What does the FCA’s Business Plan 2020/2021 mean for FinTechs?

This information is correct as of 09:00am on 17 April 2020 and will not be maintained.

On Tuesday 7 April 2020, the UK’s Financial Conduct Authority (the “FCA”) released its 2020/2021 business plan (the “Business Plan”) explaining its strategic focus. Unlike previous years, due to the disruption caused by the COVID-19 outbreak, the Business Plan sets out FCA’s priority workover the next 1 to 3 years rather than focussing solely on the year ahead.

In this article we look at FCA’s key priorities and cross-sector work, and what this means for FinTechs.

The FCA’s key priorities

The Business Plan lays out five key priorities for the FCA to address over the next 1 to 3 years, and highlights that any issues could be exacerbated by the effects of the global economic uncertainties caused by coronavirus.The first of these is an “internal” priority for the FCA to transform how it works and regulates. We shall consider the four “external” priorities, which are as follows:

1. Enabling effective consumer decision making
   • The FCA considers that the current distribution process and its support network are not working well enough to allow consumers to make effective decisions about their investments. The Business Plan refers to retail investment products as an area of particular concern.
   • FinTechs focussing on the sale of investment products that reference cryptoassets, in particular, should be aware of the FCA’s continuing strong focus on consumer protection to deliver the outcomes the regulator is looking for, particularly in light of the FCA’s consultation on the ban of such products.
2. Ensuring consumer credit markets work well
   • The FCA acknowledges that the consumer credit market is rapidly evolving and highlights the increasing demand for borrowing during the pandemic.One of FCA’s key concerns is to ensure consumers gain access to fair and affordable credit on the basis of clear and simple information which allows them to understand the range and features of products available.
   • As FinTech continues to disrupt the consumer lending market, there are opportunities for those providing alternatives to high-cost credit in the form of products and services operating in the best interest of consumers.
3. Making payments safe and accessible
   • The Business Plan makes clear that payment firms should have appropriate systems and controls in place to handle and store data correctly in order to minimise the impact of fraud and operation outages on consumers. It emphasises that firms must meet their regulatory responsibilities alongside remaining competitive on quality and value.
   • As Open Banking has resulted in a number of new FinTechs entering the payment space, those FinTechs in particular will need to ensure that they focus on countering fraud and financial crime effectively, safeguarding customer funds and embedding operational resilience in their operations going forward.
4. Delivering fair value in a digital age

• The FCA continues to emphasise the importance of ensuring that consumers are able to access, assess and act on information on products to make informed decisions.The Business Plan specifically mentions digital innovation and refers to the FCA’s recent investigations of pricing practices in the general insurance, cash savings and mortgage markets which have shown that these often fail to achieve fair value for consumers, some of whom pay a loyalty penalty. In addition, the FCA is also working to ensure that ‘vulnerable customers’ get fair value and are not digitally disenfranchised.
• Whilst FinTechs are uniquely positioned to drive digital innovation, they need to ensure that their products and services are transparent and that they have adequate controls in place to prevent inbuilt bias or discrimination.
• Many FinTechs create products which are aimed solely at ‘vulnerable customers’, usually with the aim of addressing financial exclusion.However, in doing so, such firms should be aware that the regulator will be paying special attention to ensure that vulnerable customers are proactively identified early on in the process, that they receive fair treatment and the relevant products are “fair value” for customers.

Cross-sector work

The FCA will also be focussing on the following areas of cross-sectoral work:

1. Innovation and Technology

• The FCA will engage with industry and society further on artificial intelligence, in particular with respect to machine learning, and focus on the safe, appropriate, and ethical use of new technology.
• The FCA will also be working to strengthen its rules on preventing money laundering and working with domestic and international stakeholders towards a co-ordinated approach to cryptoassets.
• The FCA intends to maintain its international collaboration through the Global Financial Innovation Network, including with respect to international sandboxes. The FCA also plans to explore the impact of its ‘sandbox services’, on the wider adoption of appropriate technologies, particularly on RegTech. Examples of other firms that have been included on recent sandboxes include platforms tokenising the issuance of financial instruments and digital identity solution platforms.

• Climate change

• The FCA will be continuing its research to better understand how retail investment products are designed, the accuracy of disclosure, and whether consumers can make effective decisions on ‘green products’, which may particularly affect the growing number of new ‘green’ FinTechs and other FinTechs offering investors access to ‘green’ products.

• Other areas of focus

• Brexit: the FCA will continue its work on ensuring that financial services firms are prepared for Brexit at the end of the transition period.
• Operational resilience: the FCA aims to set new requirements to strengthen operational resilience and require firms and FMIs to take ownership of their own processes by setting expectations for firms (i) to identify how disruption to their important business services could cause harm to their customers or market integrity and (ii) to set tolerances for disruption;.
• Financial crime: the FCA plans to implement changes on how to reduce financial crime, including a greater use of data to identify firms or areas that are potentially vulnerable, implementing the new registration and supervision regime for cryptoasset activities and taking enforcement action where it sees serious misconduct.
• Culture: with the introduction of the Senior Managers and Certification Regime to all solo-regulated firms, the FCA will be looking for firms to foster healthy cultures and fair customer outcomes.

COVID-19

Unsurprisingly, the Business Plan puts a specific spotlight on the challenges presented by the COVID-19 pandemic. Emphasising the enormous uncertainty and unpredictable impact of the current pandemic, the FCA makes clear that one of its main priorities is to ensure customers receive the support they need and are protected from harm caused by the increased risk of frauds and scams during this crisis. It reminds firms that it will “remain vigilant to potential misconduct” and “clamp down with all relevant force” on those using the pandemic as an opportunity for poor behaviour. FCA is committed to work closely with the industry and stakeholders to give firms the right support and during these difficult times.

Comment

FCA’s Business Plan comes at a time of great uncertainty for markets, businesses and individual households. Clearly the pandemic has led FCA to refocus its priorities on the immediate challenges and interventions required in light of the crisis whilst not losing sight of its wider objectives and focus on areas of greatest potential harm.

The FCA’s stated priorities for the next 1 to 3 years create opportunities and challenges for FinTechs. Whilst the FCA sees digital innovation, open banking and technology as enablers for competition and financial inclusion, its Business Plan also serves as a reminder of areas of potential harm and the kind of outcomes that the regulator will be targeting. FinTechs, like all other firms, will want to consider the Business Plan carefully and look at the key messages it delivers in respect of their business models and operations. In addition to financial crime, fair treatment of customers and transparency, it will be important for FinTechs to channel sufficient resource and focus towards potential issues arising in the context of operational resilience, digitisation, vulnerable customers, fair value to consumers and customer understanding.

Co-authored by James Highfield.