Risk and Compliance Management: Horizons for 2014/15

The UK’s FCA published recently its Risk Outlook and its Business Plan for 2014/15.  They provide a useful indication of the breadth of the regulatory challenges and evidence of a top-down approach to address them. 

The structure of the Risk Outlook is similar to last year’s.  The inherent risk factors such as information asymmetries, do not change overnight unlike the economic and market environment.  The main aspects of the changing market environment that caught my attention were:

1.    the continuing household indebtedness reflecting the growth of unsecured lending, mainly credit card, and forecast increasing household leverage (Figures 6, 18 and 19 of the paper);

2.     lenders’ forbearance in the mortgage market, supported by low interest rates; and the FCA concerns about the cost to consumers (fees and accrued interest);

3.     the stable and risky profile of mortgage lending; about 40% of mortgages have high-risk features – LTV in excess of 90%, loan to income ratios in excess of 3.5 and terms in excess of 25 years (Figure 22);   

4.     the differential impact of increasing interest rates (mortgage customers, those accumulating wealth and near retirement and those considering an annuity purchase).

The FCA then translates these observations into statement about risks.  Again, the ones that caught my attention were:

1.     the challenge of making ‘appropriate’ profits; for example, making profits from non-core activities could undermine fair treatment of consumers or financial crime responsibilities; for insurers, this could manifest itself in the response to the Retail Distribution Review and moves to direct sales;

2.     the implications of short term cost-cutting strategies materialise as demand starts to grow and could result in poor management of firms’ back book;

3.     the adoption of technology may not be supported by adequate systems and controls or expertise; this could manifest itself on insufficient spending on existing technology or the use of big data without appropriate controls;

4.     plans to mitigate the risk of failures do not give adequate consideration to conduct implications such as in respect of the changes to terms and conditions in stress conditions.

The Business Plan then identifies priorities for the key sectors.  For life insurance, the priorities appear to be:

1.       suitability of products and services sold;

2.       fair treatment of the back book;

3.       the governance of with-profits funds.  

Interestingly, the FCA business plan also reflects new responsibilities which include supervising 50,000 firms in respect of consumer credit, enforcing competition law, implementing changes to the approved persons regime and the establishing a new payment systems regulator.   

All in all, it’s going to be a busy 2014/15 for everyone.

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