The key areas firms must focus on to meet FCA’s requirements

The impact of the FCA’s 2017/18 business plan on investment management firms

For the investment management sector, the FCA’s 2017/18 business plan largely focuses on the significant number of large-scale changes that firms are required to make across the whole of their business to comply with EU regulations. This includes adapting business models and implementing new technologies to strengthen processes, systems and controls.

However, aside from ensuring compliance with the new requirements, the regulator has also prioritised tackling competition issues within the market.

Initially uncovered during the FCA’s Asset Management Market Study, the regulator’s concern is that weak price competition could result in customers paying over the odds for services and being unable to assess whether they are receiving value for money.

The observations outlined in the FCA’s sector view around administration and ancillary services further illustrates this increased focus on competition and the impact it can have on the end customer.

The regulator highlights a number of risk indicators, including a lack of incentives to innovate and invest in new technologies for the benefit of customers, high retention rates and a lack of price competition around associated charges.

Although some of these are indirect risks, they still increase the likelihood of the end customer receiving sub-optimal outcomes, which is why the FCA has turned its attention to this section of the market.

The regulator also calls into question the appropriateness and robustness of firms’ due diligence approach when appointing third parties, and whether firms are adequately reviewing the alignment of culture, customer-centricity and approach to meeting regulatory requirements.

Responding to the FCA’s business plan

Both the FCA’s business plan and abbreviated sector views provide rich detail around the specific risks that are currently concerning the regulator, but overall it’s not a significant departure from the approach of previous years. In order to respond effectively to these concerns, firms need to analyse their internal risk register in light of the FCA’s areas of focus, and assess how aligned their priorities are to those risks and activities highlighted as being on the regulator’s radar. The outcome of this analysis should be used to plan effectively for the year ahead and to efficiently allocate resources.

Importance of the right culture

Poor culture and governance are often at the heart of many market issues, including weak competition, which is why it remains a key cross-sector priority for the FCA. The regulator is looking to ensure that firms’ culture and governance delivers positive outcomes for consumers and effective competition, with accountability at all levels of the firm.

Maintaining the right corporate culture becomes even more important when implementing large-scale changes, such as those needed for firms to comply with forthcoming regulatory requirements. In order to meet FCA expectations in this area, firms should regularly review their internal culture and governance structures to ensure they are geared towards appropriate, customer-centric behaviours.

The key areas these reviews should focus on include leadership culture, operational culture and cultural influencers. Analysing the cultural signifiers within these three areas will provide a holistic view of a firm’s internal culture and a benchmark for continuous improvements.

In the FCA’s view, firms must be able to evidence their culture. Firms must ensure that their management information (MI) provides the right data to evidence that a positive, customer-centric culture is present and being monitored and actioned across the business. The MI gathered for this purpose will also help firms to demonstrate an ongoing commitment to meeting regulatory obligations and delivering positive outcomes.

Phil Deeks is technical director at TCC