What’s in store for UK financial services in 2021?

What’s in store for UK financial services in 2021?

The new year may look full of uncertainty, but there are some clear themes emerging from a regulatory perspective. Regulators’ thinking will be shaped by several macroeconomic factors dominated by, first, a recession and mounting debt arising from Covid-19 and, second, the need to cope with a post-Brexit world. Understanding these drivers should help prioritise planning for the year ahead.

Learning the resilience lessons of the pandemic

Even before the pandemic, regulators knew that operational resilience weaknesses posed a major threat to market stability and customer outcomes. When the final rules on building operational resilience arrive later this year, there is likely to be a widening and deepening of requirements, incorporating lessons from Covid-19.

Firms should be looking now at the proposed rules and the impact on their businesses. The changes required are significant in their scope and scale, and, in combination with the Senior Managers and Certification Regime, could leave individuals personally exposed.

Dealing with the aftermath of Brexit

Post-Brexit regulation will be influenced by the challenges of reconciling the ‘Singapore-on-Thames’ aspirations of some firms with the equivalence requirements of the majority. The FCA has strived to provide operational continuity by, for example, building MiFID systems equivalent to those of the European regulator. The continued functioning of these systems requires ongoing alignment with EU rules – a requirement that is likely to be challenged both politically and within the sector.

Similarly, the imminent Sustainable Finance Disclosure Regulation (SFDR) will apply to all products marketed into Europe, and will therefore continue to affect many UK fund managers. Many asset management firms urgently need to get up to speed with the rules in this challenging area.

The FCA is proposing to take a hard line with its Investment Firm Prudential Regime (IFPR), which replaces the EU’s equivalent regulation. Even organisations that were exempt from the EU’s Internal Capital Adequacy Assessment Process (ICAAP) will now have to undergo an Internal Capital Adequacy and Risk Assessment (ICARA). Many will require significant extra resources, people and systems to meet this requirement. Groups of UK firms may also have to hold capital in the UK, even if their parent company is located elsewhere. This could put UK firms at a disadvantage on the global stage at a time when it is vital for the sector to demonstrate its resilience.

Tightening up governance

The administrative roll-out of SMCR will be completed for solo regulated firms in March 2021, but application of the regime remains a work in progress. FCA data analysed by Bovill shows that almost five years after the regime was introduced, and a year after it was extended to solo regulated firms, the SMCR had completed just one enforcement action. However, in the latter half of 2020, we were already seeing a stronger focus on governance in s166 Requirement Notices, and we anticipate continuation of this trend during 2021.

We also expect regulators to close some of the obvious gaps in the market and accelerate activity to bring into the fold those few sectors still operating outside of SMCR – for example, financial market infrastructures (FMIs).

Defining culture, strategy and purpose

We’re already seeing indications of potential culture issues appearing in s166 Requirement Notices. They say culture is what happens in organisations when compliance and senior management are not in the room. And Covid-19 lockdowns mean that it has been happening a lot. But before the pandemic came along, most firms were already finding it difficult to articulate, disseminate and maintain a positive culture across a diverse and distributed workforce. Significant reallocation of resources, and clarification of strategy and purpose, will now be needed to deal with cultural issues.

Proactively addressing lending

The FCA will keep consumer credit in its spotlight in 2021. The focus will be on affordability, collections and related matters: for example, the correct application of Covid-19 rules and fair treatment of vulnerable customers.

Too many firms in the consumer credit sector have yet to fully embrace the FCA’s principles. As we move into more challenging economic conditions, any inherent failings in the collections process will increase risk and create potential future liabilities. For example, we see in our s166 work, and more generally, that 2014/2015 practices were poor. Firms should proactively review and assess their back books before the FCA comes knocking.

 

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