Financial services regulation: Adapting to change

The Financial Conduct Authority (FCA) is making significant changes in response to its new responsibilities and past regulatory failures, but it needs to manage the related risks if it’s to meet its commitments, including reducing and preventing financial crime, according to a new report by the National Audit Office (NAO).  

The FCA regulates approximately 50,000 firms in an industry worth more than £170 billion to the UK economy. The financial services sector is undergoing significant changes; the FCA began a transformation programme in 2020-21 in response to these changes and this will take a number of years to realise. Reshaping the organisation has involved high staff turnover in previous years but this has since fallen. 

The recent Financial Services and Markets Act 2023 (FSMA 2023) gave the FCA more direct power to develop regulation and a new secondary objective to facilitate the UK's international competitiveness.¹  

The report – Financial services regulation: Adapting to change – examines the FCA’s efforts to respond to the changes in its regulatory powers and remit, as well as to the pace of change in the market.  

The NAO found that there can be a significant delay between the FCA identifying an issue and it taking action. In some cases, the FCA requires additional powers to act, such as needing legislation approved by Parliament before it can impose conduct standards on Buy Now Pay Later credit providers. Relatedly, while the FCA has required crypto-asset firms to comply with anti-money laundering regulations and engaged with unregistered firms since January 2020, it did not begin taking enforcement action against illegal operators of crypto ATMs until February 2023.²  

The FCA is carrying out significant work adapting to the changes, and from 2020-21 to 2022-23 the FCA spent £317m on its change programme.³  

It also increased overall staffing by 16 per cent between August 2020 and August 2023, and recruited to meet high turnover rates in 2021-22 and 2022-23.⁴ Seven out of 11 senior officials have joined the FCA since September 2020, including filling three new roles. The FCA has identified resourcing as a risk to achieving priority commitments such as reducing and preventing financial crime and preparing financial services for the future.  

The FCA is aware it needs to maintain specialist skills to avoid causing delays in its work. A shortage of crypto skills meant the FCA took longer than planned to register crypto-asset firms under money laundering regulations in 2021, and it still finds it difficult to recruit and retain staff with these skills. The FCA told us that it had dealt with more than 1,400 cases relating to unauthorised crypto-asset activity. In 2020, more than 3,150 crypto-asset scams were reported, rising to over 6,300 in 2021, and more than 3,900 in the first half of 2022.  

The FCA has outlined key activities it is taking or is planning to take to mitigate data risks and create efficiencies, including upgrading its ‘data lake’ which stores all FCA data and enables the FCA to share data across the organisation,⁵ creating a 'single view' platform for all frontline staff to access key information on firm performance,⁶ and creating data analytics tools.⁷ The FCA plans to reduce key data risks from red to amber rating by March 2025.  

The FCA provides information on 49 indicators for 168 activities connected to its priority commitments to its senior management team and it is working to simplify this process and make the information more usable.  

Among the recommendations set out in the report the NAO urges the FCA to ensure it has the operational processes to manage the scale of change it has in motion, and to work with HM Treasury and other stakeholders to review the effectiveness of new accountability arrangements required under FSMA 2023.⁸  

The NAO also recommends that, by autumn 2024, the FCA should plan changes to provide greater clarity about its performance to stakeholders. This includes potentially developing a core set of performance metrics, and testing their presentation and reporting with stakeholders to ensure the FCA communicates its performance more clearly and transparently. It should also build on current work in developing a long-term workforce plan to ensure it maintains the necessary expertise.  

Gareth Davies, the head of the NAO, said:  

“The FCA is undergoing significant reform, responding to changes in the financial services regulatory framework and making operational changes intended to improve performance. Its work includes a series of measures to re-shape the organisation and respond to its new role under the Financial Services and Markets Act.  

“The FCA must complete its work on optimising its use of data, assessing whether it is achieving the outcomes it intends and whether it is able to direct resources to where they can have most impact. It must also be clear about which of the long list of activities it is monitoring internally are its priorities. If the FCA can do this, it will be well placed to meet the challenges of the changing environment in which it operates.”