Financial services regulation hasn't stopped, even as the world was locked down. Gavin Stewart's been offering daily updates.
Every day since we were all quarantined at home, I've been keeping you updated on what's been happening in financial services regulation. Here are this week's updates:
FCA chair's speech (1): authorisation
Last week, in Charles Randell's most important speech since last June, the Financial Conduct Authority (FCA) Chair set out how he thinks the FCA needs to change for the post-pandemic world. This week I'll be covering its main themes.
Seeing authorisation as the 'gateway' to regulation isn't a new idea. The term has been in use since at least 2012, but there hasn't so far been the commitment to follow through on making it more 'rigorous'.
I've always been a supporter of such an approach but, in truth, little evidence has been gathered to show whether it's effective.
The two great waves of new authorisations have been mortgage & general insurance intermediaries in 2005 and consumer credit in 2014, but in both cases the regulator decided not to track systematically the performance of newly authorised firms. Consequently, there is a relative dearth of information to show if stricter authorisation works.
As there's only a steady trickle of new authorisations outside of these waves, I'm sceptical about any case that a new approach can significantly reduce the 60,000-firm problem any time soon.
There are also risks in the new 'use it or lose it' approach to specific permissions. A couple of years ago, when the Prudential Regulation Authority (PRA) looked at fast-growing firms(typically recently authorised), it was evident that new business models rarely survive contact with reality unscathed.
This is likely to be just as true for solo-regulated FCA firms and too rigid an approach to permissions could easily have unintended consequences. This enthusiasm for authorisation as a gateway is, of course, connected to the London Capital and Finance (LCF) report, which highlighted a series of weaknesses.
One reality, absent from the report, that needs confronting is that authorisations' pay scales ("job families") are pitched lower than for supervisors or policy people. Making the authorisations' gateway relatively more attractive as a specialisation will be part of any successful strategy.
FCA chair's speech (2): basics
By "basics", the FCA Chair means its "four priorities for basic consumer protection: safe and accessible payments; sustainable credit; clear and safe investment choices; and fair product terms, including price."
As the speech implies, these aren't new, and he highlights a recent review showing that some high-cost credit models are "indifferent" to a loan's affordability.
The twin challenges facing this type of tight focus have historically been:
1 the broad definitions of these priorities (ie, they can be read as not excluding much)
2 the intrusion of events
In 2002, almost 20 years ago now, the Financial Services Authority's (FSA) first proper (post FSMA) business plan contained a notorious 46 priorities. The remit was narrower then, but the great majority of these would have fallen into the 'investment choice' and 'product terms' priority boxes.
The language here is at a much-higher level, but within each of these 2021 basics there will be a range of potential initiatives and it's at this level that the real prioritisation will happen or not. The July business plan will be the first real insight into how tightly the 'new' FCA wants to focus its attention.
By the time that first business plan appeared, events had already intruded. The FSA had been damaged by the Equitable Life scandal, which broke in late 2000, and Independent Insurance had also failed. On a broader canvas, the dotcom bubble had burst and the 9/11 attack had taken place.
Much as the FSA leadership of the time would have liked to focus on its own priorities, these events dominated their attention and would define the regulator's history and reputation at least as much as its own priorities.
FCA chair's speech (3): outcomes
Outcomes first stepped into the limelight as a chapter in the FSA's 2000 coming out document, "A new regulator for the new millennium". For the next few years the regulator (and me) spent much time and effort defining outcomes and trying to track progress against them.
The approach was updated around 2006 and the National Audit Office (NAO) in its various reviews of the FSA - against the Hampton principles and after the failure of Northern Rock - recognised the work done while noting it had been partially successful at best. When the FCA was formed, its commitment to outcomes was less serious, but was still there in the rhetoric.
Charles Randell promises more information next month on the FCA's new approach to outcomes, and it's good that he recognises outcomes are hard to deliver. However, many of the core problems with defining and measuring outcomes may be insuperable in a regulatory context.
Three of the biggest are:
1 The influence of the macro-economy
Example: Ironically, due to the buoyant UK economy, the FSA's outcome measurement looked most positive in 2006, the year before the financial crisis broke
2 Finding metrics that work
Example: A lot of effort was spent trying to define outcomes and metrics for the treating customers fairly initiative of the mid-2000s, but we ended up with the Treating Customers Fairly (TCF) outcomes, which are really only process measures
3 The long-term nature of the effort required
Example: Outcomes for the Retail Distribution Review were defined in 2006, hew rules were implemented in 2012 and the first stage of the post implementation review was published in 2017
FCA chair's speech (4): reshaping regulation
This portion of the speech pivots back towards principles-based regulation and raises the prospect of obliging firms to some kind of duty of care. Further announcements are promised shortly.
The specific principle of business he cites is, of course, treating customers fairly (TCF), which has a long history in this space, going back to the birth of the FSA.
Principles in general, and TCF in particular, were very much a feature of mid-2000s regulation as the FSA tried to move away from a more rules-based approach, which the industry criticised as unduly 'tick box'.
That phase was ended abruptly by the financial crisis, but it had already become mired in controversy: around
- applying standards retrospectively
- questions around 'what good looks like'
- the reams of board MI firms ended up producing to try and demonstrate compliance
Each of these pitfalls should be avoidable, but the FCA will need skill to steer its course between them.
It will also be fascinating to see where the FCA comes out on duty of care. I've long thought that the increasing complexity (and in some case opacity) of financial products and services has made redundant our traditional understanding of caveat emptor.
The regulator's adherence to disclosure as a meaningful intervention, long after it became clear that it was unrealistic to expect consumers to read T&C, let alone understand them, also has much to answer for.
What the answer is, however, is far from obvious and the FCA's 'further announcements' will deserve forensic-level attention.
FCA chair's speech (5): reshaping the FCA
The final part of the speech, unsurprisingly, covers the FCA's own transformation programme and we're promised an update in July, when the annual report and next year's business plan are both published.
Relevant to this is the TSC Inquiry on the collapse of London Capital and Finance (LCF), which continued last week with evidence from John Glen (Econ Sec) and Kathryn Braddick (DG Financial Services). From this session, it's clear that LCF and the FCA's response to it remain deeply political.
The session began with an extensive exchange in which the minister refuses to signal his confidence in the FCA's chair, his reason being that it's not his role to do so.
This is correct, not least given the treasury's renewed emphasis on the operational independence of regulators, but it hasn't stopped previous ministers from freely offering their views, and as such, the exchange has a slightly jarring tone.
I may also be reading too much into it, but the wording at the end of Charles Randell's speech - "I have sought to play my part" - could be heard as slightly valedictory.
Much weight is evidently being placed on Nikhil Rathi's raft of new senior appointments and on measurement of outcomes. I've posted before about new executives not being an automatic silver bullet (no matter how capable), and a couple of days ago I covered some of the difficulties of outcome measurement -' what's the baseline?' is another obvious but difficult question.
Charles Randell is, therefore, right to be cautious in noting that his predecessors have talked confidently about a "new paradigm" without being able to deliver. July will be our first chance to assess whether this time is different.
To discuss these issues further, contact Gavin Stewart.