The FCA (Financial Conduct Authority) published its Business Plan 2023/2024 at the start of Q2 2023. The opening comments reflected on the record levels of volatility experienced in the preceding year. The plan also commented the forthcoming twelve months is predicted to continue to be uncertain due to the current economic and geopolitical environment. Within the plan, the FCA outlined four key uncertainties that the UK economy is currently facing including; interest rates and inflation, the risk of higher unemployment compared to the current projection, the potential for further declines in real household disposable incomes and the potential for further market volatility. Due to this challenging and uncertain financial climate, the FCA also expressed concern with regards to a ‘heightened risk of firm failure’. This particular concern is in lines with events which have occurred over the last few weeks, including the news of SVB UK and Credit Suisse.
As always the FCA’s operational objectives within its business plan are designed ‘to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system and to promote effective competition’.
Carrie Whamond, Founding Partner at Alternit One explores how firms can mitigate risk in line with the FCA’s own objectives
The expressed concern for ‘heightened risk of firm failure’ outlined in the FCA’s Business Plan is open to many interpretations. Key components of the FCA’s caution include firms that experience multiple regulatory failures which undermine the credibility and integrity of the market. It is less likely that a firm will fail due to a single event; for most firms who find themselves under pressure from the regulator, the issue is operational robustness, governance & data strategy and visibility.
In the business plan, the FCA has asserted its ambition to become a data-led regulator which means it is taking significant steps across different data and digital programmes in order to do so. A key part of establishing its progress as a data-led regulator includes building on the FCA’s current risk frameworks to promote action against firms who are not meeting regulatory standards leading to financial harm, as well as further enhancing proactive and data-led detection of problem firms in order to quickly intervene when an issue is found. Finally the FCA outlined that it has invested in additional resources through its hiring process, enabling the organisation to increase the number of firms they can take action against.
The case for investing in a risk management strategy with regards to regulatory and investor requirements has never been more important. A key issue with regards to risk management is outsourcing functions to MSPs (Managed Service Providers). As part of a firm’s regulatory obligations, they must be able to understand and mitigate against any vulnerabilities that could arise from partnerships with MSPs. In an ideal world, firms would outsource different functions to different service providers in order to ensure diversification of risk. Yet this is not always the case as many firms will use a MSP for multiple functions and services. This can seem attractive to firms initially as it means one company manages many functions, potentially reducing reporting and communications. However this can also be deeply problematic should the FCA establish a firms MSP relationship was not at acceptable regulatory standards. You cannot assume a third party MSP who specialise in financial services is automatically using best practice in regards to regulations; you must carry out your own due diligence to assure you are working with a partner who can support your business, while you still ultimately have responsibility to the regulator. Like the management of investments in a portfolio, diversification here is key. Being vendor diverse allows firms to mitigate against vendor risk. At A1, we create solutions and strategies that support client needs, regardless of the vendor. We handpick the best suppliers to suit the specific needs of each client. Not only does this minimise risk in a ‘heightened risk environment’, it also ensures that we are able to offer the very best services to our clients as our service providers need to continue to perform and innovate in order to retain their relationship with A1, and onwards to our clients.
If you would like to learn more about how A1 can support your firm with managing your risk management in line with the FCA’s Business Plan 2023/2024 and regulatory requirements, contact us today.
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