Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and the Payment Systems Regulator (PSR) published their 2020/21 business plans 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.
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.
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:
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.
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.
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).
The FCA’s business plan identifies four external priorities that it plans to focus on over the next one to three years:
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.
Enabling effective consumer investment decisions
The FCA will target three outcomes to ensure consumers can make effective investment choices in a fair market:
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:
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:
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:
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.
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.
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.
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.
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.
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.
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:
Benjamin Mark-Alexander Beswick, a solicitor trainee in our London office, contributed to the writing of this alert.