This is the latest in a series of blogs looking at the impact on regulators with the intention of shedding light on a particularly significant regulatory event.
Charles Randell's speech last week was probably the most significant by an Financial Conduct Authority (FCA) Chair since the regulator's inception in 2013. It marks a subtle, but decisive, move away from the competition-led strategy of the FCA's first seven years and an attempt to rebase conduct regulation for the post-pandemic world.
In previous blogs, I've already touched several times on the debt and investments sections of his speech and will do so again in the future. But for this spotlight piece it makes sense to concentrate on its other, more future-focused, sections. These start to set out the FCA's thinking on how it wants to move forward.
The first thing to say, a cautionary note I'm afraid, is that we have been here before. The FSA was formed in 1998, and seven years on its then Chair (Callum McCarthy) - in a not dissimilar position to Charles Randell today - might well have identified the same shortcomings as the FCA's Chair does here in "Lessons of the last seven years".
To take just one example, there was already a recognition that consumer journeys often differed significantly from that implied by the regulations - the result was a major piece of research, the awkwardly named Consumer Purchasing Outcomes Survey (CPOS), to try and map out the problem.
The same is true of the speech's final section - "An ambition for the future". The FSA's early years - from the 2001 publication of "New regulator for the new millennium" onwards - are littered with efforts to define and measure consumer outcomes. While redressing information asymmetry, to take another example, was another of the FSA's perennial obsessions.
So why are these issues still unresolved? And why are they still presented as new problems?
Some of the answer stems from the long-term lack of continuity at the top of the Financial Services Authority (FSA) and FCA, which is only partly explained by the financial crisis. And in several areas, as a result, the regulator has tried the same approach more than once without looking at the lessons of previous attempts.
Another reason is the very real difficulty of consistently targeting long-term outcomes in a culture so vulnerable to short-term shocks - most obviously mis-selling scandals - that can stall or derail strategy. The impact of London Capital & Finance on the FCA's Mission is an obvious recent example.
But, more fundamentally, the regulator has arguably never really looked in the mirror and gone back to first principles.
For the most part, this is the inevitable result of the environment in which it has operated. The FSA was formed out of the sudden merger of some 12 predecessor regulators, and so there was limited opportunity to design it from scratch. And the FCA, similarly, was formed at speed. Essentially, it was the FSA minus the Prudential Regulation Authority (PRA), plus competition and consumer credit.
However opportunities have been missed along the way.
For example, the regulator's four main functions - policy, authorisation, supervision and enforcement - are each structured differently, and haven't fundamentally changed since 2004. And it doesn't have a consistent approach to the distribution of expertise - whether it should be centralised or decentralised. Both of these contribute to the inconsistency and high internal turnover of regulatory staff that firms sometimes experience.
But the combination of the opportunities of digitisation and the enforced break from the past created by the current crisis create a genuine window for change.
Underlying much of the difficulty around financial regulation - for both regulators and firms - has been the time lag between a problem being identified and a meaningful attempt at a solution being implemented. This can be anything up to eight to 10 years - eg, MiFID II, RDR, LIBOR - by which time at least parts of the original problem will have altered, sometimes radically.
Digitisation offers a means to close this gap and enable regulation to become far more real-time, while the imperatives of the COVID-19 crisis provide the justification for regulators and the industry to go back to first principles. In the coming weeks I'll explore what this new regulator for the 2020s might look like.
“As we move into the next phase of this crisis, we don’t know how quickly the economy will recover. That will be determined more by decisions about public health and fiscal and monetary policy than by financial conduct regulation. But it’s not too early to start to discuss what kind of financial system we need for the recovery, and what kind of financial conduct regulator we need to support that system.”
Speech by Charles Randell, Chair of the Financial Conduct Authority (FCA and Payment Systems Regulator (PSR), to a virtual roundtable of bank chairs hosted by UK Finance.
Financial Conduct Authority (FCA) - A financial system to support the recovery (16th June 2020)