Recent developments in business intelligence and financial technology have significantly altered and enhanced the delivery, accessibility, and range of financial services. Most of these advancements are the result of financial technology companies, or Fintechs, who have pushed traditional businesses to improve how they interact with their clients and communities. However, a lack of regulatory clarity can stifle good ideas and prevent the appropriate safeguards from being implemented to safeguard customers and the financial industry.
Most of the time, authorities have not incorporated technologies into their own regulatory and supervision frameworks, making them less equipped to monitor businesses and practices that are becoming more inventive, inhibiting their efficacy and efficiency. One of the best examples of regulators that embraced and leveraged modern technologies is the FCA.
What is the FCA?
Although it has only been around since 2013, the Financial Conduct Authority in the U.K. (FCA) is often regarded as a global innovator. The agency’s success in pushing innovation has been made possible by a combination of circumstances – a federal initiative to develop London as a thriving fintech hub, a young agency founded in the aftermath of the 2008 economic meltdown with a brand-new and untested mission to encourage financial competition and the concurrent anticipation to advance breakthroughs, a highly focused banking system and dynamic financial technology community, a simple and direct twin peaks economic, regulatory structure, and sustained executive-level support for increasing the agency’s capacity to foster interdisciplinary collaboration.
When taken as a whole, these factors allow the FCA to progress its purpose by taking measured risks and pushing the boundaries of regulation.
However, without the FCA employees who collaborated to develop the innovation framework with sincerity, inquisitiveness, boldness, cooperation, and esteem that have illustrated the institution’s innovation practices and have mainly been responsible for advancing it, the agency would not be where it is currently – enabling, and in some cases driving, advancement in the industry and evolving its own potential to monitor and control by using technology and advanced analytics.
Most recently, the FCA’s dedication to financial innovation was highlighted by creating a distinct, autonomous innovation division with over 120 personnel and an additional 40 data engineers integrated with other departments across the organisation.
Project Innovate and the new regulatory Sandbox, as well as the regtech program and its ground-breaking TechSprints, were started and supported by two small, agile start-up teams, and in less than six years, they have grown into the expanding Innovation Division. The group directed 140 businesses through its regulatory Sandbox, provided guidance and active assistance to roughly 700 companies through the Innovation Hub, and formed an international association of regulatory agencies interested in fostering innovation in the public’s interest throughout that time.
The FCA has started incorporating emerging technologies and cutting-edge business intelligence into its own operations using the expertise gathered via a partnership with market players and other stakeholders over the past few years. The agency now has immediate access to a wide range of technical talent and experience that it could not otherwise afford to reproduce, as well as the assurance and motivation to advance on its own, thanks to this close collaboration. Additionally, sandboxes and TechSprints, two collaborative tools the FCA invented to promote and hasten invention, are also being imitated globally.
Aside from these technological advancements, the FCA has also focused on cyber risk reduction, operational resilience, and customer protection.
As the U.K.’s financial industry watchdog, the FCA has also taken over the Financial Services Authority’s responsibility to develop and implement rules as the regulatory body for financial services companies in the region.
In order to achieve its strategic purpose, the Financial Conduct Authority (FCA) has three operational goals: safeguarding consumer interests, preserving and enhancing the integrity of the British financial system, and fostering healthy competition among financial services providers. The agency has broad authority to carry out its mission, including making rules and conducting investigations and enforcement actions. Since the FCA is an independent organisation without government backing, it must be able to increase fees. As a result, the agency levies fees on approved businesses that engage in activities that it governs.
Throughout the years, rules and regulations set by the FCA have tremendously evolved. Recently, the industry has seen huge transitions into more proactive practices.
The transition from reactive to proactive
Although the difference between a reactive and proactive regulator is not formally acknowledged, we can contrast the FCA with other regulators. In a nutshell, a proactive regulator can be perceived with aggressive interventions which check the activities of the businesses it regulates by undertaking different kinds of investigations to avoid anything terrible from occurring, as opposed to a reactive regulator that mainly acts after something negative has already happened.
Such inspections can take various forms, such as being entirely documentary (where the authority requires the submission of specific reports, information, or documents), on-site visits to assess detailed documentation, processes, or systems, interviewing key employees, or a mix of the two.
Operating a company in a region where the authority is less proactive is considerably more comfortable. For instance, Lithuanian Financial institutions frequently claim that the Bank of Lithuania conducts too many examinations. Non-bank PSPs in Cyprus are required to renew their licenses yearly by submitting specific papers and receiving approval from the Central Bank of Cyprus.
In the U.K., where there are substantially more financial companies regulated than in Lithuania and Cyprus put combined, the FCA had rarely taken an aggressive stance up until these recent years. It is clear that the FCA changed its approach when it began actively writing “Dear CEO Letters” back in 2020 and asking the payment service actors to disclose more information at the onset of the COVID-19 pandemic.
From this, the agency notes that the quality of the documents and data provided by the companies was disappointing. The FCA then kept in touch with even more businesses and conducted more inspections.
Just this 2021, the FCA announced that in contrast to many other more reactive authorities, the FCA agency would adopt more proactive approaches. The FCA then began criminal procedures under its anti-money laundering jurisdiction for the first time in the previous eight years. It was also the first time the agency revoked temporary licenses to stop four E.U. investment firms from selling CFDs to U.K. retail customers and used a freezing injunction to secure several million pounds worth of assets on behalf of customers with final salary pension plans.
Five things to expect from the transition
І. Few businesses are to receive FCA authorisation
According to the FCA’s Business Plan, enhanced digital applications and simpler-to-use forms will make the application process more user-friendly. However, due to a more thorough evaluation and increased inspection of the applicant’s financial and business models, the standards to which the FCA benchmarks the application will increase. Moreover, examinations of the individuals in charge of managing P.I.s/EMIs, which were unfathomable only a few years ago, may start to become the standard. Currently, the FCA frequently undertakes interviews on a case-by-case principle to better examine the important persons than a written communication exchange between the case officer and the applicant business.
The Financial Conduct Authority makes it clear that it anticipates rejecting additional applications for authorisation. When a company is authorised, it requires at least three times more FCA resources to revoke its permits than if the company had never been granted permission. “We will expect denial, withdrawal, and rejection rates to grow initially as we make the gateway more resilient,” the FCA writes in their business plan.
The FCA’s chief executive, Nikhil Rathi, recently appointed Emily Shepperd as the new executive director of authorisations and was given orders to hire about 100 more staff to handle authorisations. As a result, corporations should receive case officers more quickly than they already do, which frequently surpasses three months.
ІІ. Increased intervention and stricter oversight
The FCA plans to intervene more frequently in real time to protect customers and market integrity. In 2021-2022, the FCA was expected to take more supervisory and enforcement actions. Mr Rathi asserts that the FCA will never return to a light-touch, reactive approach.
The FCA acknowledges that the payment industry has transformed rapidly since implementing the Payment Service Directive and the Electronic Money Directive.
While EMIs and P.I.s have advantages for both consumers and businesses, the FCA is worried about the pandemic’s effect on PSPs’ financial power. The FCA’s oversight work will ensure that PI/s and EMIs are financially secure, and it will define companies at risk and contact them proactively. From 31 March 2022 to 31 March 2025, the FCA will evaluate whether payments businesses are willing to keep within their impact tolerances (the maximum permissible amount of interruption to a critical business service) to determine how effective the FCA’s task to optimise the operational resilience of the finance industry has been.
Besides this, there will be greater oversight for newly permitted companies, which the FCA calls ‘a regulatory nursery’ to identify any potential damage to the industry. A firm must submit a business plan when applying for a license. However, a program of operations and a business plan can transform. The FCA aims to ensure that businesses stick to their original plans and that if there is a modification, the FCA is immediately informed and can examine any detrimental impacts. This is a general rule for accredited PSPs, but not many of them were aware that such changes require an alert to the authorities, even though it does as part of the reporting requirements under Principle 11 of PRIN.
ІІІ. Increased requirements and additional supervision
The FCA has consistently raised specifications for non-bank payment service providers in the past few years. The agency ensures FinTech companies maintain operational resilience and customer protection.
In 2019, for instance, the FCA ensured that the Principles and Chapter 2 of the BCOBS apply to EMIs and P.I.s. It at least implies that P.I.s/EMIs and financial institutions are subject to the same marketing guidelines. The FCA is currently considering creating a “new Consumer Duty,” which would apply equally to a bank and non-bank institutions and would impose additional responsibilities on EMIs/P.I.s to customers.
Registered enterprises must have sufficient funds, liquidity, and reserves to pay pending redress responsibilities, and the FCA wants to ensure the businesses it oversees only shut down on time. The FCA mandated non-bank PSPs to have a wind-down strategy. In March 2021, the FCA announced final guidelines on operation resilience designed to enhance and improve companies’ operational resilience.
The FCA releases more and more recommendations for diverse kinds of businesses. During the pandemic, it released recommendations for payment and e-money firms to bolster firms’ prudential risk management and mechanisms for securing customers’ monies. The agency recently instructed PayTechs to clarify the distinction between preserving e-money accounts and FSCS coverage to clients. It vowed to increase protection and wind-down planning standards through targeted messaging, monitoring EMIs/P.I.s’ arrangements and safeguarding audits.
After its call for feedback in 2020 as part of its Payments Landscape Review, the FCA keeps creating rules and guidelines for payments businesses, and we should expect more and more regulatory standards geared to PSPs.
IV. Cancellation of licenses
The FCA anticipates a short-term growth in the number of companies whose permission will be curtailed by being more aggressive and improving its capacity to detect signals of misbehaviour and act swiftly by suspending or completely revoking licenses.
The agency will target dormant businesses in addition to unscrupulous operators.
There are lots of businesses that do not use their licenses for different reasons. In the best-case scenario, it arises because a firm works as a distributor of an e-money institution or an operator of a payment institution, and, in fact, it does not use its own license. In the worst-case scenario, a corporation employs a “halo effect’ of regulation by leveraging its license to ensure that its uncontrolled activities appear more trustworthy.
The FCA will be more proactive in pursuing a ‘use it or lose it’ strategy by terminating licenses of regulated enterprises that have not begun to carry out regulated practices within 12 months of approval.
V. More transparency from Businesses
The FCA aims to share more information on businesses it regulates, ensure that customers have adequate data to support educated decisions, and reward businesses to enhance their behaviour. The information should include regulatory data previously unavailable to the public, including Financial Ombudsman Service claims and sustain rates. It should be anticipated that FinTech will need to increase its transparency. For example, banks, even neobanks such as Monzo and Starling, are currently forced to share their complaints information, and these requirements are to be applied to P.I.s and EMIs.