Regulation in COVID times: 3rd wave of independence

Gavin Stewart Gavin Stewart

It's been a challenging year for financial services regulation. Gavin Stewart has been documenting the ups and downs, and in this round-up summarises his daily updates for the week.

3rd wave independence

During last week's Grant Thornton Regulatory Update webinar, I found myself arguing that the current planning for an effective "back to normal" by the end of September was characterised by too much certainty. This assumption was explicit in the Budget, and is implicit in the FCA's strategy to exit its temporary regulations on mortgages and consumer credit. This exit strategy was probably overdue but I've always thought there was a real risk of it exposing many more vulnerable consumers (including small businesses) at the end of the temporary regulations than at the start.

One of the dangers of the UK's situation is that government, central bank and regulators, because the pressure of the crisis has made them virtually indistinguishable, will now struggle to reassert their separate roles and, in the case of the latter two authorities, their independence. With growing scrutiny of its use of QE to buy up government debt, the Bank of England (BoE) is trying to steer a delicate line between supporting government policy and recognising the scale of the downside risks. The Financial Conduct Authority (FCA), meanwhile, having gone all in to support the government's furlough scheme last April, now lacks the additional "firepower" of the BoE.

Despite the success of the vaccination programme it seems likely there will still be some kind of third wave next autumn/winter, and the burden of this will be greatest on the FCA as the conduct regulator. The new FCA executive team has a largely wholesale background and it will need to get up to speed quickly on retail, which is much more complex than often assumed. A more independent line from HMT and a new regulatory approach may well be required.

FCA move on fincrime

It's too soon to say whether the FCA's decision to begin criminal proceedings for money laundering against NatWest marks a change of tack, but it is possible to provide some context, draw a couple of initial conclusions, and ask an early question.


Others will know better, but it's unusual for the regulator to bring criminal rather than civil cases - this is the first under MLR 2007, and very unusual to do so against a firm (as opposed to an individual). It also seems that the events in question took place before 2016, when Senior Managers and Certification Regime (SM&CR) came into force, so the fact no action is being taken against individuals is probably less significant than it might seem.

Initial conclusions

  • The FCA, like most regulators, has a subterranean appetite for losing high profile cases, so we should assume it believes it has a strong case
  • It would be a mistake to see this as an early example of financial crime becoming a bigger priority for new CEO Nikhil Rathi; the investigation began in 2017, and so the major decisions will almost certainly have been taken on Andrew Bailey's watch

Early question

Although large, the FCA's enforcement's resources are still finite and, given the processes and checks involved, relatively inflexible. So it's worth asking, given the scale of this case, if others have had to be paused or closed to free up the necessary resources?

The sector gap

One of the FCA's most contentious debates, internally, is around the risks to its objectives posed by the different sectors it regulates. The contention arises from both the complexity of the issues, and the range of opinions within the regulator. In the last few years, the FCA has produced a Sector Views document, ostensibly its own institutional view. The timing has varied, but in 2020 it was published on 18 February so it is arguably overdue. COVID-19 and/or the FCA's "Transformation" would be good justifications for pushing it back, but it's possible it may have had its day in its current form.

Conceived as part of the ill-fated 2014 strategy, Sector Views was an ambitious attempt to reach a single, market-centred, analysis that would drive the FCA's strategy and activities. However, it was a centralised process, run out of the policy area (Strategy & Competition), and was often seen by supervisors as only partially relevant to issues at firm level. Supervision sector teams grew in response, trying to provide alternative analysis; and supervision strategies gradually detached, becoming more independent.

Tension between policy and supervision is common in regulators, and the related difficulty in reaching a single institutional view was just as present in the FSA, and also exists in the Prudential Regulation Authority (PRA). But the FCA approach has been more extreme, explicitly downgrading the value of firm-based analysis. In bringing policy and supervision together, the FCA's "Transformation" looks to be seeking to bridge this split view of the world. The analytical quality and practical relevance of the next Sector Views, or whatever succeeds it, will be a barometer of the future FCA.

Brave new world of diversity

On the face of it, this week's two speeches, by the respective CEOs of the PRA and FCA, have little in common. Sam Woods (PRA) spoke about the future regulatory framework (FRF) post Brexit, and specifically the rule-making powers that HMT wants to delegate to regulators.

Meanwhile, Nikhil Rathi (FCA) alerted the industry to regulators' plans to push for greater diversity in firms, including the possibility of imposing new requirements. Yet they are linked because the alert would carry much less weight without the delegation of rule-making.

I've posted before about the FRF and how infeasible it would be for Parliament to devote sufficient time to financial regulation; so delegating authority to the regulators is by far the most realistic option. Another reason for delegation is that individual rules could become extraordinarily contentious politically. Within regulation, and in discussions with the industry, the case for greater diversity is relatively uncontroversial; how to get there is far harder. Translated into the political area, this could become a much more fraught debate.

Part of the focus around the FRF has rightly been on future accountability. In this regard, both speeches highlight some of the challenges of assessing regulatory performance; the PRA doesn't yet a have a resolution authority for insurers and could yet be left exposed, while the effectiveness of any requirements on diversity could only really be tested over the long term. Holding regulators properly accountable, whether to parliament or an independent authority, is really important but will rarely be easy.

Diversity challenges

Yesterday, this post was about the links between two speeches - Sam Woods' (PRA) on regulators' role post Brexit and Nikhil Rathi's (FCA) on the importance of diversity. Following on from the latter was another speech on diversity, this time by Georgina Philippou, who has moved from being the FCA's COO and is now its first Senior Adviser on the Public Sector Equality Duty (PSED). The creation of the role is a major step for the regulator but, as I suggested yesterday, she faces major challenges.

As an employer, the FCA's D&I record has some weaknesses, and the speech sets these out with impressive honesty. This is important in the broader context, as it would be much harder for the regulator to influence the industry if it put itself on a pedestal. But on a more cautionary note, the FSA/FCA has been working at this since the Equalities Act 2010, so it's not evident it has yet found a way to make sustainable progress.

Its role as a regulator and its PSED responsibilities raise different challenges. A portion of the speech is devoted to firm culture, but it has always proved easier to identify poor culture after a major compliance failure than to have the confidence to identify and tackle it in advance. And, in this area, it remains hard to spot when good policies aren't matched on the ground. Nikhil Rathi suggested there might be new requirements for firms on D&I, but there is, as yet, "no rule in (the FCA's) Handbook" on diversity, so it would be new territory. And while the FCA conducts equality impact assessments on new policy, it has often struggled to make them meaningful. There is much to do...