From one perspective the FCA’s Five-Year Strategy sets out aspects of the policy agenda well trailed over the last few years. Many issues can be traced back in some form over several iterations of the six-monthly Regulatory Grid, albeit that in specific areas focus has changed or mode of delivery altered.

From another perspective, the Strategy provides a renewed framework, placing emphasis on more recent orientation.

The FCA’s pivot to growth and the implementation of the government agenda is more recent and particularly pronounced. Financial crime is a standing issue that has received more emphasis. Smart regulation captures many of the objectives and operational ambitions of being a more data driven regulator. Consumer focus continues to expand from consumer protection and consumer duty towards something that speaks more to opportunities and returns in terms of outcomes rather than just protection.

Redress, however, does feature increasingly across the FCA as a whole.  

A smarter regulator does imply higher levels of data sharing and disclosure.

In terms of growth and consumer outcomes, the recognition of demographic challenges and the associated growing need to meet the demands of an aging population, an increased return as part of better outcomes for pensions and long-term savings vehicles may present a natural role for alternative fund sectors. A strong role for London’s competitive hedge funds sector has the potential to be part of a new focus on tilting to a more risk focused society while promoting the competitive edge of the City.

On a deeper level, the FCA is considering “widening retail access to investment opportunities” which should present interesting opportunities for other markets, including private markets and private credit – already successful parts of the UK financial sector.  

A smarter regulator does imply higher levels of data sharing and disclosure. The general high-level direction is to move towards reducing the levels of disclosure, across the board, explicitly for wholesale markets and asset management firms. This is a continuation of the work on transaction reporting, and the AIFMD Review and securitization work will be ones to watch.

However, an important question will be how the FCA and regulators balance the undertaking to only ask for data the FCA needs for the purposes sought, and the operational challenges associated with automated authorizations, AI-driven analysis. The latter should rightfully at some stage require human assessment to make decisions on supervisory action, including in relation to financial crime. This also implies implications for the new supervisory approaches (see below).

What’s not in there

The Strategy does present thinking and direction on known agenda items, including the ongoing MiFID work (disclosure and transparency requirements), and AIFMD. However, it does not appear to indicate any implications for how the growth agenda, for instance, may impact its approach to the systemic risk agenda issues, such as leverage, liquidity management, interconnectivity.

Private markets hold strong potential to promote the government growth agenda and derisk the system, however the FCA has ongoing work streams on valuation. Private credit is another area where the Bank of England and the FCA are working together to understand the market and the potential implications.

Supervisory approaches

Supervisory approaches continue to evolve and develop, raising uncertainty for industry. An important part of the agenda known prior to the Strategy is the role for a simplified Handbook.

One metric is the number of pages the Handbook will be reduced by. There are obvious risks associated with reduction of pages, sub-sections, and guidance, especially while the substantive Rule remains in place. A substantive conduct rule is not made easier or simpler to comply with through deletion of detailed subsections of the same rule. It may create more uncertainty, requiring more work on the part of compliance and regulatory development teams to determine acceptable outcomes and regulatory expectations.

The ongoing motor finance scandal is a case in point. Here, lenders’ approach to meeting the rules not only fell well short of regulatory expectations, but were possibly also in breach of common law standards around fiduciary standards and also possibly the civil law of bribery.

A substantive conduct rule is not made easier or simpler to comply with through deletion of detailed subsections of the same rule.

Furthermore, there will be less use of specific supervisory engagement tools, including Dear CEO letters, multi-firm thematic reviews – in other words less multilateral industry engagement. In some cases these tools will be removed altogether. There will be more of direct firm engagement with the regulator for individual firms, and modes of working that deliver “improved market intelligence.”

Taking a step back and scanning what is left of the supervisory toolkit, it appears we may be left with direct supervision and engagement, enforcement action, and section 166 reviews for when things are found to have gone wrong. There does not appear to be a desire in the FCA to take more enforcement action or issue more 166’s. But given potentially increased levels of uncertainty through the Handbook simplification and word count reduction, and with change towards more regulatory automation, the potential for a gap between regulatory expectations and practice may mean eventually these approaches dominate regulatory engagement.