Series 3 Episode 8: Pivoting to outcomes – dissecting the FCA’s business plan

Tessa Norman: Hi everyone and welcome to the latest episode of Risk and Regulation Rundown. I'm Tessa Norman, I'll be your guest host for this episode and today we're talking about the FCA's business plan. Joining me today are two expert guests, PwC Director Andrew Strange who regular listeners will know is usually the host of this podcast but today he's playing the role of expert guest. And Connor McManus, who is a director in our FS regulatory insights team. So, the FCA published its business plan and three-year strategy in early April. This is always an important document for the industry, setting out the regulator's priorities and plans for the year ahead. But the FCA took a bit of a different approach this year. We saw less of a focus on specific sectors or initiatives, and more of a focus on outcomes. I think it's helpful to start by reflecting on the context that the business plan was published in this year. It was published against the background of a lot of political and economic uncertainty. Connor, how do you think that backdrop and that level of uncertainty has shaped the FCA's business plan this year?

Conor MacManus: Thanks Tessa. Yes, I mean, look, we've had six years now where the FCA as well as other public authorities and of course the financial services sector have been dealing with pretty significant events. Obviously we've had the Brexit referendum and the prolonged negotiation and the UK finally leaving the EU. And then, obviously, the Covid pandemic. And just as we were coming out of that the terrible events in Ukraine. So, to some extent, you know, that level of volatility and significant events means that, you know, it's understandable that the regulator will want to have a bit of capacity to respond to events which were perhaps not predicted. So, I think that's one factor. I think the other thing is just the amount of stuff the FCA has to do at the moment, you know, since the UK left the EU there's been a very significant amount of regulatory initiatives which is creating an enormous amount of work for the FCA to do. It's well publicised they have capacity constraints which are impacting on them at the moment. So, I think that's another big factor, but then I think there's also a lot of internal work going on at the FCA at the moment. We know they're investing a lot of time and resources on their transformation programme which they clearly see as really a prerequisite for them to be able to deliver their workload.

Tessa: Yes, I think you're right that to an extent the FCA's kind of baked in a degree of flexibility into the plan by keeping it quite high level to allow it to respond to current events and the current environment. We saw some pretty extraordinary measures in response to the pandemic, so things like mortgage payment holidays. Do you think we're likely to see more of that in response to the cost of living crisis?

Conor: I think potentially. I mean, perhaps you would have expected to see a little bit more on the cost of living crisis in the business plan but I suppose there's a much broader issue than one that can be tackled by a conduct regulator. There's obviously levers that only the government can pull which would address some of the issues that we're seeing. But clearly we're going to see a lot of focus on this issue. We're going to have a lot of pressure I think from, for example, the Treasury Select Committee for all policy making bodies to be doing everything it can to address some of the challenges we're seeing at the moment. So, it will be one to watch and potentially we would see more action from the FCA in the future, I think.

Tessa: Andrew, what's your take on that? Do you think that the current environment sort of raises some broader questions about the FCA's role and remit?

Andrew Strange: Yes, I do and thank you for hosting so I can pontificate from this side of the table, Tessa, this is great. I mean, I think there's a really interesting debate on the balance of responding to issues versus kind of driving almost public policy change and Connor's talked about that a little already. You know, responding to issues like some of the forbearance measures as a consequence of Covid, you know, tackling some of the issues potentially that might fall out of the cost of living crisis are clearly something I think a regulator needs to do. I'm always intrigued by a regulator that's trying to, for example, encourage financial capability or limiting high risk investments or encouraging greater access to investments, for example. For me, there's an inherent difference between removing barriers to access investments versus encouraging people to invest and I think it's an interesting debate around what the scope and the remit of the regulator is. I also think beyond the sort of scope of purpose is a point around the scope of the actual number of firms that the FCA's trying to deal with. It's still regulating over 50,000 firms. Senior manager regime was about firms, to some extent, taking responsibility for making sure people are fit and proper. But I wonder whether actually, maybe there's a bigger role. I'm not about to advocate for self-regulatory organisations in the past, but what's the role of professional bodies? If we're talking about outcomes focussed regulation and we're talking about people's actions and integrity and so on, actually isn't this something professional bodies could do more in?

Finally, I also think there's an interesting point around the types of firm that the FCA is trying to regulate. We've got at the moment a prudential regulator in the PRA and a conduct regulator in the FCA. But actually the FCA does do a lot of prudential regulation for the investment firm world that I work in, for example. And I think if we begin to look at some of the needs of some of those firms that it regulates, you know, there's, for me, an inherent difference between the need of a retail consumer versus a wholesale market. You know, one of those is around consumer protection domestically as you'd expect but one of them is more around international competitiveness. And I could see how there is a divergent of approach that one particular regulator taking might be a bit of a challenge for them.

Tessa: Absolutely. I think a lot of what you've touched on there just, kind of, underlines the scale of the challenge that the FCA's facing on multiple fronts. So, we've talked quite a lot about the context and some of the business plan maybe doesn't say. Andrew, in terms of what it does say, what can we learn from the plan about the regulator's priorities?

Andrew: Well, as you said in your intro Tessa, I mean, it's focussed on outcomes really rather than, sort of, sectors or particular initiatives. And it's sort of evolved over the last couple of years to that point. Obviously we've got the joint regulatory grid document that's published twice a year and we're expecting the next one in May, which sort of sets out some of that granular detail around initiatives that we're expecting from regulators. I don't want to pre-empt it too much but I'm guessing there won't be a huge amount of new stuff in there. The reality is, I think, with some of those external factors we've talked about and just the realities of bandwidth I think we might see some tweaking of dates but I'm not sure we're going to see lots of new initiatives. The business plan itself, though, it kind of focusses on three main areas and priorities under that. Many of these will be familiar to firms, I don't think they're hugely new or exciting. So, it talks about reducing, preventing serious harm, so that's about protecting consumers but also encompasses things like fraud and tackling poor treatment and poor outcomes and pieces of work like the existing work around the appointed representatives regime would fit in that world very clearly. They also talk about setting and testing higher standards. I do think that's interesting because I think it's a change in tone around meeting regulatory obligations and meeting standards to one where they're talking about enhanced and going above. So, I do think there's a potential step change there in what they're expecting from firms. Clearly, initiatives like the consumer duty proposals where we're expecting final rules this summer will fit clearly into that world.

And it also builds on previous activity, so things like making sure consumer credit markets work well would be very much in the space of putting consumer needs first. And then the final one is around competition and promoting positive change, so things like that kind of broad, international competitiveness agenda. ESG type requirements would all fit into that as well, so not necessarily new but that's kind of how they're grouping them together. Couple of other points that they've also focussed on, so I was taken by the quite big focus they had on the authorisation to gateway. And I don't think anybody in a firm would want a weak authorisations gateway, I think it's important it needs to be really robust. But I do think there's potentially a slight conflict between the time constraints of having a robust authorisations gateway and the bandwidth of the regulator and that issue around sort of speed and innovation, so I think that there's an interesting debate there. They also as an organisation are transforming themselves. So, they do talk a bit about things like becoming more of a data-led regulator which we've heard before. I don't think in practice we really know what that will mean until we see their data strategy, which should be published in coming months. But they also talk about lots of the issues that I know we're facing as a firm and many of our clients are facing, so talking about expanding their footprint in Edinburgh, opening up a new office in Leeds as well, so moving outside of London a bit. And finally, I think that the remaining interesting thing that I really would love to talk more about is around some of the success metrics they're begun to flesh out.

I think possibly the last time I was a guest on this podcast we talked about the consumer investment strategy which was from autumn 2021, where they began to kind of set out some of the success metrics they wanted to achieve, so thinking about compensation scheme and access to high risk investments, or lack of access to high risk investments and so on. And what we saw in the business plan was the FCA now building this out into its overall approach, so a much greater kind of use of success metrics demonstrating what it wants to achieve in the market.

Tessa: Yes, I agree, I think that's really interesting. As you say, I think that consumer investments piece was one of the first times that we've seen the FCA be really specific about the sort of outcomes and metrics it wanted to achieve and now we're starting to see how the FCA proposes to build that out into a broader framework. I mean, can you tell us a bit more about how the FCA's planning to approach this, and also are there any lessons for firms here? Because of course a lot of firms are thinking about similar things, thinking about how they measure outcomes for instance, for how they're going to comply with the regulator's consumer duty proposals.

Andrew: Yes, absolutely. I mean, so, I think it's a good idea to set out those success metrics. I mean, let's say that up front. It allows for greater accountability of the regulator. And actually, I think probably from a regulatory perspective it increases transparency, so I think it's a good thing. As you say, I mean, firms when you think about things like the consumer duty proposals and outcome focussed regulation. Firms have really struggled with how you evidence that and I've got to say looking at some of the FCA's work here I think they're realising it is quite a tough task. It's a good indication of how hard it is, really. I mean, some of the metrics they've gone through really are a work in progress, so they're trying to work out how best to do it. And I was actually quite surprised by the number of times they were using what I would call lagging metrics there, so things like complaints data or burdens on compensation scheme. Which if you're in an outcome focussed regime, I'm slightly surprised there's such reliance on lagging metrics. Though it is exactly what our clients are finding when they're consumer duty, for example.

Tessa: Yes, absolutely. You could argue that by the time it's filtered through to complaints or other things it's arguably kind of too late to act. And the other aspect that the FCA talked about was perception metrics. Can you tell us a bit more about that?

Andrew: Yes, I think this is fascinating, the idea of perception metrics. I mean, again, if you go back to some of the things we've done in the world around consumer duty with our clients there's some really interesting debates here. If you've got a consumer who's quite correctly been refused credit, are they going to be satisfied? Probably not. In extremis, if we went back to the late 1980s, if I was as it turns out mis-sold an endowment policy but with the promise of paying off my mortgage early, probably on day two of having that product I was extremely satisfied but longer term I wasn't going to be. And again, you can't roll your eyes at this Tessa because I know I talk about this far too often for many, many years but in financial services we don't have a long stop. We don't have a long stop because of the long-term nature of the products before people necessarily realise that there is a problem or a fault. Therefore, I worry that a point in time perception is arguably either sort of the ultimate lagging metric or the ultimate premature metric, and neither of them are necessarily spot on or right. Customer perception or satisfaction for me isn't the same as a good outcome but it's really difficult to sort of juggle those points. In terms of the customer duty piece, I think it's interesting the firms could look at what the FCA's done there in terms of their own thinking, so there are probably lessons for them to learn as well. The FCA's approach in part is looking at things like surveys, whether their financial life survey, other surveys or even surveys of firms. You know, perhaps in our clients we call that consumer testing and we're seeing lots of firms talking about how they can incorporate consumer testing into their sales processes.

And I think, as we say to all our clients, you know, that can be helpful as part of the picture but it's certainly not the whole picture and I think that firms, and actually therefore the FCA, probably need to be careful about they ask those questions. I also would slightly cynically say there's an interesting philosophical question around actually what do you want from your regulator here? Do I want a regulator that is perceived to be successful or one that actually is successful? So, I think any metrics we can have that are properly tangible I think would be great.

Tessa: Definitely. And so, as well as setting out the outcomes and metrics that the FCA wants to achieve for its own activities, it also outlines the outcomes that it expects all firms to deliver. So, break that down by both consumer outcomes and wholesale market outcomes. Connor, what's your take on that and how much more kind of clarity does this give firms in terms of what outcomes based regulation is going to look like in practice?

Conor: Yes, so I think this is something the FCA and to some extent the PRA have been talking about for a number of years now. So this is the idea that now we're outside of the EU you can move away from that very granular rules based approach to regulation to something which is more outcomes or principles based. So, the regulator setting out, you know, relatively high-level objective but leaving more flexibility to firms in terms of how they deliver that. And that's clearly something that comes across very strongly in the business plan and in the strategy. You know, it is very high level at this stage, and I think the extent to which firms will get more guidance will depend on the topic. So, for example, consumer duty which we've already talked about, you know, there's a very clear objective in terms of what the regulator wants firms to achieve. But I think they're cognisant of the fact that they need to give more detail to firms in terms of what that actually looks like in practice and perhaps we'll see that when the final rules come out. You know, in other areas we're likely to see much more granular detail, so for example in the capital market space we're likely to see high-level objectives that the FCA wants firms to achieve around market integrity and the like. But that's likely to be under-pinned with much more granular rules than we see in the kind of consumer outcomes space. So I think it's helpful to see these objectives articulated in a high level way. The way in which it then trickles down into more detail, I think, will depend on the topic.

Tessa: Yes, and Andrew, what's your take on that? Particularly thinking about the kind of market that firms are operating in. At the moment we're seeing a lot of sort of product innovation, development of new types of product. Does this sort of approach work in that world?

Andrew: Well, I'm not entirely sure that this is radical enough, would be my observation. I'm not sure everyone wants something that's particularly radical, but just hear me out on it. I mean, I think that that transition to outcomes is definitely the right answer but I worry about whether we can pivot successfully to that whilst we're still thinking about traditional product-centric regulation and legislation as well. You know, do we end up with the best of both worlds or actually the worst of both worlds? And actually, I also worry that even the way we're thinking about it now, this kind of pivot to outcomes regulation is still based on slightly outdated concepts around the 'product' that people are buying. If you think about, for example, credit cards, my generation uses credit cards quite regularly. Actually, younger people, nothing like an old person lecturing younger people, but younger people are looking at things like buy now, pay later as an alternative. So, there are some societal changes there in terms of the product set as well. If you think about crypto in its widest sense, it's an investable asset and so on, the attitudes of people are very different. And I think that the approach to switching towards consumer outcomes is great but actually, do we need to go further in terms of really thinking about what is fit for not just today's products but actually also tomorrow's products or the products of ten year's time as well? And I'm not sure we're yet getting to the point where we're radical enough or flexible enough to deal with that.

Tessa: Yes. I mean, I think part of that may be addressed by Connor's point that the FCA's going to take a different approach to different areas but you're right, they've almost got to look that much further ahead to make sure that this is fit for purpose for the future.

Andrew: In here, we talk about different areas, but are there actually new areas that we haven't thought about yet? So, it's the unknown unknowns as well as the known unknowns, as it were.

Tessa: So, to kind of wrap up our discussion, it would be great to get both of your views on sort of what practical steps can firms take now off the back of the business plan and what should they really be focussed on over the next few months? Connor, I'll come to you first.

Conor: Yes, I mean there's probably two things, two points I would make. I mean, the first is, you know, as we've discussed, there isn't an enormous amount of new stuff in the business plan but there is a huge amount to do at the moment. I talked about the amount of regulatory initiatives that we've seen since the UK left the EU. We're getting to the stage now, for example, on consumer duty where firms really need to start thinking about embedding that into their operations and how they operate and their business model. There'll be similar proposals coming in wholesale market space and the wholesale markets review quite soon, so there'll be a lot to do there. So, really, there's just a lot of work to be getting on with this year and next. I think the second point, which is kind of a bigger point is around thinking about what outcomes based regulation means in practice. So, you know, as I mentioned, it's really premised on firms being able to apply quite a significant amount of judgement in terms of what regulators want them to do and embedding that into the way in which they interact with their customers and the way in which they operate. And I think that will, for some firms, require a bit of a shift in terms of thinking about compliance which, you know, much less focus on looking at the rules, much more focus on applying judgement in terms of what they need to do. So, I think that's something that firms really need to start thinking about because as we've discussed, you know, the trajectory is pretty clear from the FCA business plan, that focus on outcomes isn't going away.

Tessa: Great. And Andrew, is there anything you'd add to that in terms of the takeaways for firms?

Andrew: I mean, I totally agree with everything Connor said there. The reality is when I think about the work firms had to do just to define value in asset management, you know, that was a difficult task and actually considering outcomes is a much broader thing which applies to all firms. So, incredibly difficult. I mean, the only things I'd add on, perhaps, are I've had a number of conversations recently with compliance type people in clients who've said, 'We get what you're saying Andrew, we know what we need to do here.' However, when it comes to the business they keep coming back and saying, 'But where's the rule? You know, where does it say in COB 6.2 that I need to do X, Y and Z?' So, I think there's a really interesting, challenging cultural shift for people outside of our compliance type risk world who need to understand what the regulatory expectations are. We've said it before, I think the whole data point is really interesting when we get that data strategy later this year, I think that will be great to see. The reality is that the quality of data's going to be incredibly important. Being an outlier, whether positively or negatively, is going to potentially have an impact on the way you're supervised so firms need to think about that. And then finally, I think, I make the point, I think firms maybe could afford to be slightly more creative than they have been in the past. I'm not saying the regulator's torn up the rulebook at all but I think the regulator is genuinely open-minded about stuff, you know, whether it's how you communicate with your clients and, you know, moving away from PRIIPs type documents but actually doing stuff that really works. And I do think that it feels to me like the regulator is keen for firms to try different things. Might not always work but give it a try and see if you can get to a better outcome.

Tessa: Yes, I think you're absolutely right that the regulator kind of looking for firms to come up with the answers rather than kind of relying on finding those in the rules. Great. Well, thank you both so much for joining us. It's been really interesting to hear about, you know, why the FCA's taken a bit of a different approach this year and what firms can take from the plan and how much work there still is to do, even though there might not be a huge amount of kind of new initiatives in there this year. And also thinking about how this plays into the regulator's broader approach and where we're moving to in the future. To our listeners, I hope you've enjoyed this conversation. Please subscribe to future episodes and rate and review this series. And we'll be back with our next episode next month.