This week, we lead with the Financial Conduct Authority’s (FCA) new 5-year strategy. On the day of its publication, the Chair and CEO of the FCA found themselves in front of the Treasury Select Committee, which provided insightful sub-text for much of the key messaging here. The themes are undoubtedly familiar, but notably underpinned by the FCA’s prevailing desire for a rebalancing of its approach to risk alongside the government’s growth agenda.
In keeping with the new FCA strategy, our second item exemplifies a desire for fair value to consumers (in this case, in the pure protection market). And similarly, our third is further demonstration of initiatives to relax or re-evaluate rules for greater societal benefit.
Elsewhere this week, we pick up recent developments in sustainable finance around simplifying access to finance.
FCA 5-Year Strategy: Key Points for Firms
The FCA has revealed its 5-Year Strategy for 2025-2030, highlighting key priorities. The plan aims to make the regulator more efficient through better processes and technology. It supports investment and innovation to keep the UK's financial services competitive, enhances consumer protection and trust, fights financial crime, and improves access to home ownership by simplifying rules and helping consumers switch lenders or explore other options.
Firms can expect:
- Changes in reporting and communication with the FCA
- Emphasis on transparency and customer support
- Strengthened anti-financial crime measures
- Support for consumers in accessing home ownership
For detailed insights on FCA 5-year strategy
Read more on the FCA 5-year strategy
Fair value to consumers in pure protection market
The FCA has launched a market study into the distribution of pure protection products to retail consumers. These products provide financial support to families in the event of critical illness or death. In 2023, approximately £4.85bn was paid out in pure protection claims on individual policies, aiding those affected by bereavement, illness, and injury.
While the FCA has observed positive indicators in pure protection, including a relatively low number of complaints received by the Financial Ombudsman, there are concerns that commissions used to sell these products may affect the outcomes consumers receive and the products’ value or design.
The study will investigate whether:
- The commission structure encourages advisers to suggest switching that may not be beneficial for consumers
- Premiums are being increased by insurers to pay a higher commission to an intermediary
- The products offer fair value
- The market supports innovation and growth
The study will focus on four products: term assurance, critical illness cover, income protection insurance, and whole of life insurance. Initial findings and proposed next steps will be published by the end of 2025.
Read the FCA press release on the Pure Protection Market Study Read the FCA webpage on the Pure Protection Market Study Read the terms of reference of the Pure Protection Market Study
Interest rate stress test rule
The FCA's interest rate ‘stress test’ rule, MCOB 11.6.18R, is designed to ensure that lenders consider the impact of future interest rate rises on mortgage affordability. This rule mandates stress testing for at least five years, with exceptions for shorter contracts. Lenders can tailor their tests to reflect their customer base and products, promoting fair value and positive outcomes. With interest rates currently falling, this flexibility is crucial to avoid unnecessarily restricting access to affordable mortgages.
Several firms add a margin to the lender’s current reversion rate. However, with interest rates currently falling, this may unnecessarily restrict access to otherwise affordable mortgages. The FCA reiterates that firms have the freedom to design their stress tests in a manner appropriate for their customers, ensuring the tests are compatible with market expectations and not mechanically linked to them.
The FCA is actively reviewing mortgage rules, including responsible lending, and recently issued a call for evidence on the impact of MCOB 11.6.18R.
Read more on the interest rate ‘stress test’ rule Go to the FCA Data Request
Streamlined EU sustainable finance standard for SMEs
The EU Platform on Sustainable Finance recently published a report proposing a new Small and Medium-sized Enterprise (SME) Sustainable Finance Standard. The initiative aims to simplify SMEs' access to sustainable finance, recognising their critical role in Europe's transition to a net-zero economy. SMEs represent over half of the EU’s GDP and more than 63% of enterprise greenhouse gas emissions, yet face significant barriers accessing external sustainable funding.
The proposed standard introduces tailored criteria to classify SME activities, enterprises, and investments as sustainable, improving SMEs' ability to access green and transition finance. Key recommendations include grouping similar activities, clarifying ambiguous EU Taxonomy terms, simplifying Life-Cycle Assessment (LCA) requirements, and developing an accessible online eligibility-checking tool.
The EU Platform encourages SMEs to voluntarily report sustainability key performance indicators (KPIs), such as aligned turnover and CapEx. Financial institutions are similarly urged to disclose the proportion of SME financing aligned with these simplified criteria. The standard may expand to cover additional sustainability objectives in future reviews.
Read the report - Streamlining sustainable finance for SMEs
