This week in regulation


The Speed Read - What's been happening this week?

  • CP17/37: Consultation Paper on Industry Codes of Conduct
  • Wholesale Insurance Brokers Market Study Launched
  • Speech: Robo Advice
  • Principles to keep watch over ARs following alert about introducers
  • The FCA's Future Approach to Consumers

CP17/37: Consultation Paper on Industry Codes of Conduct

Although the FCA has a conduct framework for those undertaking regulated activities, it is less clear what the expectations are for regulated firms when undertaking their unregulated activities. In response, the FCA has released a consultation paper that puts forward its approach for supervision and enforcement of SM&CR rules for authorised firms’ non-regulated activities. It also proposes that it should publically recognise industry codes of conduct which it believes present and promote the right standards. Firms should note that these codes remain voluntary and are not binding regulation.

The catalyst for this consultation paper (CP) is the growing number of codes created within the industry following a series of misconduct cases in unregulated wholesale financial markets. It is believed the development of industry standards that are supported by the FCA will help senior managers understand their obligations and conform to good conduct. Within the CP, the FCA also proposes extending the application of FCA Principle for Business 5 to unregulated activities. This principle outlines the expectation that firms ‘observe proper standards of market conduct’ and would ensure obligations across both unregulated and regulated activities are comparable. The FCA hopes both these changes will influence and encourage firms to follow enhanced standards of conduct even when they are not binding or regulated.

The aim of the regulator’s proposals is to enhance its ability to take action against any misconduct deemed ‘serious and egregious’ which could potentially cause harm to markets and/or consumers.

Comments on the regulator’s proposals should be put forward to the FCA by 5th February 2018.


Wholesale Insurance Brokers Market Study Launched

Following significant changes in the wholesale insurance sector and the development of new services and business practices, the FCA has launched a market study into the sector to assess whether the current dynamics foster adequate competition.

The study will examine:

  • How competition between brokers works in practice, including uses of bargaining powers;
  • Broker conduct and how this impacts competition; and
  • How conflicts of interest are managed and their impact on competition and client outcomes.

The market study will place particular focus on discovering whether the sector encourages innovation and competition in the interests of its clients, which will ensure London remains an international centre for insurance.



Speech: Robo Advice

Bob Ferguson, Head of Department, Strategy and Competition Division at the FCA, delivered a speech on Robo Advice this week, touching on the role he sees Robo Advice playing in the industry, what the FCA is doing to reduce barriers to entry and some of the key emerging themes from the sector.

  • Where does Robo Advice fit into financial services?Ferguson says that Robo Advice is good for the industry, good for consumers and good for the regulation. In a nutshell, automated advice models can boost competition and play a crucial role in narrowing the advice gap identified by FAMR by providing crucial access to currently unserved and underserved consumers.
  • How is the FCA reducing barriers to entry? – the FCA’s Advice Unit was created to quell any doubts on the regulatory barriers those developing an automated advice model may have to overcome. By providing feedback to firms on regulatory rules that may be deemed to be limiting the development of automated advice models and providing firms with guidance and case studies on relevant rules and experiences of the Advice Unit, the FCA hopes more firms (both established and start-up) will be encouraged to develop new propositions. Ferguson reminded the audience that the Advice Unit underwent some change in June, and now supports mortgages, insurance and debt counselling, in addition to investments, pensions and protection. Furthermore, it offers support to guidance models in addition to traditional automated advice.
  • What are the emerging themes from the sector? – the FCA’s 2015 research highlighted a couple of emerging themes:
    • Combining humans and automation seems to be the modem of choice for firms as they explore viable Robo business models;
    • Consumers don’t tend to search for ‘financial advice’ online, instead searching for a particular product. Firms will need to make sure their offering is explicit from the outset so that consumers are not confused or misled by what service they are buying.
  • What are the key risks for firms developing Robo Advice models? – Ferguson outlined some of the key areas of risk he sees for firms developing propositions in this sector:
    • Other countries have developed Robo Advice models and their regulators have responded in kind with different approaches. Simply taking a model that works abroad will not necessarily work in the UK, both from a consumer perspective and in accordance with UK regulation.
    • Although Robo Advice has the potential to more effectively manage large and widely distributed salesforces, the risks of mis-selling remain if the model is poorly designed and not suitably governed. Remember, the responsibility lies with the firm providing the service and product, not with the systems provider. It is up to you to make sure that your customers and business is not put at risk.

Although the Robo Advice market is still taking shape, the FCA has been explicit that it will focus on outcomes (as with traditional advice). The industry can expect to see much challenge from the FCA at authorisations stage in particular.


Principles to keep watch over ARs following alert about introducers

The risk of introducers having disproportionate influence over an advice firm’s business has once again been raised by the FCA, this time with specific reference to Principles who have Appointed Representatives (ARs) or Introducer Appointed Representatives.

There have been cases of introducer firms undertaking certain tasks that are core to the advice process and applying undue influence over the final investment decision. The FCA cautions that Principle firms are at risk of this activity being carried out inappropriately without the right controls and oversight of ARs.

Key points Principle firms should consider are:

  • Be aware of all activity being carried out by ARs as there is the potential that customers could be misled by usage of the FRN;
  • Question whether it is necessary to appoint an AR for the planned activities and whether they need to be authorised for them;
  • Undertake sufficient due diligence when appointing an AR, including checking companies house to make sure they are a genuine company and not affiliated with a scam;
  • Monitor the type, source and volume of business being submitted by your ARs, which will identify business trends that may point to poor outcomes for customers;
  • Ensure that all business directors of ARs have gained prior approval from the FCA.

Principles should be reviewing their current AR relationships now to ensure they remain appropriate, necessary and relevant. You should also review monitoring processes and due diligence to make sure they are adequate for exercising appropriate control over ARs and will uncover any dubious activities or influences.

The FCA's Future Approach to Consumers is a hefty document, so to make it more digestible, check out our key take-aways and summary document

Summary & take-aways

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