The Outlook highlights seven key ‘forward looking areas’ which will be under increased regulatory scrutiny over the next 12 months.
This is important for financial institutions because:
The Conduct Risk Outlook, along with the Business Plan, provides a good insight into what the regulator will be looking at over the next year. Firms should use the document to consider where they might find themselves subject to thematic reviews or other regulatory scrutiny. Acting early in response is important as the FCA is likely to view firms more favourably where they can demonstrate that they are trying to understand and deal with issues proactively, rather than waiting to be forced to change business models or remediate.
Key areas and possible implications for financial institutions:
- Technological developments outstripping firms’ investment, consumer capabilities and regulatory response.
Firms need to demonstrate how they are using technology in customers’ best interests and ensure that a balance remains between the simplicity of the interface and the information provided to the customer. Systems also need sufficient investment to ensure that there are fewer outages that undermine customer confidence.
- Poor culture and controls threaten market integrity.
Following the LIBOR scandals, and with the FX markets being scrutinised, how can firms demonstrate they balance their own interests and of those of the customer, and are they are able to evidence how they benchmark against market leaders in this important area?
- Firms with large back-books acting against their existing customers’ best interests.
The announced review being undertaken will have a massive impact on the firms involved, and all firms with legacy books should be proactively assessing the issues raised by the regulator in an attempt to alleviate the demands of any potential regulatory intervention.
- Retirement income products and distribution delivering poor consumer outcomes.
Firms need to demonstrate that fair and balanced consumer outcomes of both advice and product design are the primary concern, when providing such services for customers undertaking what is probably one of the most significant and complex decisions of their lives.
- The growth of consumer credit leading to unaffordable debt.
Consumer credit firms which are unused to regulation may find the FCA’s focus on strategy and business model challenging and some should be prepared for a potentially significant impact on their profitability as the regulator begins to identify market practices that do not meet its expectations.
- Complex terms and conditions.
Reviewing T&Cs in line with the regulator’s concerns will be a key indicator of firms proactively dealing with this concern; altering documents where necessary to ensure that they are beyond ‘fair, clear and not-misleading’ and do not give bias to the firm over the customer in any way.
- House price growth that is substantial and rapid.
The FCA sensibly highlights the potential issues with rapid house prices rises, but the real risk of higher interest rates as the economy continues to warm. The FCA warns against over-optimism as house prices continue to rise, but to maintain thorough and prudent underwriting decisions on new loans.
Many of the risks arising in the FCA’s Risk Outlook manifest themselves where firms do not have a strong conduct culture. Many of our clients have made great strides in this area, but the industry as a whole still has some way to go to prove to the regulator that the underlying culture has fundamentally changed.
While the FCA will continue to challenge the industry on areas of specific risk or failure, their focus on getting firms to manage conduct risk effectively and to embed consideration of the customer in their culture will be a theme that underpins all of their work. Firms will need to demonstrate that they are tackling both if they are to satisfy the regulator.
To discuss the implications further please contact: