensure that people are allowed to continue accessing cash from ATM networks where they want/need to in a digital world. The PSR will oversee LINK as it manages free-to-use ATMs, and will work closely with the FCA, the Bank and HM Treasury to develop a long-term framework.
3. Card-acquiring market review. Initial findings on this market will be set out in a report, followed by a review and final report.
4. Authorised push payment scams and Confirmation of Payee (CoP). The PSR will work towards reducing scams and protecting victims. CoP and the Contingent Reimbursement Model Code (the Code) will be assessed and amended if necessary to promote fraud prevention. The PSR will actively encourage firm behaviours needed to ensure the Code has its intended impact.
5. Competition and regulatory enforcement casework. The PSR will continue its progress in current casework and investigate breaches of competition law – opening new investigations where necessary – to tackle anti-competitive conduct and ensure there is a credible deterrence against this behaviour.
6. Sector intelligence and analysis. The PSR will work towards improving how it collates and analyses market development information to identify risks and promote efficient use of resources to advance its objectives.
7. Strategy setting. A strategy will be published following consultations with stakeholders and other interested parties.
8. Revised Powers and Procedures Guidance. The PSR intends to publish its final updated guidance, to ensure stakeholders understand how the PSR works, how it makes decisions on taking regulatory/enforcement action, the processes it follows and what to expect.

Benjamin Mark-Alexander Beswick, a solicitor trainee in our London office, contributed to the writing of this alert.

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