From tougher enforcement to prescriptive stances on financial products, regulators will be batting for customers more in 2021
In a nutshell:
Regulators intervening more often and earlier to address risk and secure customer outcomes
Expectation of customer remediation and redress to be proactively provided by firms
Regulators also using their powers, including through the courts with test cases or quasi class actions.
In the UK, the Financial Conduct Authority (FCA) holds broad product intervention powers. For example, it banned the promotion of certain “mini-bonds” to retail customers between January and December 2020, with a view to making this permanent in early 2021 following the required consultation (which closed in October 2020). We will likely continue to see the FCA exercise these powers in areas it sees as high-risk for customers, given the objectives in its 2020/21 Business Plan to “prioritise end outcomes” and “make faster and more effective decisions”.
In Hong Kong, the Securities and Futures Commission (SFC) has issued a joint circular with the Hong Kong Monetary Authority (HKMA) announcing a thematic review to assess intermediaries’ spread of charges and their compliance with requirements governing the disclosure of trading capacity and monetary benefits, with a focus on non-exchange‑traded investment products. In recent years, the SFC has stepped up the use of thematic reviews, including the use of joint reviews with the HKMA, as a tool to assess cross-sector risks. We expect the regulators to use the findings of this thematic review to assess compliance by licensed intermediaries and take regulatory action if breaches are found. The regulators will share their findings with the industry and consider issuing further guidance, likely in early 2021.
The design and distribution obligations, which now commence on 5 October 2021, represent a step-change in financial services regulation, placing greater responsibility on issuers and distributors of financial products to appropriately design and distribute their financial products."
- Sean Hughes, ASIC
In Australia, we expect to see continued activity and consultation by the Australian Securities and Investments Commission (ASIC) in relation to using its new product intervention powers, and a significant change to the compliance landscape when the related “design and distribution” obligations take effect from October 2021. In relation to product interventions, we expect ASIC to build on the foundations it established in 2020 with its regulatory guide, its intervention orders on contracts for difference and short-term credit contracts, and its successful defence of a judicial review challenge to its power. We expect to see more interventions in binary options, car yard insurance and continuing credit contracts (on which ASIC is already consulting) and that ASIC’s interventions and consultations will start to have a deterrent effect, leading to fewer interventions in future.
Enforcement with a focus on customer remediation and promptness of outcomes
Remediation or redress schemes by large financial institutions have been common in the UK, often following an enforcement investigation. More recently, the FCA has also used its statutory powers to compel redress in circumstances where this would have been “voluntary”. Notwithstanding this, the FCA has stated that it has seen “too many resources devoted to redress and remediation, and not enough to empowering consumers to make good decisions”. This may be a further signal from the FCA that it will be aiming to intervene sooner, before loss to consumers or damage to markets can occur. The FCA’s reaction to Covid-19 issues, with interventions on forbearance and lending, represent a more agile, ad hoc, approach which may inform the approach it takes more broadly.
Similarly, in Hong Kong, the SFC has emphasised its “front-loaded” regulatory approach for a number of years, with a focus on tackling the greatest risks and intervening at an early stage to address persistent problems and emerging threats. Whilst this is likely to continue in 2021, the SFC can and will exercise its powers of enforcement and seek court-imposed civil remedies on behalf of investors in what it sees as a suitable case. For example, it recently brought civil proceedings against a former listed company and member of senior management for falsely inflated company revenue in the listing prospectus, seeking court orders for restitutionary payments to shareholders.
In Australia, Covid-19 has led to a slow-down in ASIC enforcement action in 2020. While the effect of the recent turmoil in ASIC’s leadership remains to be seen, we expect to see a return to the “why not litigate” approach and pursuit of cases from its own investigations and the Financial Services Royal Commission as it adapts to the “new normal”. Remediation is sometimes featuring directly in those cases, as ASIC alleges that a slow or inappropriate approach to customer remediation is itself a breach, for instance of the unconscionable conduct or efficient, honest and fair obligations. ASIC has recently begun consultation on updates to its regulatory guide on remediation and is also likely to use other measures to place a strong emphasis on prompt compensation of customers, as seen in its review of consumer credit insurance where it is overseeing customer remediation programs.
We believe the circumstances of the current coronavirus emergency, and its effect on businesses holding BI policies means this uncertainty needs to be resolved as quickly as possible. We have sought court declarations as part of a test case, aimed at resolving the contractual uncertainty around the validity of many BI claims."
- FCA, Business Interruption page
Test cases and quasi class actions
In both the UK and Hong Kong, regulators have shown a willingness to use their powers to secure remedies for classes of customers, in a manner that mimics aspects of the class action process.
Test cases are another powerful tool that we expect to see regulators use in 2021 and beyond, with the aim of achieving greater clarity and quicker outcomes than a piecemeal approach of individual investigations and claims. A high profile example in the UK was the FCA’s test case on business interruption insurance policy wordings, which aims to bring certainty for the market about the application of various forms of wording in the wake of Covid-19, and will do so far more effectively and efficiently than waiting for individual claims or Financial Ombudsman Service complaints to be determined.
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