In order to see what’s coming our way next year, we need to look back at the previous communications the FCA has been drip-feeding us throughout 2021.
Some of the work the FCA is concentrating on won’t directly impact financial planning firms; other aspects will, but the degree of impact may vary depending on the make-up and size of the firm and what systems and controls are already in place.
The FCA’s business plan, published in July 2021, told us they’ll be introducing the new Consumer Duty, which will come into effect in April 2023. One consultation paper has already been published on this (CP21/13), the other was published on 7 December 2021 – CP21/36.
This new Consumer Duty will undoubtedly impact all regulated firms, but to what extent will depend on what is already in place. For example, if you’re comfortable with having documented how PROD fits into your firm and this is regularly reviewed, then you will be in a good place; if not, then you will need to get a wiggle on.
Firms will be required to conduct value assessments which you will need to supply to the FCA on request. While the CP does not use the words ‘cross subsidy’ it does refer to where firms use the same fee charging structure for all clients and deliver the same service throughout, can the firm demonstrate value for money?
What is ‘value’ is a big subject – the FCA advised that they will provide further guidance on this, but firms do need to start thinking about their charging structure, their client proposition and how they can prove they give value for money ie by way of client feedback (this does not mean client questionnaires, but somehow firms will need to evidence client feedback, both positive and negative). Customer service will also be a key focus, as well as client communications. If you haven’t read the paper yet, then it is recommended that you do so to get an idea of where the FCA are coming from, and what work may be required.
Appointed Representatives (ARs)
The FCA have identified that many principal firms have not been effectively monitoring and supervising AR firms attached to them. As a result of this, over the years, the activity of the AR firm has brought principal firms down and/or the AR has acted outside the scope of their agreed regulated permissions, leaving many consumers with no regulatory protections in place. This has led to poor consumer outcomes.
Many firms who have ARs attached to them would have already received their FCA questionnaire which asks various questions as to how the principal firm is monitoring their AR firms. The FCA have also published a consultation paper – CP21/34 – setting out their thoughts on how ARs should be supervised going forward and the increased requirements placed upon the principal firm. If you are a firm with an AR attached to it, this is a must read.
Diversity and inclusion
In July 2021, the FCA published a discussion paper, ‘DP21/2 Diversity and Inclusion in the Financial Sector’. This paper talks about the benefits of ensuring that firms are mindful of diversity and inclusion within their teams. A consultation paper is due out in Q1 2022 with a policy statement on the subject in Q3 2022.
ALL firms will be impacted by this, albeit on a proportionate basis. Expect to be reporting back to the FCA via RegData (Garbiel) returns more data around the staff within the firm. If you’re new to this area, you are strongly encouraged to attend some webinars on the subject and do some reading, just to get a feel around the subject and think about any improvements, if any, your firm should make or start to introduce.
Investment Firms Prudential Regime
MiFID and CAD exempt firms should already be aware and have nearly completed their preparations in relation to the increase in capital adequacy requirements which come into effect in January 2022. These firms should have already received an exploratory email from the FCA so if you haven’t received it, check you spam email. If you still can’t find it, contact the FCA firm contact centre as soon as possible.
Capital Adequacy for Article 3 Exempt firms
In the Consumer Investment Strategy report published in September this year, the FCA mooted that they will review capital adequacy requirements for firms. This has been further backed up with the recent discussion paper ‘DP21/5 Compensation Framework Review’ which is looking at how the FSCS is funded. Responses to this paper are due in by 04.03.22. Watch this space.
Regulatory Initiatives Grid
The FCA is a member of a forum made up of other regulatory bodies which produces the Regulatory Initiatives Grid every 6 months. The aim of this forum is to ensure there is consistency of approach by the regulators. The latest grid was published in November 2021. This grid is a useful tool for all firms as it sets out what is on the agenda and gives a timeline as to when it is expected to start the various projects ie when various consultation papers and policy statements are due to be published and when the rules are expected to come into effect. This includes HMT Money Laundering Regulations updates.
On the agenda at the moment, as well as everything listed above, is:
- Q1 2022, the FCA are expected to publish the Consumer Investment Strategy with the aim of consumers making more effective investment decisions
- Pre-paid funeral plans become regulated from July 2022 so if you do advise and arrange these types of plans, your need to do your Variation of Permission via the Connect system ASAP.
- Review of DB transfer advice is expected to continue into Spring 2022.
- A review and amendments to the current PRIIPS regulation is due to be conducted, but is currently on hold for the time being.
- Improving outcomes in non-workplace pensions – a consultation paper has already been published on this (CP21/32). This is expected to come into effect in 2022.
- Stronger Nudge to Pensions Guidance – expected to come into effect June 2022
- A review of the financial promotions regime and high risk investments i.e. certain crypto assets
- HMT are reviewing the high-risk countries in line with FATF guidance
- Sustainability Disclosure Requirements, which will introduce fund managers to have sustainable investment labels making it easier for consumers to distinguish between sustainable and impact funds. This will include a focus on whether asset managers present ESG properties of funds in terms that are fair, clear and not misleading. There has been no definitive date around requirements that financial planners will need to introduce around ESG/ethical/ impact investing.
It’s going to be a busy year next year regulation wise - have a relaxing Christmas to gear yourself up for what is coming during the year ahead.