What the FCA’s new ‘data-led’ approach means for UK financial services

As set out in its 2021-2022 business plan, the FCA aims to become a ‘data-led regulator’. In 2021 the FCA appointed a chief data, information and intelligence officer, Jessica Rusu, whose remit is specifically the FCA’s regulatory systems and innovation systems such as the ‘RegData’ data collection platform and the 'sandbox’, which offers space for firms to test innovative products and services. The FCA’s data-led approach is now a regular feature of its communications with firms. With a regulator that has as extensive powers as the FCA has though, a question is often posed by firms: what does ‘data-led’ mean in practice?

Appointed representatives and data collection

In December 2022 new rules came into force for firms who have appointed representatives (ARs), including obligations to provide more data on their ARs to the FCA around concerns that firms with ARs were not always effectively overseeing their activities. The new rules were also accompanied by a request by the FCA for information using its statutory powers, known as a s165 request, seeking information on existing use of ARs.

Recently the FCA published its analysis of the data it has collected since the new regime came into effect. The range of data collected by the FCA included data about the types of ARs appointed, the sectors in which they operate, the AR network models used and oversight activities. The analysis published by the FCA along with the accompanying charts and data tables is revealing both in terms of how the FCA approaches the data and in signposting to the relevant sector the concerns the FCA has. 

In the case of appointed representatives, the analysis confirms the FCA’s views from 2019-20 that there are higher levels of conduct issues in a principal firm/AR model than where a directly authorised firm carries out all relevant activities itself. The FCA has gathered information on the overall market and identified that the largest growth sector for ARs has been consumer credit, specifically retail finance providers and credit brokers. Its analysis delves into models, leading it to caution principals around the challenges in a model involving tradespeople ARs offering finance options to customers in their homes.

In the investment sector, the FCA notes the use of a secondment model where employees of ARs are seconded to a principal firm, such as an investment fund manager, and carry out regulated activities in that firm which they would not be able to do within the AR firm. Concerns expressed by the FCA include the misleading marketing that some ARs have subsequently engaged in, the systems and controls in the principal firm and the management of conflicts of interest.

The FCA highlights that it has already launched four ‘skilled person’ reviews on principal firms in the asset management sector and alternative portfolios, providing a clear indication of its willingness to use its powers where the data supports its concerns.

The leveraging of data gathering exercises can also be seen in the FCA’s reporting of its action over the past year since the creation of its dedicated AR team. The FCA reports that, following the active data gathering and supervisory approach, principals have terminated their relationships with over 1,300 ARs, there have been 12 applications for voluntary requirements to be imposed and, in the FCA’s description, “many more informal interventions”.

An extensive data collection exercise has enabled the FCA to focus on models of particular concern to it such as the ‘regulatory hosting model’, but it is clear from the breadth of the reported analysis that the improved data has led to significant action outside this particular concern.

Furthermore, this is also openly just the start of a longer term FCA approach to data and how it supervises the principals of ARs. The FCA signposts an intention to develop its analysis and conduct deeper analysis of the data it holds, as well as using the data and analysis for more assertive supervision. 

In this instance, the use of data has enabled the FCA to examine both the entirety of an aspect of financial services and to narrow in on particular areas of concern for further action. This more forensic approach may help provide reassurance around the scope of the FCA’s powers and when and how it exercises them.

New data rules in consumer credit

The FCA can only proceed with its data-led approach if it has the necessary data to analyse and support its actions. The recent publication of a consumer credit consultation paper (122 pages / 1.38MB PDF) signposts the FCA’s desire to improve its data in a systematic way that will enable it to follow through on its plans to be a data-led regulator. As a regulator with significant powers, the FCA can regularly obtain information on an ad hoc basis simply by asking firms to provide information.

Where it has concerns about whether information will be provided or where it requires precise and comprehensive information, it can use its power in s165 of the Financial Services and Markets Act (FSMA) to compel firms to provide requested information. However, either of these options will only provide a one-off set of data. To achieve a more regular influx of data, the FCA relies on rules requiring firms to report information to it at prescribed intervals.

Data rules, and especially detailed data rules, will be sector specific. However, the overall appetite for new data rules and how they are crafted in a particular sector can be instructive for all firms in anticipating potential changes to their own sectors. If approved, the latest proposals for further reporting by consumer credit firms – excluding mortgages and overdrafts – will require affected firms to report granular information on a quarterly basis.

The quarterly data will give the FCA insights into the entry into agreements and the ongoing performance of agreements, enabling the FCA to gain understanding of how consumers and firms act over the full life of consumer credit agreements. Ongoing reporting will be required up until the point the agreement is cancelled, terminated, sold to another firm or statute barred.

The level of detail sought by the FCA is considerable and points to the potential nature of data that may be sought in other sectors. The FCA has consciously requested specific data items at agreement level such as postcode, date of birth, opening date of account, transaction reference etc to enable them to monitor the agreement over time and across datasets. This will enable it to carry out more sophisticated analysis through the use of this ‘matching’ data.

The FCA acknowledges that this data could be requested through an ad hoc information request. However, these are resource intensive and to achieve the regulator’s aims would need to be issued regularly. By making new rules, the FCA can achieve a regular flow of data and give firms a clear indication of what it will be collecting, albeit at the cost of firms needing to establish systems to ensure submission of this data.

Of perhaps greater importance is chapter three of the consultation, which indicates that this level of data may only be the starting point of the FCA’s data-led approach in consumer credit. There are a number of areas where the FCA has opted not to propose rules at present, in particular declined applications and decision metrics, but the FCA is looking to open a discussion on how it can collect information on this. Such data, if collected, has the potential to touch on firms’ commercial decision-making and is particularly worth being aware of in other sectors where firms may decline to offer products to prospective customers.

The FCA’s supervisory approach

The data-led approach of the FCA can also be seen in its supervisory approach and response to more immediate concerns arising in particular sectors. For example, in responding to the questions around cash savings rates, the FCA’s action plan includes requiring provision of fair value assessments, a commitment to publishing a bi-annual analysis of easy access savings rates and further analysis between on-sale and off-sale products and how cash savings contribute to profitability.

Similarly, the regulatory use of and focus on data can be seen in the recent portfolio letters issued by the FCA in the insurance and funeral plans sectors. For example, in both the life and personal lines sectors, the FCA indicates in its letters that it will be looking to test assessments of value and examine firms’ approaches to this. The FCA also refers to its current analysis of complaints data and its concerns about the level of detail in solvency assessment reports.

Takeaways for firms

For regulated firms, the FCA’s emphasis on data provides a clear indication as to how the FCA will respond to issues and correspondingly what steps firms can take to ensure they are in the best position to ensure positive engagement with their regulator. The overall issues remain familiar concerns of the FCA, such as affordability in the consumer credit space, the value of the product in relation to insurance and funds, and in general customer support, especially of vulnerable customers.

However, the FCA is now applying closer analysis of more granular information to reach its views, and is moreover willing to look at matching across data sets. A stronger approach to analysis and interrogation of their own data should assist firms in responding to enquiries from the FCA and, if called upon to do so, in justifying their decision making. Clarity about what data is collected and how it is used will also assist.

The consumer duty requires firms to monitor retail customer outcomes and to compile an annual report for the board setting out whether good outcomes have been achieved. Robust processes in relation to the selection of data items, collection and analysis, to meet these obligations will similarly assist firms in their interactions with the FCA. 

Firms can also expect that with a data-led approach, the likely initial response of the FCA to an issue will be to request relevant items of data, whether that is value assessments or other data and analysis that may have been collected. Maintaining systems that allow easy retrieval of data will help ensure that any regulatory interactions with the FCA start smoothly.

Additionally, as already flagged in the consumer credit consultation, it seems likely that in areas where the FCA has historically had concerns, more detailed granular reporting requirements will be introduced. This process started with the value measures data collected in general insurance, is continuing with consumer credit and is only likely to increase to ensure the FCA has the data it considers it needs.

There are, however, risks for both sides of the regulatory equation to be aware of in the use of increasingly more granular data. Whilst there are clear benefits to the regulator having a greater understanding of the markets it regulates and how they operate, it is a regulator of those markets applying rules that allow a variety of firm models and commercial decision making to exist.

The granularity of agreement level data being sought invites a risk that both firms and the regulator will need to be alive to, that the regulatory view does not replace legitimate commercial decisions. Under the consumer duty all firms that are in a distribution chain with a retail customer should be acting to deliver good customer outcomes. What is a good customer outcome however is not necessarily a binary option.

A data-led approach is intended to lead to swifter regulatory action and to date this has been the case, with the FCA moving quickly on cash savings to prepare an action plan and call for provision of information from the banks. Where there are clear issues to investigate, firms should expect this speed to continue. The other side of the coin, however, is the risk of delay should challenges be made to the analysis conducted by the FCA. As the FCA becomes increasingly confident in its analysis and approach, this will be an area to watch especially in relation to the more finely balanced interventions.