The Model Office Blog

As we enter a new year, it provides us with an opportunity to review the past years activities and look ahead at what is to come. Indeed January is named after the Roman god Janus, who had two faces so he could see the past and future. What Janus may have told us from a regulatory perxpective.is the FCA are 'one one' with their future vision and learning from the past when it comes to firms regulation data and compliance analytics.

We already have the 2021/22 business plan where Nikhil Rathi, Chief Executive says, “We operate in a world of rapid and disruptive change. To be an effective regulator, we can’t just respond to today’s challenges. We need to prepare for those of tomorrow.” The Plan says that the FCA will be:

•  More innovative – taking advantage of data and technology to increase its ability to act decisively in the interests of consumers
•  More assertive – testing the limits of its powers and engaging with partners to make sure they bring their powers to bear
•  More adaptive – constantly learning and always adjusting its approach as consumer choices, markets, services and products evolve

This all points to a regulator that will be bold in utilise data and technology to provide evidence-based practice in its regulatory approach. So what are the key themes for 2022 and how can firms prepare?

1. Directly authorised (DA) v Appointed Representative (AR):With the continued objective of consumer protection comes a wide sweeping review of the AR market. Their consultation paper CP 21/34 heaps a whole load of additional responsibilities and information on the Principal and its AR firms across;

• Percentage split, nature and revenues of regulated and non-regulated activities
• Details on the AR firm history and on-going activities, whether they were a member of a previous principal and report on why they have moved, whether it was part of a group and if so the group’s name, whether individuals within the AR will be seconded or contracted to the principal firm
• Provide full financial revenue details of ARs and nature of the financial relationship between the Principal and its ARs
• Annual checks on accuracy of AR details and report changes to the FCA
• Submit AR firm complaints data moving away from aggregated complaints reporting
• Include AR permitted activities on the Register
• Benchmark AR staff standards to that of the Principals standards
  
  2. Operational Resilience: March 31^st sees the end of the implementation period and start of the transitional period where enhanced SM&CR firms will have to:

• Identify important business services
• Set impact tolerances and gather baseline data
• Mapped dependencies
• Scenario test and set on-going governance standards
• Produce self-assessment document

3. Consumer Duty:The FCA’s consultation paper CP21/13 is open for feedback until 15 February and the final rules are expected end of July 2022. This far-reaching duty intends to set a higher standard of care and expectation beyond the current set of principles and rules. As our blog illustrated, this has huge ramifications particularly for all firms with Appointed Representative firms who, under the above new FCA considerations, have a duty to limit the risk of customer harm. Firms will now have to show evidence and test that their communications are clear and that consumers are receiving good outcomes.
   
4. Regulatory Fee Hikes: The FCA has revealed a hike in fees for all regulated firms to help fund its plans to be a “more innovative and assertive regulator”. The City watchdog has proposed increasing its minimum fee, paid by most regulated firms, from £1,151 to £2,200. It also wants to merge a fee charged separately to consumer credit lenders into the minimum fee. The figures are up for consultation until the end of January 2022. Once agreed, invoices are sent out by the FCA in July, to be paid by September
   
5. High risk investment review:The FCA is planning to strengthen financial promotion rules for high-risk investments, due to concerns that everyday investors do not properly understand the risks involved. The FCA published a call for input (CFI) on consumer investments in April seeking views on whether more types of investments should be subject to marketing restrictions and if tougher rules on financial promotions are needed. It looks at 3 areas in particular; 

• Classification of high-risk investments
• Segmentation of high-risk investments (think PROD)
• Responsibilities of firms who approve financial promotions

How RegTech can help? 
A theme that runs through the above 5 regulatory changes is the need for firms now to apply evidence-based practice and deliver management information and quality data to prove they are meeting these high standards for consumer and market protection. 

As we wrote in our three lines of defence blog, Governance, Risk and Compliance management now requires tools that offer data analytics so risks can be identified, managed and monitored. RegTech tools can offer firms a valuable third line of defence when it comes to internal audit activities, something that has either been missed or driven by disparate practices historically.

Whether this is looking at specific compliance challenges as above or more general governance activities, RegTech can offer valuable data across a firm's interpretation of the rules and how their competence and conduct shapes up. For instance benchmarking adviser activities and behaviours against FCA advice suitability requirements, training and competence and how the business is meeting systems and controls, AML, FinProm, MiFIDII, PROD, ESG standards, this and much more is available at the click of a RegTech button. 

With the FCA increasing fees to fund its own adaptive and assertive approach to consumer and market protection, they are now obviously serious in relation transforming to a outcomes (results and performance based) responsive and iterative focused regulator driven by innovation. Therefore, firms who adopt RegTech stand a better chance of proving they too are adapting, using technology to enable them to evidence they continue to comply and compete.

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