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Freshfields Risk & Compliance

| 3 minutes read

No hold up in FCA investigations in run up to Brexit

The FCA published its business plan for 2018/19 and sectoral priorities on 6 April 2018.

At the same time, the FCA announced that it needs to devote an estimated 5 or 6% of its resources to Brexit preparation, which means that a couple of large projects will be delayed and the FCA will have to be more targeted in the scope of its other work. Nevertheless, it’s unlikely that this will mean a substantial reduction in the number of investigations or that the FCA will refrain from investigating potential serious misconduct as a result.

There remain 7 cross-practice priorities.

•  Firms’ culture and governance which should drive behaviours and produce outcomes likely to benefit consumers and markets.

• High-cost credit, building on the significant impact already made in the market. This is more specific than the 'consumer vulnerability and access' priority of the previous year.

• Tackling financial crime, including fraud, scams and anti-money laundering to make the UK financial services sector a hostile place for criminals and a safe place for consumers. As part of this, the FCA will undertake diagnostic or thematic work to gain a better understanding of the money laundering risks in capital market transactions, and determine how to address them.

• Data security, resilience and outsourcing since technology plays a pivotal role in delivering financial products and services.

• Innovation, big data, technology and competition which are driving change in markets.

• The treatment of existing customers to ensure that they do not get less attention or receive poorer outcomes than new customers.

• Long-term savings, pensions and inter-generational differences which reflects the changing UK population and their financial needs.

These priorities will be familiar. Most are the same as last year or derive from the previous priorities or FCA work. High cost credit did not appear as a specific priority last year, for example, but it featured in the work relating to vulnerable customers and as part of the FCA’s focus on creditworthiness tests and treating customers fairly when they faced financial difficulty.

The FCA’s focus for non-Brexit work will be a combination of these cross-sector priorities and sector-specific work.

From the long to-do list in the business plan, the FCA will be following up on previous thematic reviews and assessing how firms have assimilated rules and legislation. For example, the FCA will review the impact of its financial advice markets review and publish the outcome of its pension review, consider whether firms are complying with MiFID II requirements to control conflicts of interest and whether affordability assessments are being used effectively for the full range of credit products. The FCA will also publish its ‘approach to market integrity’, which will include guidance on its expectations of firms’ implementation of MiFID II and the Market Abuse Regulation.

With two of the seven priorities focused on technology, it’s not surprising that the FCA will devote resources to reviewing the risks associated with robo advice, algorithmic trading, and crypto-currencies whilst encouraging fintech through UK and global 'sandbox' schemes. The FCA will assess whether robo-advice models can deliver cost effective and adequate advice to consumers in an environment where Government and regulators are keen to encourage saving and appropriate investment decisions for retirement. Whilst, in the wholesale markets, the FCA will look at algorithmic trading to assess the extent to which they could exacerbate market volatility or be used for market abuse. And all of this work sits alongside the FCA’s on-going assessment of the resilience of IT systems to hacks and outages that could occur at any time.

One area of new work relates to a finding that the UK financial services sector is vulnerable to money laundering in capital market transactions. The FCA has not stated specifically which aspects of capital markets it will focus on but the FCA may pursue further investigations and enforcement actions in this area.

It is also likely that the FCA will choose to pursue investigations for market abuse in new areas in the light of the work planned for this year. The FCA can use the enhanced transactional data to pursue market abuse in fixed income, commodity and non-standard derivative transactions, investigate whether retail customers have received adequate advice or suitability assessments when sold unusual or speculative derivative products, and investigate the timeliness and accuracy of information given by credit reference agencies. 

As we have commented recently, the FCA may discontinue many investigations where customer redress and other remedial action is taken but we can expect the number of investigations to remain at its current level for the foreseeable future, despite the need for the FCA to prepare for a post-Brexit world.


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