The year ahead in financial services regulation – 2024/25

April 29, 2024

Spring is here! The birds are singing, daylight hours are getting longer and the Financial Conduct Authority (FCA) has published its annual Business Plan (the Business Plan). With renewed vigour for the year ahead, we have summarised what the FCA has in store for us in 2024 and early 2025.

Given that there will be a general election during this period, we have also looked at Labour's plans for the financial services sector, to test what the landscape might look like if there were a change of government mid-year and what this might mean for the Business Plan.

FCA Business Plan 2024/25

The Business Plan is designed to further the FCA's three-year strategy, which focuses on: (i) reducing and preventing serious harm; (ii) setting and testing higher standards; and (iii) promoting competition and positive change, and is designed to deliver the FCA's operational objectives to:

• protect consumers;
• protect the integrity of the UK financial system; and
• promote effective competition in the interests of consumers.

The Business Plan is also designed to deliver the FCA's new secondary objective to "facilitate the international competitiveness and growth of the UK economy". The FCA has published details of the outcomes and metrics used to measure delivery of the strategy and HM Treasury has also published metrics by which the FCA's performance will be measured. These initiatives mean we will have more information than ever before about how the FCA is performing and how its Business Plan is supporting its strategy and, in turn, delivering on its objectives.

A challenging operating environment

The Business Plan identifies a number of challenges for the year ahead:

• Inflation rates have decreased but they are still above the desired 2% target set by the Bank of England. Consequently, current monetary policy is restrictive, which is intended to curb inflation, but is also slowing down economic activity and leading to a less robust job market.
• Further, the FCA notes a heightened risk that firms may struggle to service their debts. This is particularly true for those with riskier market-based corporate borrowing. Additionally, high levels of public debt in major economies pose a threat to the UK's financial stability.
• Global geopolitical tensions also remain elevated, which suppresses worldwide economic growth and disrupts shipping and trade. There is also the ongoing risk that unforeseen events could lead to significant upheaval and disruption.

Overall, the FCA's outlook suggests a period of caution and vigilance as businesses and policymakers navigate these complex challenges.

As we have suggested, if there were a change of government mid-year, we do not anticipate any of this changing. Labour's approach - dubbed "securonomics" - commits to provide a secure policy platform for growth which supports innovation, sustainable finance and international competitiveness. In other words, very similar themes to the FCA's existing concerns.

FCA priorities

The Business Plan identifies 13 areas of commitment, with a particular focus on the following three:

• reducing and preventing financial crime;
• putting consumer needs first; and
• strengthening the UK's position in global wholesale markets.

Reducing and preventing financial crime

The FCA states that it will continue to take a data-led approach to identifying potential harm for supervisory and/or enforcement action. It will continue to:

• take assertive action to combat scams and fraudulent activities; and
• work with partners to support system-wide improvements as well as using its powers through the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) to improve standards in the legal and accountancy sectors.

In support of this, the FCA will continue to develop its use of AI to help prevent fraud and scams. The desired outcomes are to:

• slow the growth in investment fraud victims and losses;
• slow the growth in Authorised Push Payment (APP) fraud cases and losses; and
• reduce financial crime by preventing money laundering through supervised firms and taking steps to improve the effectiveness of supervision by professional body supervisors.

Consequently, the FCA will start to increase investment in its systems to use intelligence and data more effectively within the FCA's financial crime work, so it can target higher-risk firms and activities.

Labour's plan for financial services does not explicitly address financial crime on the whole, but is framed in terms of helping the current and anticipated victims of fraud. Given the widely publicised damage that bribery and money laundering wreak on the UK economy, we do not anticipate them falling off the agenda, but there may be a shift in priorities further towards consumer protection (see more detail on this below).

To stay up to date on the financial crime landscape throughout the year and how the priorities in the Business Plan are delivered, see Dentons' White Collar and Financial Crime "insights" page here.

Putting consumer needs first

The much-anticipated Consumer Duty came into force for open products and services on 31 July 2023, representing a change in the FCA's expectations of firms, with a significant focus on delivering good outcomes for all consumers. From 31 July 2024, firms need to ensure that both open and closed products are delivering the right outcomes for consumers. This includes:

• firms acting in good faith towards consumers and avoiding causing them foreseeable harm while supporting them to pursue their financial objectives;
• consumers paying a price for products and services that represents fair value, and the improvement of poor-value products and services to deliver fair value or their removal from markets;
• equipping consumers with the right information to make effective, timely and properly informed decisions about their products and services;
• maintaining appropriate access to financial services; and
• supporting consumers to sustainably manage their debts.

See our published articles for more in-depth analysis on the Consumer Duty and what it might mean for regulation in 2024, or its impact on insolvency practitioners.

Looking back at the Business Plan, the FCA anticipates conducting market studies across different sectors to drive up standards and a review of firms' treatment of customers in vulnerable circumstances. For example, the FCA will look at unit-linked pensions and long-term savings products to test the transparency of charges across value chains, how firms assess overall product value and their response where they identify unfair value. It will also look at how swiftly the insurance industry responds to claims, including where customers are more likely to show characteristics of vulnerability.

As noted above, and true to the Labour ethos, consumer protection plays a key role in its plan for future services. In addition to its fraud prevention strategy, there is a focus on increasing consumer knowledge and understanding through continuing the FCA's existing education work, as well as a new "national financial inclusion strategy" to increase access to financial literacy education in schools and colleges. Regulation of the "Buy Now Pay Later" sector was also flagged.

Strengthening the UK's position in global wholesale markets

The FCA wants the UK to strengthen its presence in global wholesale markets whilst also nurturing local markets that boost the economy and promote growth.

The desired outcomes for this include:

• the regulatory framework is clear, well understood and trusted by all market participants;
• market participants view the UK as one of the top markets of choice; and
• market participants regard the regulatory framework as proportionate in terms of speed and cost.

In order to achieve these outcomes, the FCA will continue the following activities:

• finalising its comprehensive review of the Listing Regime (see our summary of the FCA's proposals);
• soliciting feedback on regulatory adjustments to broaden options for investment research payment methods;
• preparing derivative markets for the upcoming implementation of the new derivative reporting rules under the UK European Market Infrastructure Regulation (UK EMIR) by September 2024;
• focusing on overseeing principal firms and ARs by leveraging enhanced data analysis, including updated Gateway forms and regulatory returns; and
• strengthening engagement with principal firms, particularly high-risk firms, through assertive supervision and targeted enforcement actions.

With (i) international competitiveness and (ii) strengthening the UK's capital markets both explicitly referred to in Labour's plan, it is fair to say that this priority would likely continue in the event of a change in government. Plans include conducting a review of the pension and retirement saving landscape to identify and tackle the barriers to pension schemes investing more into UK productive assets. It also proposes to enable greater consolidation across all pension and retirement saving schemes so that schemes will have access, expertise and risk profile to increase their investments in long-term illiquid assets and therefore deliver higher returns for savers.

Further 10 commitments in the FCA's Business Plan

Preparing financial services for the future

The FCA invested in implementing the Treasury's Smarter Regulatory Framework (SRF), marking significant progress, which has led the FCA to reconsider its priority for the upcoming year. Its focus is on ensuring efficient collaboration with the Treasury and other regulatory bodies to streamline the transition of firm-facing requirements into independent regulation. Additionally, the FCA will continue to integrate changes into the regulatory framework, enhancing its secondary objectives and accountability measures.

Dealing with problem firms

The FCA's commitment to "dealing with problem firms" focuses on proactively identifying and addressing problematic firms and individuals. Ongoing efforts include enhancing auto-detection capabilities, promptly addressing firms not meeting threshold conditions, utilising regulatory tools to prevent harm and identifying any regulatory framework barriers hindering effective action. The FCA also intends to "name and shame" firms under investigation to increase transparency about its enforcement work and to act as a deterrent.

Taking assertive action on market abuse

The FCA's focus is on combatting market abuse while maintaining a framework that fosters innovation and reduces industry costs. This includes improving cross-asset class market abuse detection, utilising advanced analytics such as network analysis and enhancing market monitoring and intervention in fixed income and commodities.

Additionally, the FCA will explore transferring MiFID data reporting regimes, developing a proportionate market abuse regime for cryptoassets, extending data reporting supervision to various regulations and strengthening its influence on international markets data strategy. The FCA will also publish results from a peer review of market abuse systems, as well as revised market cleanliness data to better capture anomalous trading.

Reducing harm from firm failure

The FCA's priorities remain on minimising the adverse effects of firm failure on consumers and markets, particularly amidst the current economic climate. It proposes to utilise data and horizon-scanning methods to anticipate at-risk firms and ensure swift and effective responses to protect consumers and market integrity. Additionally, the FCA promised to support the industry by sharing pertinent information obtained from its data and financial resilience assessments, including examples of both successful and inadequate wind-down planning practices.

The Labour Party has been clear in stating that it sees financial stability as a prerequisite for economic growth and even the title of its approach ("securonomics") recognises that stability is essential for economic growth. Consequently, we do not anticipate that there will be any change in focus on stability in the financial services sector should Labour form the next government.

Our environmental, social and governance (ESG) priorities

The FCA is focusing on facilitating positive change within the financial sector, particularly in transitioning towards net zero and addressing broader sustainability concerns.

This year, the FCA will integrate sustainability disclosure requirements and investment labels across the market, reinforcing anti-greenwashing measures and expanding the regime with a portfolio management consultation in 2024. Additionally, the FCA will remain engaged with the UK and international partners to address new and emerging risks, advancing work on transition finance and preparing to implement a "Nature" regulatory principle.

Insights from updates from our dedicated Dentons ESG team can be found here. For more detail on ESG developments with a disputes lens, see our UK bulletin.

Shaping digital markets to achieve good outcomes

Amidst the ongoing transformation of sectors through technology, the FCA's focus remains on managing associated operational risks to maximise benefits for consumers and markets.

This year, the FCA will collaborate with stakeholders to assess the impact of AI on UK markets. Additionally, it will publish outcomes from its Big Tech Call for Inputs, collaborate with the Digital Markets Unit on pro-competition efforts, and rigorously investigate digital consumer journeys and firms using sludge practices.

With the announcement of the FCA and Bank of England's consultation on their proposed approach to the "Digital Securities Sandbox" (DSS)¹ , we anticipate plenty more news in this space. For more detailed analysis on these developments, see our articles on the development of regulatory sandboxes.

A central theme in the Labour Party's industrial strategy and plans for the financial services sector is to champion innovation and further the development of technology to deliver long-term better outcomes for consumers and to make the UK a centre for technological innovation in financial services (and other sectors of the economy). Accordingly, we do not anticipate that the FCA's current focus will change and, if anything, there will be a drive to further develop this area, particularly in relation to the opportunities that the continuing development of open banking and open finance might offer.

Improving the redress framework

The FCA wants to ensure consumers have access to fair and efficient redress when issues arise, promoting fairness in the claims management companies (CMC) sector and holding accountable firms responsible for harm.

This year, the FCA would like to improve redress guidance for firms, complaints reporting, the Advice Guidance Boundary Review and proposed capital deductions for personal investment firms. Additionally, the FCA will address historic discretionary commission arrangements in the motor finance market and collaborate with stakeholders such as the Financial Ombudsman Service and the Financial Services Compensation Scheme to enhance co-operation and address shared concerns.

In order to improve regulatory efficiency, the Labour Party has indicated that it would like to see closer co-ordination between regulators. Consequently, we expect to see the work to drive collaboration and efficiency between regulators to continue under any Labour government.

Enabling consumers to help themselves

The FCA's view is that, as technology advances, consumers often face unclear or misleading advertisements, especially in challenging economic times.

Thus, this year, the FCA aims to maintain rigorous assessments of firms' applications to approve financial promotions and swiftly address non-compliant promotions. For analysis of the new financial promotions regime, please see our article here. The FCA will enhance supervision of cryptoasset firms' promotions, improve detection of harmful content and continue campaigns like InvestSmart and Consumer Awareness (see our article summarising the new crypto FinProm regime here).

Additionally, the FCA will collaborate with social media platforms and search engines to uphold online safety. It aims to respond to last year's Advice Guidance Boundary Review, outlining options for legislative and regulatory reforms to ensure consumers have affordable access to guidance for informed decision-making.

Minimising the impact of operational disruptions

Operational disruptions pose a significant threat to consumer access to essential financial services and market stability, exacerbated by increasing cyber threats and geopolitical complexities. Moreover, reliance on critical third parties is contributing to systemic risks in the financial system.

To address these challenges, the FCA is enforcing standards on operational resilience for all relevant firms by 31 March 2025 (see our articles here for some risks and opportunities presented by the focus on operational risks). Additionally, it will publish a consultation paper outlining expectations for reporting operational incidents and propose new rules to mitigate systemic risks from critical third parties (CTPs) in the financial sector. For analysis of the new CTP regulatory regime, please see our article here.

Improving oversight of appointed representatives

The FCA believes inadequate oversight by many principals exposes consumers to risks of misinformation and mis-selling, thereby undermining market integrity. The new rules and guidance implemented since 8 December 2022 aim to enhance oversight, information disclosure and standards across financial services.

This year, the FCA will oversee principal firms and appointed representatives by leveraging enhanced data analysis, including updated Gateway forms and regulatory returns. The FCA will strengthen engagement with principal firms, particularly those deemed high risk, through assertive supervision and targeted enforcement actions to uphold regulatory standards and protect consumers.

Further themes in Labour's plan for financial services

Whilst we would not expect Labour's plan to comment on the specifics of appointed representatives or the anticipated consultations outlined above, it is generally aligned with the FCA's proposed programme of work for the next year.

There is an emphasis on fin-tech - echoing the FCA's commitment to prepare financial services for the future and to shape digital markets to achieve good outcomes - as it outlines an intention to set standards for the use of artificial intelligence in financial services, albeit with a predictable bent on consumer protection. Innovations such as "Open Finance" (praised for its potential to improve financial inclusion) and development of a UK central bank digital currency are both namechecked.

Labour's intention to deliver a "world-leading green finance regulatory framework" is also reminiscent of the FCA's commitment to ESG. Labour's plan would include: (i) requiring FTSE-100 companies to publish their carbon footprint and adopt credible 1.5°C aligned transition plans; (ii) defining a clear timeline for a UK green taxonomy; and (iii) consulting on the possibility for banks and insurers to issue covered bonds secured against green infrastructure.

Perhaps the only element of Labour's plan which is not expressly addressed in the Business Plan is the concept of "inclusive growth". This is the idea of specifically extending the financial sectors' footprint across the UK, rather than concentrating resources in London and other existing hubs. This includes: (i) evaluating innovative place-based impact investing models to fund the development of cities and regions using private finance; (ii) establishing "Skills England", a new expert body to support deeper talent pools in regional financial centres; and (iii) doubling the size of the co-operative and mutuals sector, which is more commonly based outside London.

Concluding thoughts

All in all, we are set for another interesting year in the world of financial services. The FCA remains committed to investing further in its data resources and technology, which could lead to increased innovation and better outcomes for consumers and firms. Its re-emphasis on increasing competitiveness on the global stage is also encouraging as it could lead to increased investment activity in the financial services market and the development of innovative business ideas that could better service the industry.

Labour's plan for financial services largely echoes the existing FCA Business Plan. Whilst there might be reprioritisation and an even greater emphasis on consumer protection and green finance, we do not anticipate that any change of government in the next financial year will result in a significant change in the FCA's direction of travel or areas of focus.

The FCA notes that updates on its general progress will be made sometime in the summer, with the intention to measure its progress against the objective to "further international competitiveness and growth" of the UK economy in the medium to long term.

1. The sandbox would be a tool for regulators to learn how we need to react to benefit safely from developments in digital asset technology. ↩