Often the best way into the FCA Business Plan is first to get a sense of the overall budget context and only then to look at the planned activities.
Budget context
There is an important reference to the budget in the April minutes of the FCA Board. These talk about “the transitional nature of the 2021/22 budget and the intention to commence a new business planning process, aligning financials to the organisational strategy, in the autumn”.
Against this background, the 4.5% increase in the FCA’s annual funding requirement (AFR) is unsurprising. It is similar to the PRA, which cited inflation, Brexit, operational resilience, cyber and technology as justification, all of which apply also to the FCA.
The conduct regulator also has more ambitious plans but, given the existing budgetary pressures, we should not assume that these will be fully funded until the “new business planning process” is complete. In this context, the FCA has also announced a review of its fee structure, and the signs are that this will lead to a significant increase in the minimum fees’ level for small firms.
For now, however, the two main elements on which the FCA’s new strategy depends are: (i) the “Transformation” programme; and (ii) its evident determination, as set out in the April Board minutes and stated clearly during the Business Plan’s launch, to take more legal risk with its enforcement cases.
Transformation
The FCA’s “Transformation” programme, which now also incorporates implementation of the recommendations from the report into the failure of London Capital & Finance (LCF), is the engine of the new strategy. The headline is a £120 million technology investment (over three years) and this is complemented by some potentially expensive recruitment and increased resources in Authorisation and an increased focus on fraud detection. There is also a post Brexit emphasis, which initially centres around the implementation of the Hill and Kalifa Reports – on Listing and Fintech respectively - and the reform of two major EU Directives, MiFID II and Solvency II.
Against an overall budgetary context which is broadly flat in real terms once existing operational pressures are considered, this suggests the FCA is assuming quick efficiency savings can be made from the “Transformation” programme. However, the Board’s reference to this year’s being a “transitional” budget indicates a longer horizon and suggests a potential tension between a demand for short term results and real long-term change.
At a high level, the “Transformation” programme involves merging two large business units (Supervision and Strategy & Competition) and reconfiguring them along a broadly wholesale/retail split. This is an even more complex restructuring than the 2013 split of the FSA into the FCA and PRA, and it is easy to imagine it taking longer than expected.
It is also worth pausing on the concepts of “efficiency” and “effectiveness” in a regulatory context.
Efficiency and effectiveness
At some point, greater efficiency often entails some additional risk, which in the private sector can be justified by cost savings and greater financial benefits elsewhere. In a regulator, however, even a relatively small risk crystallising can cause serious reputational damage with little chance of its being balanced out by successes elsewhere. There is some jeopardy here.
All regulators strive for greater effectiveness and realising the promise of technology will be critical to successful regulation in the next decade. More specifically, the FCA wants to use technology to spot and resolve issues earlier.
This is not a new ambition and the FSA, especially in its last years, aspired to be able to identify potential problems at the product design stage, so they could be fixed before they caused harm. The results were mixed but the astute use of technology should now be able to produce a much better outcome, although it will not be a universal panacea.
There is also a potential paradox in that a more effective use of technology can make it harder to target resources. This is because spotting a greater number of problems earlier, when they are less well developed, can mean having to expend additional resource on triage, to decide what to prioritise. It is therefore possible that the more effective the FCA’s “Transformation” is, the more pressure there will be on the FCA’s longer term budget.
Enforcement
The FCA, and FSA before it, have been through many restructurings and, while taking different forms, they have largely had similar aims. By contrast, the determination to take more legal risk with enforcement cases is a departure and runs against the grain of developments since the FSA partially lost the Legal & General (L&G) case in 2005. This led to the regulator putting additional checks and governance around its enforcement process to reduce the chances of losing major cases in the future.
The strategy has largely worked, but it does make the enforcement process slower. The decision to take more legal risk, and the associated shift of decision making in enforcement cases from the Regulatory Decisions Committee (a sub-committee of the FCA Board) to the Executive, could speed up the process considerably.
However, it would be easy to underestimate the impact of losing a major enforcement case. Some firms will doubtless push back on the FCA’s newly assertive use of its powers, and we can probably expect more enforcement cases to end up in court.
Reserve funding
Those Board minutes from April also mention “people stretch” and the “role of contingency and overdraft funding.” The unusual element here is contingency funding, which the regulator would typically avoid. The only time the FSA used it was for a period during the financial crisis, and in 2021 it is likely to be a tacit nod towards the continuing stresses caused by the pandemic. In the Business Plan, Covid-19 is generally referred to in the past tense, but in practice it is likely to continue as a major driver of regulatory activity.
Lastly, it is worth noting the FCA’s announcement of a branch strategy. This will mean an expanded office in Edinburgh, a new branch in Leeds – doubtless close to the Bank of England’s – and smaller presences in Cardiff and Belfast. As a development, it is probably overdue, and there have been at least two previous reviews into whether the regulator should have a branch strategy, so it is likely to be seen as a positive step.