22 June 2022 • Governance Risk & Compliance
The FCA recently shared reports regarding their future strategy for 2022 through until 2025. In this report, the regulator detailed their intention to enhance their regulatory oversight in key area and how they propose to measure performance moving forward. The effectiveness of the FCA’s supervision affects consumers, the health of businesses in the sector and the overall economy so the proposals in the 3-year plan will no doubt dictate decisions some firms make over the short to medium term.
Reducing harm from firm failure, improving oversight of Appointed Representatives and minimising the impact of operational disruptions are all on the FCA’s agenda over the coming 3-year period.
Improving oversight of Appointed Representative
An ‘Appointed Representative (AR) carries on regulated activity under the responsibility of an authorised firm’, i.e., the ‘Principal’. The Principal is responsible for ensuring that its ARs are overseen in a manner which is coherent, cohesive and compliant with FCA rules.
At present, the FCA believes that the potential for consumer harm from ARs is too high. Due to this, consumers are exposed to the risk of being misled, mis-sold and under-protected. In response to this analysis, the FCA has set out a framework to implement changes. In the report, the FCA shared that Principals currently generate between ‘50% to 400% more complaints and supervisory cases than other directly authorised firms’.
The proposed changes that the FCA has made are in line with their overarching goal to improve the existing intelligence they have on AR’s and Principals. The FCA’s changes will place them in a better position to be able to identify which business models pose the most risk of harm. This change will include increased scrutiny at the authorisation gateway so that, over time, firms with risks that cannot be managed will not be able to continue to trade. The FCA have stated that they will measure their success through metrics that illustrate that Principals are overseeing ARs effectively, by comparing complaints about Principal firms to non-Principal firms. With these changes, there is an expectation that there will be a reduction of complaints when consumers receive information, guidance and advice regarding financial products from ARs.
Historically the AR regime has been an appealing alternative to becoming directly authorised, both in terms of speed to market and cost-efficiency. No doubt Principals and ARs alike will keenly watch the development of these proposed changes and adapt accordingly but it will be of broad interest whether these advantages are diluted to the extreme where direct authorisation overtakes as a preferred option. Wheelhouse Advisors will continue to watch these developments and provide updates as appropriate.
Minimising the impact of operational disruptions
The FCA acknowledges and accepts that operational disruptions are inevitable. With that said, it is critical that firms can respond to, learn from and recover from operational disruption to reduce any future occurrences. If firms cannot deliver on this, consumers can be subjected to great loss. Covid 19 and the ongoing cybersecurity threat are examples of the operational risks to which firms have, and are currently, exposed. Such risks showcase the need for firms within the financial services industry to be able to protect themselves on an operational scale and to invest in their resilience to protect not just themselves but also their investors and the wider markets they operate in.
By acknowledging the threat of operational disruptions, the FCA has introduced a new set of rules and guidance that seek to strengthen a firm’s operational resilience. The FCA will be assessing the impact of a firm’s resilience through their ‘business continuity and incident response plans, cyber security and third-party management’. The FCA will be monitoring how resilient firms are, as well as the severity and scale of actual disruptions that do take place. There will be a greater focus on firms that cannot meet with the FCA’s new standards, and the regulatory body will also be assessing the resilience of third party providers who are outsourced critical services to the industry.
Larger firms or those with complex business models will attract closer scrutiny from the regulator on this topic. But the FCA’s expectations for small or simpler firms is for them to have developed a proportionate framework to preserve their operational resilience – for many firms, an efficient and proportionate approach to this is in to incorporate into their ICARA process, where the analysis of financial and non-financial resources required to protect against material harms to the firm are captured and succinctly summarized.
If you are a firm looking for advice as to how to keep on top of the FCA’s proposed changes or develop an ICARA processes that operates efficiently and effectively, Centralis Governance, Risk & Compliance has the expertise and knowledge to assist you. Contact Michael Chambers to learn more about how we assist firms.