Question 3 (500 words)

With reference to documentation published by the regulator of a sector and jurisdiction of

your choice, identify and briefly outline two of the main challenges for that regulator over the
next 12 months. Discuss the relevance of these two challenges for the regulatory environment
and a regulated firm in your chosen jurisdiction and sector.

On 26 April, Mr. Nikhil Rathi the CEO of FCA, delivered speech at City week 2022 outlining the
FCA perspective on the critical issues in financial regulations(Source). The following are two of the
underpinning key challenges in the next 12 months:

1: The pandemic impact / Cost of living crisis

The economy already faced rising inflation on the back of the economic recovery emerging from the
pandemic. War was then visited on Ukraine by Russia, with the resulting aftershock for commodity
and agricultural prices, rippling down to wholesale markets, firms and consumers. Cost of living
challenges mean consumers are more exposed to risk while also being more reliant on financial
services. It has profound effects on consumers and business finances and has increased financial
pressures on banks.
This has driven and continues to drive significant change in the retail banking landscape, much of
which has yet to play out. It effects the factors they consider when making decisions, such as which
products to offer, their price, which channels to use and which customer segments to serve. the
transition from pandemic to endemic is likely to be a bumpy one. The outlook continues to be marred
by uncertainty and divergences. (Source).

Therefore, FCA’s challenge is ensuring that Banks remain resilient and contribute to the recovery and
act in their customers’ interests. As part of FCA ongoing supervisory work, FCA responsible of
monitoring how banks are implementing new charging structures and business models. New charging
structures could be positive for competition if they are transparent and fair. However, changes could
also lead to charges falling disproportionately on low-income consumers or those in vulnerable
circumstances, or to firms offering reduced services to these consumers. For example, the pandemic
has dampened demand for consumer credit overall as spending fell. FCA intervened to protect
consumers with temporary support measures such as the payment deferral guidance.
The impact of the pandemic requires the regulators to collaborate with banks to ensure proactive
assessment of their business models and strategies and the drivers of harm which may be inherent in
them, and considering the extent to which the culture, leadership, governance, and oversight
arrangements within the firm are adequate to mitigate those risks.  (Source).

3- Cryptoassests
The crypto market that reached almost $3 trillion in market valuation last year, compared to roughly
$20 billion just five years ago. The banks' exposures to cryptoassets are relatively low at this stage,
the potential for this market to scale up rapidly and the wide range of potential direct and indirect
channels of bank exposures raise financial stability concerns. The dynamic nature of cryptoasset
markets necessitates a proactive and forward-looking regulatory response (source). At present,
cryptoassets are only regulated in the UK for money laundering purposes, and FCA do not have
conduct or consumer protection powers over the industry. Banks remain responsible for assessing the
risks to their business and consumers. They should have appropriate systems and controls to counter
the risk of being misused for financial crime.
FCA role is assessing that firms are adequately taking account of cryptoasset risks and making it clear
to consumers when they are interacting with unregulated services.
However, any further controls and requirements by FCA shouldn’t hinder the innovation in financial
services, including cryptoassets and their underlying technology, where they have applications that
are in the public interest. For example, cryptoassets, and in particular a subset called stablecoins,
could lower fees, speed up international transfers and automate payment transactions further.   At the
same time, risks to consumers and the market must be appropriately mitigated. This will require
further cryptoasset regulation as the industry evolves (source).