UK regulator knocks out seven shades of fintech hits

Andrew Bailey, FCA chief executive

The UK’s Financial Conduct Authority (FCA) has revealed seven areas where its intervention can have the greatest impact, or where there is the greatest harm or potential for harm to its objectives.

In yesterday’s (16 May) speech by Andrew Bailey, FCA chief executive, delivered at the British Insurance Brokers’ Association (BIBA) Conference 2018 in Manchester, he outlined these “cross-sector priority areas” – and mentioned Brexit again.

The seven priorities comprise firms’ culture and governance; high-cost credit; tackling financial crime; data security, resilience and outsourcing; innovation, big data, technology and competition; treatment of existing customers; and long-term savings, pensions and intergenerational differences.

No point in rattling off every word from Bailey as plenty of old ground was covered.

However, in terms of culture and governance, it will be finalising the rules for the extension of the Senior Managers and Certification Regime to all Financial Services and Markets Act 2000 (FSMA) firms.

For innovation, Bailey says “over the coming months will be our work with fellow regulators on a blueprint of the global sandbox – in which innovative firms can test in multiple jurisdiction, minimising time to market”.

As reported in February, the FCA was looking for views on the merits of creating a global fintech sandbox.

The march to March

When it came to Brexit and the insurance industry, there were some specifics.

Bailey said: “We are working on the basis that the UK’s exit from the EU will take place in March next year. After this, we expect a transition or implementation period to take effect, which we strongly welcome.”

For passporting he was very clear – “the risks of not getting this right are considerable, because without passporting the authorisations of those firms that rely on it fall away in the market into which they passport, unless some other action is taken”.

According to the FCA, this matters because the authorisation provides the legal basis to continue to service existing contracts in many EU countries including the UK.

Bailey explained that in insurance, servicing a contract means the legal basis to pay on claims to policyholders and receive premiums from them. The most recent information “suggests” that this could affect £27 billion of insurance liabilities and ten million UK policyholders and around £55 billion of insurance liabilities and 38 million policyholders in the rest of the European Economic Area (EEA).

Stats were on hand, as Bailey noted that as of this April, 5,910 financial services firms were passporting out of the UK under EU Directives, and 8,629 firms were passporting in.

Last December, the UK government committed to legislate to allow insurance companies from the rest of the EEA to continue to service insurance policies held by UK-based customers by creating a regime of temporary permissions and did the same for other financial services.

Bailey wants an agreement between the UK and the EU for a “permanent commitment to open financial markets”.

He stated: “In the absence of that agreement to date, we need the backstop. But, and this ’but’ is very important, such a temporary permissions regime implemented in the UK cannot cover customers in the rest of the EEA with policies from a passported UK insurer. At present, such customers are reliant on their UK insurance company transferring existing contracts to legal entities located in the EU, a more complicated process. Any change or backstop arrangement here is in the gift of the EU not the UK.”

Looking ahead, Bailey believes one of the “most significant” regulatory changes in 2018/19 will be the implementation of the Insurance Distribution Directive (IDD) which comes into force on 1 October 2018

In brief, the IDD will help “reduce conflicts of interest and ensure firms act in consumers’ best interests”.

Speed and privacy

With GDPR on its way next week, i.e. 25 May, this was unsurprisingly mentioned.

Bailey cited work commissioned by the Financial Services Consumer Panel and conducted by the Management Department of the London School of Economics (LSE).

A “key finding” of the LSE work is that consumers don’t understand the value of their personal data, and therefore what ownership really means.

Bailey said: “We should not base our protections on assuming that they do know this value. There is, however, a subtle but important distinction between whether consumers know the value, and what they value. The LSE study suggests individuals value privacy, but it is less clear what degree of privacy they expect and assume given the pace of change.

“But, many really value speed of access and expect it, the need for speed if you like. The trade-off between speed and privacy may be an example of the conflict between short-term rewards and longer-term goals.”

As he said, this is a “challenge”.