Compliance Matters: week ending 1st November 2024
There have been enough column inches written about Wednesday’s Budget Statement. You will be grateful that I do not intend to add to the analysis.
Here are some of the issues that affect our industry that I have seen over the past couple of weeks.
CrowdStrike outage: lessons for operational resilience
Regulation of Buy-Now, Pay-Later: consultation on draft legislation
FCA publishes results of non-financial misconduct survey
Vulnerability is not a buzzword
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CrowdStrike outage: lessons for operational resilience
The FCA has published its insights, observations and key lessons from how firms responded to the CrowdStrike outage and their preparedness to respond to future incidents.
Since the beginning of 2023, the FCA has seen a continued trend of third-party related incidents. Between 2022 and 2023, third-party related issues were the leading cause of operational incidents reported to it. These outages emphasise firms’ increasing dependence on unregulated third parties to deliver important business services. This highlights the importance of firms continuing to become operationally resilient in line with FCA rules.
The FCA used the publication to urge financial services firms to enhance their resilience against potential operational disruptions, particularly in light of the recent global chaos caused by CrowdStrike's software update failure. The FCA highlighted that unregulated third-party issues were the primary cause of operational incidents reported from 2022 to 2023. Although consumer harm was minimal following the incident, the FCA said firms need to improve testing scenarios and third-party risk controls. Companies have until March 2025 to implement these measures to ensure they can withstand severe disruptions.
Regulation of Buy-Now, Pay-Later: consultation on draft legislation
The Government has issued an open consultation to bring Buy-Now Pay-Later (BNPL) products into FCA regulation. The consultation runs until 29th November.
The Governments states that across the UK, millions have used BNPL products, which can be a helpful way of managing finances from month to month. However, without regulation there are risks.
The Government has published a consultation setting out its plans for regulating the BNPL market. These plans aim to ensure people using BNPL products receive clear information, avoid unaffordable borrowing, and have strong rights when issues arise. The Government’s approach will maintain access to a popular product while adding safeguards.
The consultation will be open until 29 November. After reviewing feedback, the Government will bring forward legislation as soon as possible.
Key principles underpinning the regulation will be:
clear information, in line with the Consumer Duty;
key statutory rights, such as CCA s75 protections;
complaints handling rules and access to the FOS;
requirement for FCA authorisation; and
FCA rules on affordability and creditworthiness assessments.
FCA publishes results of non-financial misconduct survey
The FCA has published the results of a survey to better understand how firms record and manage allegations of non-financial misconduct. The survey of over 1,000 investment banks, brokers and wholesale insurance firms found that the number of allegations reported increased between 2021 and 2023.
When the survey launched, the FCA was clear that it was likely that data could be read in different ways. For example, a high number of complaints could be an indicator of a healthy culture in which people feel they can speak up, confident they will be listened to. A low reporting rate may indicate the opposite.
In the three years covered by the survey, bullying and harassment (26%) and discrimination (23%) were the most recorded concerns. However, the large 'other' group of concerns (41%) indicates how difficult it can be to categorise issues of personal misconduct.
How a firm deals with non-financial misconduct will be used by the FCA as an indication of how it addresses honesty, integrity, and reputation when issuing annual certification and appointing senior managers. Firms will need to demonstrate robust procedures for dealing with any member of staff implicated in non-financial misconduct.
Vulnerability is not a buzzword
A speech delivered by Graeme Reynolds, director of competition, at the PIMFA Wealth Vulnerability event highlighted:
The FCA is aiming to unlock greater competition and innovation.
It wants firms to take time to understand what vulnerability means for their business, and for their client base.
Firms need to understand what procedures need to be implemented to support the delivery of good outcomes for those different aspects of vulnerability.
Vulnerability and good consumer outcomes, two of the themes of the Consumer Duty. This speech also referred to the FCA’s supervisory strategy for the financial advice sector. Once again, trust and recognising vulnerability were front and centre of the speech. Wealth management is seen by the FCA an outlier in identifying clients who have characteristics of vulnerability with only 5% identified by portfolio managers.
FCA supervisory activity will test firms’ understanding of four key aspects of the Consumer Duty:
client needs, and monitoring
training, skills, and capability of staff
product and service design
communications and client service
Compliance Matters can assist in reviewing your policies and procedures to ensure they meet industry best practice.
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