It’s a time of change. The UK financial services sector faces perhaps unprecedented uncertainty, with the shape of Brexit as yet undefined.
Nevertheless, the FCA has set out its annual Sector Views, analysing the industry. The publication is the regulator’s ‘annual analysis of the changing financial landscape, the resulting impacts on consumers and market effectiveness’.
What do the Sector Views tell us, and what can we learn from their conclusions?
A snapshot of the financial services sector
The FCA’s Sector Views cover all the markets regulated by the Authority:
- Retail banking
- Retail lending
- General insurance and protection
- Pensions savings and retirement income
- Retail investments
- Investment management
- Wholesale financial markets
It also looks at cross-sector themes, which we focus on here.
Usually the views are shared in tandem with the regulator’s Business Plan, which is released in April. This year, the FCA has decided to share them earlier to give its stakeholders ‘a more up-to-date insight into our view of how the financial system is working’.
The regulator covers a number of areas in its overview of the market:
- Societal change
- The macro-economic environment
The FCA sees three aspects to the growth in technology:
- An increase in automated solutions and digital platforms, which provides opportunities for improved consumer engagement and decision-making.
This growth in automation does, though, have regulatory implications. The way automation is used, and the assumptions that underpin any automated advice need to be carefully monitored to prevent either mis-selling or the potential exclusion of vulnerable consumers.
The FCA says that ‘firms will need to ensure they have strong compliance and control functions’ to ensure any innovation does not increase the threat of regulatory breaches, financial crime or data risks.
- Technology is enabling disruption
Innovative solutions have furthered competition, enabling new entrants to disrupt the financial services sector by competing with incumbent firms. And while innovation ‘can improve the design and delivery of many financial services products, reducing costs to firms and improving access for some consumers’, there are also potential downsides.
These include the possibility that innovation sees ‘significant activity being undertaken outside the regulatory perimeter and without protections’. The FCA cites cryptocurrencies as an example of a market where firms ‘may act in ways not initially envisaged within [the] regulatory framework’.
- The ability of technology to deliver personalised products and services
Technology can enable more sophisticated data analysis within the sector, increasing the potential for bespoke products and solutions. While this can be a positive, the opportunity for certain groups to be excluded from these developments is a concern for the regulator.
As the FCA says, ‘the UK population is changing, and so are its financial needs’. Life expectancy is increasing, with firms facing the challenge of communicating compliantly with an ageing population.
Slower economic growth and the low returns environment have slowed financial progress from generation to generation, with today’s younger people less likely to own homes or see the same kind of wage growth as their parents experienced compared to the generation above.
This impacts on consumer expectations and behaviours. Pensions freedoms and other changes mean that people of all ages are ‘having to assume greater levels of responsibility for increasingly complex [financial] decisions’. This creates potential challenges for regulation.
The FCA ‘continues to plan for a range of scenarios’ regarding the UK’s exit from the EU. These include the possibility that there will be a transition or implementation period, as well as the potential for the UK to leave the EU without a deal.
The regulator has released a series of updates on its approach to the UK’s departure, the most recent published last month. The Sector Views state the Authority’s belief that ‘Brexit will impact all the sectors the FCA regulates’, with firms operating under more complex structures to respond to the changes.
The macroeconomic environment
Macroeconomic developments drive changes in the markets regulated by the FCA.
The recent challenging environment in the UK – in part as a result of the Brexit uncertainty – has potential to impact firms’ financial performance. It also affects their customers.
The low-return environment has seen consumers move to riskier investments. There are communication imperatives for the firms that market these investments, to ensure their financial promotions meet guidelines on suitability and are fair, clear and not misleading.
Pressures on household finances increase reliance on borrowing and consumer credit, an area that the FCA has regulated since 2014.
A challenging time for the UK financial industry
The FCA’s summary paints a picture of a sector facing a range of challenges – and alongside them, it mustn’t be forgotten, a number of opportunities.
The Compliance professional’s role sits against an ever-changing landscape – which similarly can be viewed as either threat or opportunity.
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