On June 4, Megan Butler – the Financial Conduct Authority’s Executive Director of Supervision (Investment, Wholesale and Specialist) – addressed the online Virtual Festival, hosted by the Personal Investment Management & Financial Advice Association.
Ms Butler said that the FCA’s main areas of supervisory focus during the coronavirus pandemic are operational resilience, financial resilience and integrity.
The FCA director said that, in general, the financial industry had responded well to the challenges posed by Covid-19. Consumer access to services had been maintained, and for most firms, their business continuity arrangements appear to be effective.
Ms Butler briefly mentioned the measures the FCA has introduced to protect borrowers, such as requiring lenders to provide payment holidays. Then she moved on to cover the regulator’s resilience requirements for firms in more depth.
The FCA’s expectations of firms regarding operational resilience include:
- Firms must identify what their most important business services are
- Firms must consider how much disruption they can reasonably tolerate for each important business service
- Firms must ensure they are able to remain within their impact tolerances during severe but plausible scenarios
- Firms should assess their continuity arrangements for important business services to identify vulnerabilities in their operational resilience and make changes where necessary
Next, she said that the FCA will be sending a financial resilience survey to firms, to allow the regulator to understand the effect coronavirus is having on firms’ financial resilience. Ms Butler conceded that some firms may exit the market altogether because of Covid-19 pressures, and said that, in these circumstances, all parties must seek to minimise any delay in the return of client money and custody assets.
The FCA director suggested that financial pressures could result in harm to customers if firms “cut corners on governance or their systems and controls”. The volatility in share prices could lead to more customers making complaints, saying they were not made aware of the risks associated with their investments.
On the subject of integrity, Ms Butler mentioned three practices which were causing concern to the FCA, and which could become more prevalent given the economic pressures caused by the health emergency. These are:
- Phoenixing – attempting to avoid liabilities to customers by closing down the firm and starting a new one
- Life Boating – setting up a new entity and applying for authorisation before complaints and liabilities at the original firm have crystallised
- Leaving an advisory role and setting up a claims management company to handle mis-selling complaints about the advice that they had given in the past
The FCA director said that all of these practices would be considered to constitute a breach of the fitness and propriety requirements.
Ms Butler then observed that coronavirus had led to some firms offering mental health counselling services to advisers in another firm, and she said that, if firms offered this service, they would not be considered to have breached FCA rules on inducements.
Finally, she looked to the future of regulation, saying:
“We will capture the lessons from this emergency about delivering quickly. But we also need to look at our entire system, from the data and intelligence we collect, how we decide which firms and individuals to allow to operate and how we supervise them, to how we ensure that unacceptable firms and individuals are stopped and removed from the regulated sector as quickly as possible.
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