FCA Speech: Post-COVID regulations needed
28 May 2021
In an FCA speech given by the regulator’s Chair, Charles Randell to the Finance & Leasing Association on 22 April, faster and simpler regulation was identified as a priority for the financial watchdog post-COVID.
The Chair outlined five significant areas of concern for the FCA as the world recovers from coronavirus, for which Randell has expressed ‘cautious optimism.'
FCA future in a post-COVID world
With the pandemic resulting in the accelerated digitalisation of the financial services industry, Randell reflected on the varied outcomes of COVID for consumers: ‘Some have become financially more secure, adding to their savings as they have been unable to spend their money, but others have exhausted their savings or fallen further into debt.’
The digitalisation of many activities has resulted in ‘a new world in which largely unregulated online activity has become a bigger part of our lives, exposing the vulnerable to more and more scams, whether they are high interest rate scams, cryptocurrency scams or bank transfer scams; and where, even with regulated activities, consumers are sometimes only one click away from a bad decision.’
The FCA now needs to transform in order to keep up with this digital revolution and improve regulation, with a particular focus on Buy Now Pay Later firms. Randell outlined 5 ways in which to do this:
Focusing on the gateway
The number of firms being regulated by the FCA has more than doubled over the past ten years and continues to grow with the watchdog currently regulating around 60,000 firms. As this number increases, the FCA must make sure that 'firms which have FCA authorised status are good enough.'
Randell addressed the need for the watchdog to be more ‘rigorous with firms at the point when they apply; if we do authorise them, we need to know whether they are using their authorisation and what for; and we need to quickly remove the authorisations of firms which are not using them or which are misusing them.’
A stricter and more efficient approach to these gateway activities will improve what has been labelled the ‘60,000 firm problem.’
Getting the basics right
With an incredible number of regulated firms in the new world, Randell highlighted the fundamental need to get the basics right. For his second focus, the Chair outlined the FCA’s four priorities for basic consumer protection: safe and accessible payments, sustainable credit, clear and safe investment choices, and fair product terms, including price.
Randell drew particular attention to a review published back in August 2020 into relending by firms that offer high-cost credit, in which he explained one paragraph stood out:
'The review raises several concerns about firms’ conduct, including poor practice in the use of online accounts and apps to encourage consumers to borrow more, and marketing messages which emphasised the ease, convenience and benefits of taking more credit. Some firms suggested that consumers could use additional borrowing, for example, to take a holiday, and reinforced the message by including imagery of exotic locations. Some firms also appeared to use ‘nudge’ techniques such as appealing to social norms by conveying a message that relending is common practice and normal behaviour.'
This promotion of a somewhat harmful business model with ‘unsuitable consumer advertising and communications’ has resulted in a tighter focus on the basics, with Randell adding: ‘We will continue to focus on them because, frankly, none of these aspects of consumer financial services is yet in a satisfactory place.’
Focusing on outcomes
Customer outcomes will be the third focus for both the FCA and firms post-COVID: ‘Firms must identify if consumers are trapped in a cycle of unaffordable debt and take action to break that cycle, such as forbearance, support and referral to appropriate debt advice, rather than extracting further rents from the most vulnerable. If they do not, we must be ready to take strong enforcement action against both the firm and the senior managers who are accountable for product design and consumer outcomes.
‘In order to play our part in producing these outcomes, we need to collect and use the right data from firms, joining those data up with a cross-organisational strategy to intervene more promptly.’
Regulation in a post-COVID world will need to change in order to keep up with the digital accelerations: ‘Both financial services legislation and financial regulation are full of complex detail, with statutes, statutory instruments and rulebooks that fill countless shelves. But complexity produces loopholes and opportunities for regulatory arbitrage.’
Randell identified Buy Now Pay Later products and online promotions as pain points for the FCA that need government intervention and changes in legislative frameworks.
Regulation now needs to be more agile and confident, and the FCA will be using their Principles for Businesses to act against those firms who are not complying: ‘Transforming the FCA will require us to reset our approach to the Principles, including in particular our Principle that firms should treat their customers fairly. We have been giving consideration to a New Consumer Duty (or Duty of Care).’
Now that the UK has left the EU, additional speed and scope is required to adjust the current rules and standards of consumer protection. The FCA wants to deliver better, more effective outcomes than the current European rules.
Reshaping the FCA
The final focus for the FCA is reshaping the watchdog itself, with the appointment of Emily Sheppard as Executive Director for Authorisations, and Sheldon Mills and Sarah Pritchard as Executive Directors for Consumers and Markets respectively.
The watchdog has also seen Jessica Rusu appointed as the first Chief Data, Information and Intelligence Officer, Stephanie Cohen as the FCA’s new Chief Operating Officer, and Sacha Sadan as the Director of Environment, Social and Governance (ESG).
Randell ended the speech with: ‘As Chair of the FCA, I have sought to play my part in creating the financial conduct regulator we need for the recovery and the new world we face. As key players in the financial lives of millions of UK consumers and businesses, I hope you too will reflect on the part you need to play.’
The FCA speech has outlined the potential for many changes in regulation following on from COVID-19. Our RegTech solution, Pentana Compliance, enables your business to meet the key requirements set out by the FCA and facilitates effective regulatory compliance in an ever-evolving post-pandemic world.
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