A smarter regulator sounds different, but is it?
Becoming a smarter regulator is one of only four FCA priorities for the next five years, making the FCA’s reform of its operating approach a key component of its new strategy, and not just a means to deliver it. It is therefore a significant focus for the FCA from which we can infer its serious intention to become more efficient and effective.
The FCA commits to invest in technology, people and systems to be more effective, to digitise and simplify authorisations processes, and to enable quicker regulatory judgments through improved record-keeping. Data requests will be reviewed and streamlined in order to reduce the burden on firms, and to ensure the FCA is only collecting what it needs and what it will use. “My FCA” is proposed as a single-entry point for firms enabling them to manage all their regulatory obligations and tasks in one place.
In one sense however, this focus on efficiency and effectiveness is only really a continuation of developments we have seen over the last year or so. The FCA has taken steps since 2021 to transform its operations and capabilities through automation, new data tools, and resourcing, and the FCA’s operating service metrics suggest tangible progress has been made, particularly for authorisations.
Smarter is not softer
This desire to become more effective can also be seen in the FCA’s proposed approach to supervision. The FCA promises to significantly streamline how it sets its supervisory priorities, reducing the level of oversight for firms in the fixed firm portfolio that are perceived to be lower risk, and publishing a smaller number of market reports once a year. This is a move we are already seeing the FCA take in relation to the Consumer Duty as it withdraws multi-firm and thematic reviews and portfolio letters which pre-date the 2022-2025 strategy.
However, the FCA makes no suggestion that it will be reducing its expectations or adopting a less robust approach to regulating firms and maintaining high market standards. While the overall tone of the strategy has shifted, on careful reading, the FCA’s assertive supervisory agenda remains an important component: “New approaches will allow us to better handle that significant caseload, so that we can act faster and more assertively where harm is greatest”.
As it seeks to adopt its ‘new approaches’, the FCA will distinguish between those firms who are “demonstrably seeking to do the right thing” and those who are not, flexing the intensity of its supervision accordingly. Whilst this means a more proportionate approach, it also means it will be a highly focussed one. For those firms who cannot demonstrate compliance or who do not seek to meet regulatory outcomes, the FCA intends to be swifter and more purposeful in its interventions where it has cause for concern.
This refocusing of FCA resources is likely to enhance the FCA’s ability to drive an assertive supervisory agenda. With improved market intelligence gained from the stated intention of having direct contact with more firms, and a more coordinated and strategic use of data, the FCA will likely have more supervisory intelligence to work from. Its intention to conduct fewer but more focussed supervisory reviews will also provide the FCA with a clearer supervisory pipeline and greater capacity to make more focussed, targeted interventions where it identifies potential harm.
This approach correlates with what we have been seeing with the FCA’s approach to enforcement and interventions over the last 12 months. As part of the FCA’s strategy of “impactful deterrence”, the FCA has streamlined its portfolio of enforcement cases, carrying out fewer but more targeted investigations which have greater impact, as it has sought to make far more effective use of its broader interventions toolkit. This approach is reiterated in 2025-2030 strategy, where the FCA stresses “In enforcement, this focus means a streamlined portfolio of cases, with the same number of outcomes but delivered faster.”
But interesting discussions lie ahead
Looking slightly further ahead however, the FCA recognises that its tolerance for risk will be an important factor in its future approach. It has opened the debate on how different regulatory risks may be weighed up against potential opportunities for encouraging growth. Interestingly, the FCA has also signalled a willingness to have this debate in relation to standards at the gateway, recognising the impact of the authorisations process on competition and innovation, stating that “every notch higher can make it more difficult for new entrants”. This will be an important debate to follow and will be a real test of the FCA’s commitment to a different approach to regulation.
What does this mean for firms?
In the meantime, the FCA’s vision of a “smarter regulator” is a more effective and efficient regulator that places greater weight on the quality and nature of a firm’s regulatory engagement and interactions. This is a particularly important shift to note for firms who experience more direct contact with the regulator than they have in the past. This could be for a variety of reasons but is likely to include firms operating in a market the FCA considers to be high risk, rapidly-growing firms and firms with more innovative business models. It also puts greater onus on the largest firms to be able to proactively demonstrate what they are doing to meet regulatory expectations and ensure they are “doing the right thing”.
This approach emphasises the importance of firms being open, cooperative and engaged with the regulatory agenda. Firms will also need to think carefully and more strategically about the data that they provide to the regulator on a proactive and reactive basis and proactively seek to apply lessons-learned from the FCA’s communications. We would also encourage firms to participate actively in future discussions with the FCA around the balancing of competing risks, to ensure their views are heard.
