The Financial Conduct Authority (“FCA”) has published its third Annual Competition Report which focusses on its proposals for promoting competition and innovation, particularly with respect to the impact of FinTech on UK financial services. It also addresses the FCA’s ongoing role in supporting the UK Government prepare for Brexit, and uphold an orderly transition as part of the withdrawal process – avoiding any cliff edges – for UK financial markets.
The FCA was created in 2013, with one of its main objectives being the promotion of effective competition – in the interest of consumers – within the regulated UK financial services market. This included working with the national competition regulator, the Competition and Markets Authority. Following on from this, in 2015, the FCA was duly granted powers of enforcement for breaches of competition law, and the ability to also use the Financial Services and Markets Act (“FSMA”) in the pursuit of such objectives. Later that year, and in line with such expanded powers, the UK Government requested that the FCA publish an Annual Competition Report on its regulation of financial services, and this is the third such annual report on the subject.
The FCA has identified the implications of EU Withdrawal (Brexit) work as a key area of focus in its 2017/2018 business plan. The FCA has already devoted significant resources to this work, which is estimated to continue to be considerable. The ongoing work encompasses mainly providing technical assistance to the UK Government. It also involves working with firms to understand their future operation plans and their impact, as well as working on the design of the proposed temporary permissions regime for EEA firms currently operating in the UK. It also looks at how to achieve continued close cooperation with the European Supervisory Authorities, as may be possible.
Cross-sector focus areas:
In addition to the focus on Brexit, the FCA identifies a number of cross-sector priorities, including promoting competition and innovation, and technological change and resilience.
With FinTech largely viewed as being capable of “changing the face of financial services,” the FCA sees an opportunity to promote competition and innovation. In doing so it previously published a Discussion Paper on Distributed Ledger Technology, which enhances its role in monitoring potential risks, while maintaining a proactive and supportive approach to technological innovation. In addition, it is recognised that advances in smart data, digitalization and data analytics are opening up new product and service opportunities for companies, which similarly requires a deep understanding and protection/vigilance over how “consumers interact with new goods and services”.
The FCA is also prioritising firms’ operational resilience to technological changes and challenges, and will seek to undertake an assessment of this. Together with the Prudential Regulatory Authority and Bank of England, the FCA published a Discussion Paper on Developing the UK Supervisory Authorities’ Approach to Operational Resilience in July this year.
Other cross-sector priorities identified by the FCA include: firms’ culture and governance, financial crime and anti-money laundering, treatment of existing customers, and consumer vulnerability and access to financial services.
The new format of the Annual Report is now closely aligned with the FCA’s decision-making framework:
One practical change in the presentation of the report is its new format, which now closely follows the FCA’s decision-making framework. This includes defined sections which identify potential harm, diagnose the cause, identify the appropriate remedy and also assess the impact of any intervention. This provides a sensible, structured approach to intervention, and the focus on analysing the impact is particularly welcome.
Identifying the potential harm
By using several criteria and sources of information, including intelligence gathered from sector views and the Financial Lives Survey, the FCA identifies potential ‘harms’ caused by weak competitive markets within the UK financial services sector. This year’s focus was on the area of retail lending and pensions.
Diagnosing the cause of harm
The diagnostic process, which may either take the form of a market study or a cross-functional approach, outlines those areas where the FCA has applied a competition angle to its analysis. This enables the regulator to consider how different retail banking business models may be affected by market changes in the future, and what the potential implications are for consumers, especially in evolving markets such as pensions.
Identifying the correct remedy to address the harm
This section of the report considers key actions that have been taken to remedy any harm, and support competition and innovation. Remedies particularly aimed at improving competition include the 2017 Asset Management Market Study, the Investment Platforms Market Study Interim Report, the very recent Investment and Corporate Banking Study and work in the retail banking sector by way of a progress report. The FCA has also taken steps to provide greater clarity about its rules over the last year, by publishing both a consultation paper and a package of rules and guidance designed to help consumer credit firms identify and manage risks around incentive schemes and performance management.
In addition, the FCA has sought to establish a balance between the support of competition and innovation, and the advancement of other operational objectives. This was achieved through initiatives like the New Bank Start-up Unit, the New Asset Management Authorization Hub and the Innovate Program. It is useful to highlight the FCA’s focus on balancing innovation with pragmatic investor protection to ensure market efficiencies, which is of vital importance in the FinTech market. Indeed, the UK has become a leading Fintech hub and such an accomplishment is partly due to the willingness of regulators like the FCA to accept and embrace this change. Lastly, over the last year, the FCA has taken enforcement actions based on the Competition Act 1998, initiating two investigations and issuing three ‘on notice’ letters.
Measuring the FCA’s impact
The FCA acknowledges that remedies have to be proportionate and realistic in terms of a likely response from both firms involved, and UK consumers. Accordingly, the FCA understands the importance of assessing what has been done, and evaluating the effectiveness of remedies when meeting their objectives. A Discussion Paper published in April this year has recently sought to do this, placing an special emphasis on the crowdfunding market, the mortgages market and the pay day lending cap.