What key lessons should firms take away from the FCA consultation on codes of conduct for unregulated activities?
In November of last year, the FCA published a draft consultation paper setting out the expected code of conduct for unregulated activities. The move had been coming for some time, as the FCA became increasingly vocal in its criticism of unregulated funds. In 2017 it attracted complaints when it demanded 250 advice firms deliver data on unregulated investment recommendations they had made.
Earlier in October, it had ruled that advice in more than half of define pension transfers was unsuitable or unclear. Back in 2015, the FX manipulation scandal in which six banks including Citibank, RBS, HSBC and UBS admitted to manipulation of the unregulated FX market, highlighted the problems.
High profile incidents such as these, say the FCA, reveal a gap in compliance. While authorised firms are aware of their requirements, they are less clear about unauthorised operations.
“For authorised firms, the FCA sets the framework for conduct and makes clear its expectations of firms and individuals undertaking regulated activities,” states the consultation. “However, for markets and activities not covered by regulatory rules and principles, our expectations of authorised firms can be less clear.”
A second prompt has been the recent introduction of SM&CR for banks and insurers. The FCA is now consulting on extending this regime to all FCA authorised firms and believes developing these standards is a useful way to help the industry police itself in support of their regulatory works. The consultation, therefore, contains proposals about how the regime should link to industry standards.
The FCA proposes to extend the individual conduct rule 5 (covering proper standards of market conduct) to cover both regulated and non-regulated conduct, including all those areas in which they do not currently have a framework of rules.
They say they will supervise compliance and may take enforcement action in the most serious cases which are found to have caused significant damage.
They aim to publicly recognise these standards setting out a clear framework for the entire industry making it easier for firms to establish key compliance issues across both regulated and unregulated activities.
The goal of the consultation is to provide clarity where they perceive it to be lacking. Authorised firms should now understand where they stand with the regulator in relation to their market activities including their approaches to industry codes and expectations as set out by SM&CR. By doing so the FA also hope it will enhance their ability to take action against the most serious breaches, which may cause harm to individual consumers and financial markets.
Voluntary codes of conduct
However, these proposals will not have equivalent standing to binding regulation and firms will not be required to become signatories to any code.
Even so, firms would do well to make changes to embrace these changes. They are part of a wider movement among regulators to improve the codes of conduct across both regulated and unregulated market activities in which financial institutions will come under increased pressure to demonstrate compliance with codes of good conduct. It not only helps them to offer a superior service to their customers, but it also reduces their chances of incurring the wrath of the regulators.
Overall, the financial world welcomed the voluntary codes of conduct as they set out clearly the expectations of the FCA for unregulated sectors. However, there were complaints surrounding the high predicted cost of compliance to the business sector.
The Personal Investment Management Association raised a number of concerns, including the increasing burden of regulation on small and large businesses alike from what it called ‘quasi’ regulation and a lack of clarity about what the regulations would include.
In a letter to the FCA, it said:
“We are unclear as to what issues would be within and without the terms ‘standards of market conduct for unregulated markets’ and ‘unregulated financial market activities’.”
It also questioned whether codes intended for the retail market might be misinterpreted as applying to the wholesale market. Industry codes, it said, should be submitted to public scrutiny and there should be a cost-benefit to any code which should also be subject to a consultation. The regulator should also look at the codes to avoid duplicate or contradictory content.
The FCA expects to publish a policy statement in which it will outline any changes to its handbook in Q1 of 2018. After that publication, it says it plans to adopt a general approach immediately, which means they could start to accept applications for codes to be considered after the policy statement has been published.
Staying up to speed
The industry has been quick to share its opinions, both good and bad, but whether you’re worried by increased regulation or welcome the greater focus on unregulated activities, firms will have to keep pace with an environment which is changing rapidly.
In such an environment, regulatory intelligence platforms become increasingly important. They help you stay up to date with events and understand the evolving demands of the FCA.
The FCA is becoming more confident in using its toolkit and is progressively refining its regulatory approach. Although these expectations are not mandatory, they are part of a global shift in attitude by regulators.
Firms would be well advised to take them on board and instil compliance throughout every area of their organisations. To do so they will need to encourage buy-in from all stakeholders and employees – no matter what their level might be. Tools such as Enforcd provide an accessible platform to ensure everyone is up to speed and encourage a culture of compliance throughout the organisation.