On 25 March, the Financial Conduct Authority (FCA) published its Strategy 2025-2030 with the straplines “Deepening Trust”, “Rebalancing Risk”, “Supporting Growth”, and “Improving Lives”. The document highlights the FCA's priorities over the next five years, reflecting extensive engagement with industry bodies, consumer groups, and FCA staff. So what can we expect?
Financial crime
Reducing and preventing financial crime was one of the FCA's key objectives in its previous Strategy 2022-2025. It has also featured heavily in the regulator's Business Plans stretching back well over a decade. It has always been a priority area, with the FCA's enforcement data to March 2024 confirming that 37 criminal and 21 dual track investigations were in progress out of a total of 188 cases (the prosecution of John Dance, the former WealthTek LLP principal partner, for fraud and money laundering relating to the alleged misappropriation of £64 million of customer funds being a particularly high profile example).
With the fraud epidemic showing little sign of abating (UK Finance's Annual Fraud Report 2024 having shown that £1.17bn was lost to fraud in 2023), the FCA has signaled a renewed focus on disrupting crime through, among other tools, public warnings, formal requirements on firms, civil action, and criminal prosecution for the most egregious cases. The regulator has also acknowledged the importance of a joined-up approach with other authorities, indicating a redoubling of efforts to partner effectively with domestic and international agencies to share intelligence and coordinate action where required.
Might we therefore see more cases where the authority exercises its criminal powers over the next five years? One tends to think so.
Smarter regulation
What is certain is the FCA's commitment to becoming a smarter regulator, taking advantage of technological solutions (including better data gathering) to achieve proportionate outcomes that best serve consumers, markets, and the Government's growth agenda.
Last year's FCA enforcement report showed a c.28% rise in the number of interventions in authorised firms' businesses, indicating a general trend in the regulator spotting and remediating compliance issues at earlier stages (avoiding in many cases the need for full-blown enforcement action, with all the time and resources that process requires). Voluntary and own-initiative requirements (VREQs and OIREQs) are on the rise, enabling the FCA to bend firms to their will on the basis of a comparatively low evidential threshold i.e., if the FCA has concerns the firm may be in breach (the high-profile consumer redress case involving Bluecrest Capital Management (UK) LLP demonstrates both the breadth of the FCA's powers in this regard, and the significant consequences its requirements can have).
The Strategy states the FCA will invest in its technology, people, and systems to be more effective in supervisory functions, noting that the regulator assess around 100,000 cases every year. Measures will include digitising and simplify the authorisation process as well as investing in record retention and storage systems to enable quicker and more effective decision-making.
The harnessing of technology will also help support growth and productivity. For example, the FCA has already worked with over 200 firms to test AI and machine learning services. Further development of seamless data sharing, with proportionate regulation, will also promote the proposed Open Finance initiative (building on Open Banking) by enabling new solutions to be brought to market that improve consumer choice and information while driving down cost.
Rebalancing risk
With innovation comes risk. The Strategy therefore notes the FCA's commitment to enabling informed risk-taking rather than risk elimination. This requires a dynamic and forward-thinking approach to regulatory, market and firm, and consumer risks.
- Regulatory risk: setting realistic and proportionate barriers to entry is critical in encouraging competition and innovation whilst keeping bad actors out of financial services.
- Market and firm risk: enabling firms to exploit market opportunities and take advantage of technological advancements must be balanced against the risk of e.g., increased market volatility and manipulation.
- Consumer risk: consumers who use financial services must decide on their risk appetite. Whilst the focus might naturally centre on higher risk opportunities, the Strategy also acknowledges those who take a more conservative approach, losing out on higher returns whilst perhaps retaining more control over access to funds. Any assessment of consumer risk must acknowledge that what is good for one consumer may not be good for another; a cookie-cutter approach won't necessarily work.
What should firms be doing now?
Firms can expect a more interventionist FCA over the next five years, with an increasing focus on its supervisory powers to achieve early outcomes.
The Strategy indicates a more principles and outcomes-based approach more generally, emphasising the need to avoid overly-prescriptive rules that stifle innovation and growth. This is consistent with the Government's drive to improve the UK's competitiveness on the global stage. This should be seen as a positive development in many respects, not least for firms looking to develop new products and services (although an outcomes-based approach may leave firms disappointed if they're looking for more certainty in regulatory requirements).
Firms should therefore be considering how best to leverage available technologies to improve the efficiency of their processes and enhancing consumer experiences, while also gaining better insights into their risks (including financial crime).
In all of these strategic considerations, firms must be mindful of the Consumer Duty principles that underpin all of the FCA's consumer-related objectives. Products and services must be tested to demonstrate their robustness and appropriateness for customers, with the associated compliance framework also being fit for purpose to promote good customer outcomes.
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