Sentinel Regulatory Services news & information

The Financial Services Regulation Committee (FSRC), a House of Lords Select Committee, has recently published a report for UK regulators titled ‘Growing pains: clarity and culture change required.’ In this article, we will explore some of the themes in the report including the ever-increasing compliance burden, compliance costs, Financial Conduct Authority (FCA) Authorisation process and the Consumer Duty.

Increasing compliance burden

The FCA’s 5-year strategy set out its plan to have more ‘direct contact points’ with a higher proportion of firms. In many respects this is a positive development from a regulator that has been perceived as bureaucratic and remote. However, it depends on what form ‘direct contact’ takes. Sentinel supports such an approach done correctly. Direct contact can keep regulated firms on their toes and benefits FCA staff who can stare into the whites of managers’ eyes, gain practical insight into the application of their rulebook, and the chance to gauge “tone from the top” in action or not.

If it is contact via a series of information requests and surveys, then it is unlikely to help according to the FSRC report. In fact, a London Markets Survey cited in the report revealed that “a large number of people said that they felt that the amount of information being requested by the regulators had increased in the last 12 months. There was also a strong sense that they did not know why they were being asked for that information.”

Piling on the administrative burden is not the answer, especially if there is no clear reasoning behind it. For example, the report mentions a regulated firm submitting 300 filings to UK regulators over one year, compared to only 56 filings to regulators in another jurisdiction.

Elsewhere the report states that FCA supervisors do not understand the business models they supervise and make use of inflexible supervisory processes. The adherence to such rigid supervisory processes “increases the information requests put to firms without necessarily addressing the key risks they face.” The lack of supervisory experience, initiative and flexibility appears to be further increasing the burden for regulated firms.

If the FCA is not careful, it is not only non-domiciles and the wealthy who will be leaving the UK, but also financial services firms operating in competing jurisdictions. The UK is already seeing a shift to the Middle East, no doubt for a variety of reasons, but extra administration cannot help the UK’s cause.

Costs of compliance

Undoubtedly the cost of getting compliance wrong is high, as it should be. But so is maintaining an adequate compliance function. The report cites that a firm employed 78 compliance staff for the UK market alone compared to 73 for the other 40 countries combined in their European and Middle Eastern operations. Why? There could be several reasons for this, but it is an indication of the UK’s regulatory burden.

The report cites a mid-sized firm whose compliance team reviewed over 250 FCA regulatory publications in 1 year, of which 160 were relevant to its business. Professional, well-resourced firms will diligently review these publications while less well-resourced firms are less likely to. Arguably this volume is another reason why the FCA should pivot away from regulation by publication towards more direct contact with firms. It is unsurprising that compliance costs are rising, with one firm cited in the report noting their compliance costs have increased by 138% since 2017.

Authorisations

Firms seeking to conduct regulated activities in the UK must apply to the FCA or become an appointed representative of a principal firm. Whilst the latter is usually a much quicker process than the former, both are subject to FCA approvals. Particularly direct authorisations can be painstakingly long for firms, especially without independent compliance advisors to guide you through the process. The report identifies the slow FCA processes and compares it to other jurisdictions which are far quicker such as Singapore, the United States, and Ireland. As consultants and a principal firm, we have certainly seen this first-hand.

It is not only authorisation of new businesses which is slow. The report highlights how the approval of Senior Managers is “too onerous and frequently still require too long to receive approval, especially compared to other financial centres.”

The report also highlights the FCA’s approach to measuring its compliance with authorisation service standards which does not always reflect the true time taken to complete the authorisation process. We are sure the market will welcome the report recommendation for the regulators to publish further data on the apparent discrepancy between the progress it reports and the experience of firms going through those processes.

Consumer Duty

As expected, the report suggests regulatory overreach including the ‘over-application of consumer protections to wholesale markets.’ One example of this being the Consumer Duty rules, which has resulted in wholesale firms having to demonstrate that their wholesale activities are outside of the scope of the rules.

Furthermore, a product which is primarily for corporate clients but with some retail customers, has required one Firm dedicating eight of its UK staff to comply with one element of the Consumer Duty rules. According to the report this highlights that the FCA does not do enough to distinguish between firms that cater to wholesale and retail markets, or market segments in its regulation and supervision.

Whilst the report acknowledges that most witnesses support the underlying objective of the Consumer Duty to “act to deliver good outcomes for retail customers.” They do not support the FCA’s implementation of the Duty which, according to the witnesses, has generated uncertainty and duplication of rules. However, it should be noted that the FCA is reviewing its handbook rules and has already published consultations related to this such as those related to mortgages.

Conclusion

Undoubtedly, regulators face a delicate balance between rigorous oversight and fostering a strong financial services industry. There are clear deficiencies and the FSRC’s report underscores the necessity for greater clarity, fairness, and a more collaborative culture in financial supervision.