Insight: The FCA Annual Report: taking a closer look

Here in the UK, after weeks of blanket media coverage around Brexit, a change of Prime Minister and the legal complexities involved in the Labour leadership election, we could be forgiven for wanting a change of subject matter.

So the Financial Conduct Authority’s (FCA) Annual Report for 2015/16 could provide a welcome respite for financial services professionals, though it’s not exactly what you might call light reading.

The FCA has thoughtfully highlighted in the accompanying press release some of its headline activities over the year, including implementing the Senior Managers and Certification Regime (SM&CR), the new regulatory framework for individual accountability, and issuing penalties totalling £884.6 million as a result of enforcement action, as well as barring 24 people from working in financial services. 

The Financial Conduct Authority (FCA) has today published its third Annual Report, which looks back on the key pieces of work undertaken by the organisation throughout 2015/16. The FCA has also published a report summarising the activities it has undertaken to promote competition in financial services in its first three years.

The Annual Report details work the FCA has carried out over the last year, including:

  • Implementing the Senior Managers and Certification Regime, which seeks to deliver a step change in individual accountability;
  • Influencing policy and technical standards internationally through bodies such as the European Securities and Markets Authority, the International Organisation of Securities Commissions and the Financial Stability Board;
  • Making significant progress on major initiatives such as the Markets in Financial Instruments Directive and the Market Abuse Regulation;
  • Working closely with stakeholders through the Debt Market Forum, Project Innovate and the Financial Advice Market Review;
  • Taking tough action on past transgressions, issuing penalties totalling £884.6m; and
  • After taking over regulation of consumer credit in April 2014, successfully integrating over 25,000 firms into our regulatory regime. The FCA now regulates over 56,000 firms and 125,000 approved persons.

The Competition Report, the first to be published by the FCA since it gained a competition objective in 2013, presents detail about activities carried out by the FCA to promote competition, and provides further insight into competition in selected markets. Activities carried out since 2013 include:

  • Launching ten new market studies or calls for input. These included looking at investment and corporate banking, asset management, competition in the mortgage sector and the use of “Big Data” in the retail general insurance sector;
  • Publishing the final findings following the Retirement Income Market Study, proposing remedies which included making customers more aware of annuity rates available on the open market when discussing annuities, and simplifying pension providers’ at retirement communications with their customers; and 
  • Publishing the interim report into the credit card market where 34 million consumers’ credit card accounts were analysed, approximately 40,000 consumers were surveyed and input was received from 24 firms in relation to business models. Overall, it was provisionally found that competition is working fairly well for most consumers. However, there are concerns about consumers with persistent levels of debt or who only make minimum payments as it was found that most firms do not routinely intervene to address this behaviour.

John Griffith-Jones, Chairman of the Financial Conduct Authority, said:

“Our overriding goal is for markets to work well, even when the external environment affecting financial services is challenging.  It’s pleasing therefore that, despite this, on the whole, UK markets have worked well.

“As a regulator we focus on the areas which are not working so effectively, and where problems do occur our aim is to respond quickly. A simple quantitative assessment of our achievements during the year is not possible, but there are some indicators of a positive direction of travel which are highlighted in this report. 

“We were given our competition mandate in 2013 and tasked with producing a standalone annual competition report to show how we are delivering against our objectives. This report is published alongside the FCA’s annual report, which covers all three of our interlinked objectives.

“I hope both documents demonstrate both the breadth of our activities and the difference we make to UK consumers, financial services and the wider economy.”

The FCA’s Annual Public Meeting will be held on 19th July 2016 at the Queen Elizabeth II conference centre where members of the public can ask questions about the reports.

Notes to editors

  1. The full text of the annual report.
  2. The full text of the competition report.
  3. As part of HM Treasury’s 2015 Productivity Statement (Fixing the foundations: creating a more prosperous nation), the UK Government asked both the Prudential Regulation Authority (PRA) and the FCA to publish Annual Competition Reports to explain how they are delivering against respective competition objectives and set out clearly the steps taken to drive more competition and innovation.  
  4. On 1 April 2013, the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the PRA. On 1 April 2014, the FCA took over responsibility for consumer credit regulation.
  5. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; 



In glancing through the report (and I’m not claiming to have read it in its entirety) a few things caught my eye as a result of seeing some familiar phrases connected with areas we focus more specifically, de-risking, the practice of withdrawing or restricting services to categories of customers deemed to be high risk, so I was interested to see what the FCA had to say on this.

There are a couple of references, including a reminder that the FCA considers the ‘appropriateness of firms’ de-risking strategies’ during anti money laundering (AML) assessments. The FCA also makes the point that a bank’s decision to work with a customer is ultimately made on commercial grounds, but adds: ‘We think that there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements.’

It’s not the first time the FCA has said this: Rob Gruppetta, who heads the FCA’s financial crime department, used the same words in a speech in December last year. And it’s no surprise that the FCA is singing from a similar hymn sheet as the Financial Action Task Force, which has made clear that ‘the wholesale cutting loose of entire countries and classes of customer’ is not in line with its standards.

But with a lot going on around correspondent banking at the moment, a sector closely associated with de-risking – including recent input from the International Monetary Fundand Bank for International Settlements – it’s a useful reminder of the FCA’s stance.


Corporate culture

The issue of corporate culture tends to rise up and down the news agenda, usually depending on whether a big business has been behaving less well than it should have. The recent Volkswagen emissions case and, here in the UK, the collapse of retail group BHS have refocused interest on the business benefits of a ‘doing the right thing’ culture – an approach likely to have helped curb the kind of conduct that led to the financial crisis and the damaging loss of trust it created.

It’s a fascinating issue and one that generated headlines when the FCA dropped a planned thematic review of banking culture, exploring ‘whether culture change programmes in retail and wholesale banks were driving the right behaviour’, in favour of ‘engaging individually with firms’, which it said it saw as the most effective way to drive continuing culture change in the sector.


Conduct risk

Referring to this, the Annual Report stresses that the FCA has not changed its view about the importance of firm culture which, together with governance, forms one of seven priorities set out in its 2016/17 Business Plan. It also makes the point that its ‘work on raising standards focuses on proactive engagement to ensure that the industry itself increasingly takes responsibility for, and ownership of, conduct risk management.’

And it highlights the importance of the SM&CR in driving the greater individual accountability that the FCA says is ‘key to improving standards in the banking industry’, adding: ‘If things go wrong, it will help us to hold senior managers to account for misconduct that falls within their area of responsibility. It will also hold individuals working at all levels to appropriate standards of conduct.’

Given that it is very early days for the sm&CR, it’s very much a case of ‘watch this space’ when it comes to assessing how successful it will be. Meanwhile, it’s interesting to see in theAnnual Report that the FCA has been looking at its own ‘tone from the top’ – considered an integral part of driving the right corporate culture – as part of a board effectiveness review, carried out at the end of last year: the review made recommendations in various areas, including ‘attention to corporate culture’.


Satisfaction levels

Meanwhile, given the generally dim public view of financial services over the post-financial crisis, the findings of an FCA consumer survey reported in the Annual Report provide encouraging feedback. Admittedly, the number of those surveyed was not large (ranging from 363 people for investment services and 2,001 for banking), but satisfaction levels were high.

For banking, credit, general insurance, investment, mortgages and savings, at least 77% of respondents said they were fairly or very satisfied with services, while banking and investment shared the top spot with a score of 88%. Perhaps the times really are a-changin’.

And so back to where we started: Brexit. It may not be mentioned by name, but its potential future impact on financial regulation is what you might call the ghost at the feast.

Just how closely the UK and Europe are integrated is demonstrated in content looking at the FCA’s role in influencing the global agenda, through organisations such as the International Organization of Securities Commissions and the Financial Stability Board.

Others include the European Banking Authority and the European Systemic Risk Board, with senior FCA executives also chairing key committees of the European Securities and Markets Authority and sitting on its board of supervisors. The report also refers to the FCA’s ‘particularly key role in influencing and implementing European legislation.’

In his foreword to the report, FCA chairman John Griffiths-Jones touches on the outcome of the EU referendum and the close relationship of the UK and European regimes, along with the implications this has post-Brexit: ‘Muchfinancial regulation currently applicable in the UK derives from EU legislation…The longer term impact of the decision to leave the EU on the overall regulatory framework will depend in part on the relationship that theUK seeks with the EU in future.

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