In an ever-evolving world, financial services regulation is adapting to changing circumstances. As global events continue to take their toll, Gavin Stewart has been blogging daily to keep you updated.
This week's posts covered OpRes, Archegoes, inflation and yet another update on the Financial Conduct Authority (FCA). Contact Gavin Stewart to learn more about any of these issues.
Is OpRes firm-by-firm or systemic?
There is a lot of valuable material in this speech by Lyndon Nelson on operational resilience - including historical context, regulatory cooperation, the international landscape, principles vs rules, the limitations of the regulatory toolkit, and the recognition that the March 2022 deadline is effectively a staging post.
Today, however, I'm going to focus on just two aspects:
1 the emerging approach to the Cloud
2 the potential stance of the Financial Policy Committee (FPC).
On the Cloud, the Prudential Regulation Authority (PRA), sensibly I think, wants to look before it leaps, encouraging experiments in collective approaches, such as pooled audits. More than most fields of regulation, operational resilience is shaping up to be a joint endeavour between regulators and firms.
This is due as much to the depth of shared interest, as it is to the limited role regulators are able to play by themselves. And, looking ahead to the Future Regulatory Framework (FRF), it may come to be seen as a template for genuine consultation, though this is clearly in the eye of the beholder.
Turning finally to the role of the FPC, I was struck by the statement, in relation to impact tolerances that, "if the FPC determines a tolerance on payments, it is reasonable that we will take an end-to-end approach."
It goes without saying that the FPC will inevitably express a tolerance on payments, that - end-to-end - will establish a collective standard that participating firms will need to meet. This has always been implicit, but I've not seen it put so plainly before.
OpRes starts off as a challenge for individual firms, but ultimately it's a systemic one.
Archegos and the perimeter
As the fallout from the Archegos scandal rolls on, it's worth taking a step back to look at the wider implications. I've already posted about how it echoes elements of the financial crisis, both around risk management and the ringfencing debate, but it also more than touches on longstanding issues involving the regulatory perimeter.
The Gloster review that was so critical of the FCA's supervision of London Capital & Finance (LCF) was keen that the regulator should spend more time and resource monitoring risks outside of the perimeter; but it was silent on where the FCA should be doing less, a problem regulators will always struggle to answer.
Archegos, Greensill and Wirecard, are all great examples of the importance of perimeter risks, but also of the difficulties involved. Archegos is a family office, explicitly outside the perimeter, while the others are lightly regulated UK entities that are part of larger international groups; Greensill was only regulated in the UK for anti-money laundering, Wirecard as an e-money provider.
Perhaps data and AI will ultimately provide the solution to the FCA's needles in haystacks problem, though it's unlikely to do so without considerable investment, which seems unlikely. And the perimeter itself is notoriously complicated, adding another dimension of difficulty.
A partial, but short-term, answer might lie in a combination of:
(1) more activist enforcement around the perimeter, accepting this will often be after the event
(2) greater use of existing powers to request data from unregulated entities.
However, both would still require shifts in our regulators' mindset.
Inflation and regulation
Over the last few days, publication of the FPC minutes has shown a split in the committee over the speed and extent of the UK's COVID-19 recovery and the likely implications for inflation. And ONS data has revealed the resilience of the UK's economy during the Q1 lockdown.
From a regulator's perspective, the two important points here are the continuing uncertainty about the pace and shape of the recovery (which I've posted about previously), and the risk of significantly higher inflation (which I haven't).
The last time UK interest rates were 2% or over was in the first few days of 2009 and they've been below 1% since March that year. Since then, a combination of economic factors and QE has kept them low, and only six months ago, the PRA was consulting firms on their operational ability to deal with negative rates. That possibility now seems a way off, but some of the same issues around operational ability might also apply to significant increases in rates.
Changes in interest rates will also have a significant impact on the conduct issues firms will have to grapple with, an obvious past instance being interest rate hedging swaps (IHRP), which firms ended up mis-selling, partly because they didn't take sufficient account of changes in interest rates.
Were rates to rise sharply, the FCA's agenda would be forced to shift abruptly and mortgage regulation (as an obvious example) would automatically become more of a priority. However, given the wider uncertainties, it's much less clear that any of its current priorities would become less so.
FCA in the TSC firing line
Nikhil Rathi's honeymoon period as the FCA's CEO ended yesterday. At less than nine months, it's been shorter than most.
His appearance at the TSC, alongside Charles Randell (Chair) was dominated by Greensill, but also took in a raft of other issues. This included Business Interruption (BI) insurance, the mortgage market post-Grenfell, mortgage prisoners, loyalty penalties, mutuals and British Steel pensioners.
During his appearance, the FCA faced heavy criticism on Greensill, including whether it had been "inept" and asking why it always arrived late on the scene. There was also a suggestion that one answer, on British Steel pensioners, was "shamefaced".
Some of the criticism is fair, although in many cases the major errors pre-date the current FCA leadership, and some of these are shared with parliament. The pension issue, for example, originated with the surprise pension freedoms' announcement in the 2014 Budget, which in turn, triggered the FCA into too-rapid policy formulation.
All that said, and accepting the complexity of the resulting issues, the regulator acknowledged during the session that it still hasn't worked its way fully through the problem.
Less fair was the criticism over Greensill, the majority of whose activities were firmly outside the regulatory perimeter. Even if the FCA was to take a keener interest in what happens beyond its legal remit, which I've always believed it should, it's a stretch to lay Greensill at its door.
At one point, the FCA's CEO was asked of the regulator was "overstretched". He said it wasn't, but at the very least, there's an increasingly pressing need for parliament and the FCA to agree where the regulator's responsibilities begin and where they end.
Regulating access to cash
Access to cash and bank branch closures, its close relation, have a long history with regulation. Shortly after joining the Bank of England in 1989, following a swathe of branch closures, I remember a senior bank official explaining, with evident approval, that banks had consciously walked away from their "societal" role in the mid 80s.
Subsequently, there have been further waves of branch closures - driven my market changes, technological advance, commercial pressures and sector consolidation; and regulators, often uncertain of their role and authority, have continued to stand back.
When the FCA was formed in 2013, there was considerable debate over how it should interpret the new statutory obligation to "have regard to" access. Despite the evident connection with vulnerable consumer and one of those waves of branch closures, it decided to rely on competition and to remain largely neutral on branch closures.
Since then, concern has grown (including at the regulator), especially since the Access to Cash Interim Report at the end of 2018 and again during the pandemic. And the FCA has been changing its stance, most clearly in yesterday's speech by Sheldon Mills (FCA) and the parallel joint statement by the FCA and PSR.
However, I suspect it may be too late; digitisation has moved too far and fast and banks' operating models increasingly reflect this reality. Access to cash has been growing as an issue for a generation or more, and will become more acute in future.
While there seems to be the prospect of legislation, its scope and timing are uncertain. In its absence, it's hard to imagine the FCA's actions, including its "expectations of firms", will be sufficient to protect access for the vulnerable.