The FCA Wants Firms to Feel "G-Force"

From diversity and inclusion to the Consumer Duty, 2023 is a big year for the FCA. This is how it wants financial services firms to behave

Andy Pettit 17 January, 2023 | 8:48AM
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In investment circles, governance is most frequently the third pillar of the ESG acronym. But at its heart, governance is the system by which entities are directed and controlled. In business and finance it comes in two main guises – corporate governance and product governance.

In the eyes of the Financial Conduct Authority (FCA), corporate governance encompasses not only the formal governance at board or senior levels, but also the broader set of processes, systems, controls and arrangements by which decisions are made and business gets done.

Specifically in the context of asset management, the regulator sent a letter to asset management firms in January 2020, stating that “overall standards of governance, particularly at the level of the regulated entity, generally fall below our expectations”. And prior to that, its Asset Management Market Study diagnosed weak governance as an important root cause of the sector’s failure to consistently deliver good value and good outcomes to consumers.

Diversity Included

The FCA implemented three remedies. These were: a requirement for two independent directors on the AFM Board; the value assessment itself; and added new responsibilities under the Senior Managers and Certification Regime (SMCR), which aim to more fully represent investor interests in firms’ decisions.

Beyond asset managers, however, the FCA leverages the UK Corporate Governance Codes within its Listing Rules, requiring companies to report annually how they have applied it. Produced by the Financial Reporting Council, the Code places emphasis on relationships between companies, shareholders and stakeholders, and promotes the importance of establishing a corporate culture aligned with companies’ purpose and business strategy, promoting integrity and diversity.

Diversity and inclusion is an area the regulator is increasingly focused on. In practice it wants to see an inclusive approach to diversity leading to better decisions. People with different life experiences bring new types of thinking and new approaches to problem-solving to the table. That’s not just at board level, but throughout organisations.

Duty Done?

In FCA terms, product governance is about the systems and controls firms have in place to design, approve, market and manage products throughout their product lifecycle so they meet meet legal and regulatory requirements. Ultimately, the FCA believes good product governance should result in products that meet the needs of one or more identifiable target markets; are sold to clients in the target markets by appropriate distribution channels; and deliver appropriate client outcomes.

Reinforcing the importance of governance, a new Consumer Duty, perhaps the FCAs flagship piece of new regulation, will be imposed from July on any firm that has influence over a consumer’s outcome – from product manufacturers, through distributors (including platforms), to financial advisers. By doing this the regulator is seeking to induce a culture shift. It wants to embed good outcomes for retail customers in businesses, and help customers make better decisions.

To ensure their firms fulfil the Duty, boards must incorporate into their governance responsibilities a culture in which good outcomes for consumers are central, and monitor and report progress annually to stakeholders. Actions are expected to span the firm, and include things like people management policies and practices, performance management, and pay and bonuses. Risk management functions should pay special attention to consumer risks, and they should also be a key lens for internal audit.

As we approach the go-live date, the regulator is pushing firms to be ready and can be expected to monitor progress closely.

Andy Pettit is director of policy research at Morningstar

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Andy Pettit  Director, Policy Research (EMEA), Morningstar

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