Blog: FIsion Blog | 16 April 2018

Prioritising Brexit, continuing to tackle risks and opportunities of new technology: FCA publishes 2018/19 Business Plan

The FCA has published its latest Business Plan, along with its Sector Views document covering all the markets the FCA regulates and providing context for its priorities by giving an overall FCA view of how each of those markets is performing. With Brexit top of the list for its discretionary activity, much of the other planned work for 2018/19 relates to familiar themes and existing projects rather than launching new initiatives.

Brexit – an inevitable priority

In the Business Plan, the FCA describes preparing for and implementing changes resulting from EU withdrawal as 'inevitably the priority for our discretionary activity'. It expects the focus of its work on Brexit in 2018/19 to include:

• Supporting the government and providing technical advice in relation to (i) negotiations with the EU and other countries where the government seeks an FTA and (ii) the legislation produced by the government;
• Continuing to work with regulatory authorities across the EU and globally to ensure appropriate supervisory cooperation and information sharing in respect of firms and markets, policies and future regulatory regimes;
• Reviewing the FCA Handbook in light of the legislative changes for Brexit, including looking at duty of care (see further below) and the potential for increased automation.

Cross-sector priorities: continuing themes for an 'ever-evolving landscape'

The FCA admits to having made 'difficult and challenging decisions about our priority activities that are not related to work on EU Withdrawal.' This applies to both its cross-sector and sector-specific priorities for the year.

In an echo of last year's Business Plan, the FCA's cross-sector priorities place particular emphasis on the challenges and opportunities of new technologies. This is evidenced by the fact that it devotes two of its cross-sector priority themes (Data security, resilience and outsourcing and Innovation, big data, technology and competition) to the issues raised in this area. High-cost credit - including arranged and unarranged overdrafts - and intergenerational issues are two of its other continuing areas of cross-sector focus.

Under the Data security, resilience and outsourcing theme, FCA activity will include considering risks to firms’ resilience. On the list of risks is PSD2 implementation which, according to the FCA, has 'the potential to increase cyber attacks and data breaches'.

As the FCA points out, the Innovation, big data, technology and competition cross-sector priority is 'strongly linked' to the Data security theme. In addition to on-going initiatives such as its Innovate Programme and the Regulatory Sandbox, it will look to:

• Publish an update on its Strategic Review of Retail Banking Business Models in the first half of 2018, which will explain the results of its preliminary analysis and proposed next steps. A particular focus here is understanding what impact the growing use of digital channels and declining use of branches is having on business models and the implications of this for consumers;
• Finalise the (long-awaited) proposed new rules on crowdfunding and publish them for consultation in 2018;
• On cryptocurrencies, respond to the Treasury Committee enquiry and work with the Bank of England and the Treasury as part of a taskforce to develop thinking and publish a Discussion Paper later this year outlining its policy thinking in this area.

Sector priorities and views

The Business Plan contains key planned activities for each of the FCA's seven financial system sectors. The Sector Views document supplements and informs the Business Plan, setting out the FCA's observations in respect of the key developments, performance and risks for these sectors.

Looking in particular at the FCA's observations on and plans for the retail lending and retail banking sectors:

Retail lending: customers above profits

In the retail lending sector, including the mortgage market, the FCA expects firms to put customers' interests above short-term profits. In the consumer credit market, the quality of debt advice and the long-term sustainability of some business models are specific areas for concern for the FCA.

Key observations from its retail lending Sector View include:

• The increase in consumer credit lending has continued, with an annual growth rate of 10.3% in the year to April 2017. This was mainly driven by increased amounts borrowed on credit cards, motor finance and unsecured personal loans. There has also been significant growth in smaller markets, such as peer-to-peer lending and high-cost credit markets;
• First-time buyers and re-mortgages drove growth in the mortgage sector, and the FCA expects any further growth in the near term to continue to be driven by these groups;
• The motor finance market saw a 8.2% increase in the 12 months to April 2017, although this rate was 7.5% lower than that in the same period for the previous year;
• The FCA expects that technology will have a marked impact on the retail lending sector, particularly as firms adapt to PSD2 and Open Banking, which may accelerate the digitisation of lending practices;
• There are indications that more firms are lending to consumers who are less able to cope with financial shocks. This is a cause for concern for the FCA, as significant harm can be caused where consumers are sold unaffordable and unsustainable products.

Key planned activities for the sector include:

• Publishing a Policy Statement on rules which will clarify its expectations of firms when carrying out creditworthiness assessments on their customers;
• Launching a market study on credit information in Q4 2018, to collect evidence to gain a better understanding of the potential for harm in this market and, if necessary, identify remedies;
• Publishing an interim report on its Mortgage Market Study in Q2 2018, which will set out its findings and invite views on any potential remedies. Final findings, a summary of the feedback and next steps will then be published later in 2018/19;
• Completing its review of the motor finance market by the end of 2018, including publishing its findings and details of any areas of concern identified;
• Publishing an interim report on its review of the retained Consumer Credit Act 1974 provisions, setting out its initial views and inviting responses – no specific timing for this is given, although the FCA is required to report to the Treasury on its review by 1 April 2019.

Retail banking: major market changes ahead

The wider context here relates to how technology and innovation will, according to the FCA, 'profoundly shape the size and nature of the market over the next decade.'

Key observations from the FCA's retail banking Sector View include:

• Technology has led to significant changes in the payments market, with 32% of consumers having made a mobile payment in December 2016, but many technology firms currently operate outside the FCA's regulatory perimeter;
• The downward trend in customers' use of cash is expected to continue, while new types of payment services such as mobile wallets and payments made through social media evolve in the digital banking landscape;
• Cyber-crime, attacks and financial fraud continue to grow. The FCA is concerned that consumers are not always able to identify and avoid sophisticated payment scams.

Key planned activities include:

• Developing a Payments Sector Strategy, to improve its understanding of the payments system by identifying the key players and current and emerging trends that may cause harm in future;
• Undertaking diagnostic work on payment fraud, including Authorised Push Payment fraud, to develop appropriate interventions as well as support industry initiatives;
• Supporting the Bank of England's commitment to open up direct access to its Real-Time Gross Settlement (RTGS) system to non-bank Payment Service Providers (giving electronic money institutions and payment institutions direct access to payment schemes) by strengthening FCA supervision of all applicants;
• Following UK implementation of PSD2, supervising AISPs and PISPs and developing its understanding of the emerging business models.

New duty of care: discussion paper in the pipeline

The FCA originally planned to explore the possibility of introducing an obligation on firms to exercise reasonable skill and care in providing financial services as part of a wider Handbook review post-Brexit. However, the Business Plan suggests that it intends to take forward some aspects of this work, starting with an initial Discussion Paper in summer 2018. The same timing is expected for the publication of a Feedback Statement and final version of its Approach to Consumers.