Gavin
I think there's also something about how it's paid for, so is it from savings elsewhere and reprioritization or is it going to lead to an increase in fees?
David
Does some of that resource get diverted to going after fund manager because then their ESG disclosures are a bit iffy. That's an interesting, prioritisation isn't it. The regulatory initiatives grid. So that was another publication bit later than we expected it so running a bit behind schedule so for those that don't know I think we're on a fourth iteration now, It's meant to be six monthly, isn't it a consolidation of all other regulatory initiatives that all of the UK's FS regulatory bodies, Bank of England, FCA, PRA, Pensions Regulator are pursuing, the most impactful developments in the right environment over the next year are going to be ESG related in fact we are properly looking at some interest rate rises in the very near future.
Gavin
I think there'll be a lot of steep learning curves if we do get proper and sustained inflation.
David
Hi, and welcome to the Grant Thornton Risk and Regulation Unravelled podcast. My name is David Morrey and I'm joined today by my colleague Gavin Stewart, say hi, Gavin.
Gavin
Hi there.
David
For our monthly review of the state of financial services regulation. For those of you that have been joining us for some time you'll know we spend a few minutes each month looking at the words and deeds of the regulator and some of the more interesting stories that might affect a regulated firms in the UK. Also, we try and be a bit forward looking and, forward looking is probably the focus for today because we're recording on November the 22nd and we now have courtesy of the HM Treasury, the Future Regulatory Framework Consultation? Yes, which we might talk about for quite a while, it’s finally landed. I think we got till next February to get our take by design and consultation feedback. Gavin, what's your take on the headlines, probably be quite a few things but what's your headline for the document?
Gavin
Much as expected, I think, no massive change from the discussion paper. The original, I think that the CBA stuff is probably the most significant change.
David
Yeah, I definitely wanted to talk about that. Yes, I think as expected one of the things it says is that fundamentally the UK's model for financial services regulation, as enshrined in FISMA is fit for purpose, is now free from unwanted meddling distortions from Europe and you know, fundamentally, that PRA, the FCA, the role they play in the regulatory terrafirma are not going to change.
Gavin
No, they're keeping that I mean FISMA is getting a bit of a sort of glowing rewrite. I
David
It’s an outstanding success Gavin.
Gavin
Yeah, I don't remember 20 years ago it having quite the kind of plaudits being thrown at it before a lot of the EU directives started kicking in, but you know, hey ho but we shall see.
David
Yes, if you read the document of the consultation, it might feel like it's the Holy Grail of global regulatory standards and that will be preserved, so Twin Peaks is still with us, stating the obvious, the objectives and principles of the regulators are unchanged, except?
Gavin
Well, except, so both will get a secondary objective on competitiveness and likewise I think a new principle on climate change and under NetZero economy to have regard to in the way they make their rules.
David
Yeah, and how's that going to work do you think? I always struggle with secondary objectives or secondary principles and quite how those implements overall rulemaking?
Gavin
So, I think there's a couple of things, certainly, you know, when I was there and involved in all this, there was quite a lot of checking of, you know, are we aligning ourselves with the principles of good regulation? How do we translate our activities across the four objectives? Clearly, competitiveness will come into that but quite how it does I think will be quite interesting. There's also I think, you know, we all know that there's a kind of extensive lobby outside that competitiveness should be really, really important. Post financial crisis that went away for a bit, it’s clearly now back and I think how the regulator's strike the balance on that will be really interesting. On the face of it the FCA may have more trouble than the PRA bag which has more, more kind of gravitas to fall back on, if you like in terms of central bank independence of what we're really here for but we'll see, you know, I think it's the beginning of the story, not the end.
David
Yeah, that was my reaction to it so you know, it could be a secondary objective which actually becomes more important than some of the other objectives depending on political accountability which is another area of the framework.
Gavin
Yes, that was a bit weird, I was expecting more on that, and it feels like they've just let the select committee pretty much carry on as it is.
David
Yes. I mean the accountability was at different levels and particularly if you're talking about parliamentary accountability then it's proposals around parliamentary accountability and then the Treasury Select Committee as a sort of pointy end of that is, you know, it's things like, notify them of any consultation that you're doing in response to our letters. I mean, there's no sense that the TSC or any parliamentary body is going to be beefed up to take a more active practical role in regulation, at least I'm not seeing that.
Gavin
Yes. If we were on camera, I'd be shrugging my shoulders at this point. Yeah, I think that's right and I think you know, the TRC works, you know, works well but I don't see that there's much enhanced accountability of the type we were promised and I think in the back of that there is a little bit of it does look like the Treasury, as such, has quite a lot more influence both directly and also I think just through the accumulation of different levers it has which I think enables it to exert quite a lot of influence potentially on the way the regulators behave and I think it will be interesting to see how that plays out but I think it's more Treasury than Parliament as such, the way I read it.
David
I would agree, I mean the TFC can be an entertaining watch at times but the reality is they tend to get involved with things, you know, when it's already become a story and it's in the headlines and so more proactively in terms of involvement in forward looking regulation and policy setting, or at least my perception is a lot less, Treasury's probably got more legals, I mean they can, for instance, commission an independent review of an area which feels a bit like sort of taking some of the policy setting out to the regulator and taking it into the HM Treasury. I know one of the things you were writing about the other day as well was just sort of the number of HMT alumni that are now sitting in quite senior roles in than the regulators and that, you know, they are kind of bluing potentially the distinction between these bodies,
Gavin
I think COVID did that as well, which we've talked about before, the way in which the regulators were effectively used as a as a mechanism of government, which I think was, you know, justified at the time, but you have to kind of unpick it at some point, I think the review of policy they track the Treasury's ability to require the regulator's to do one is quite interesting because the argument used is that firms don't use judicial review very often and so it's almost like, instead of that we'll have this but they then go on to say that we only use it once in a blue moon, you know we use it extremely rarely, that's what we envisage and so on and the two don't really fit together very well.
David
Well, no, you know, the first part the first part that statement it’s been suggested in some way that Treasury would be using it in a way that would be in the interests of regulated firms but, you know, I don't know why anyone would think that would actually be the case in practice. Yeah, so that's more or less all we can say about accountability I mean I think they're moving a couple of the advisory panels onto a statutory footing which may give them a bit more leverage. They know that there were advisory panels representing certain stakeholder groups that are meant to be consulted on emerging regulation, regulatory issues and theory, they may have more teeth, I'm looking at Gavin and he's not necessarily looking particularly positive on it.
Gavin
Yes, I mean the panels are interesting, so a lot depends on what their budget is, a lot depends on their membership and how that membership approaches it, both whether they develop collective positions, in which case are obviously more influential like consumer panel, the small business panel, voting panel, etc. Yeah, so sometimes you get individuals on the panel who have pet obsessions and sometimes you get more collective positions and then there's also how constructively the regulator responds to those and there are various tensions in it and how you make the process work well is a bit of a sort of, you know, secret recipe and more often I think they've worked less well. I don't think putting on a statutory basis necessarily makes a huge difference, but we'll see over time, I think the CBA stuff is more of a big deal.
David
So yeah, I tend to agree with that. So as avid readers of regulatory publications who are actually making up a rather jaundice listening group will know there should be a cost benefit analysis in terms of any new regulatory proposal tucked in the back which have evolved over the years and I you know, I guess we can take personal views on whether we think they're good or useful or not but the FRF, the future regulatory framework document suggests that a framework document should be published to explain how they should be done, how they're going to be done and then a panel formed to review and challenge.
Gavin
The question of whether that's pre or post publication which is obviously a call.
David
Okay, that's interesting. Why would you do it post publication.
Gavin
Well, ostensibly for it to be a quicker process so a pre-publication review will take longer and so the whole process will slow down as opposed to sort of a lessons learned but if we take a live example like the consumer duty so we're waiting for the second consultation before Christmas, which will promise we'll have a CPA, you could imagine a CPA independent panel taking quite a close interest in that but given all the feedback, so we'll wait and see but you know, these things potentially do matter quite a lot in terms of, you know, what does the policymaking engine look like and how does it really work?
David
Yeah, I mean so I'm with you in that it has the potential to be quite a significant change or quite a significant emphasis at the least in terms of how new policy proposals are reviewed and then fed into the sort of detailed rulemaking stage. A lot depends on how to use them, and the personalities involved but I think that is absolutely an area that will bear a lot of watching. No dramatic proposals around regulatory framework I didn't think I mean there's a concept of a designated activities regime to sort of allow a bit of a broadening around...
Gavin
Yeah, I mean, again, depending on how to use but I'm quite keen on the idea, I think the sense that there are activities that aren't, you know, core financial activities for regulated activities order, but nonetheless, they potentially have an impact on your objectives, is a really important one and if you go back to the crisis there's quite a lot of activity takes place around the regulatory perimeter, there's quite a lot of arbitrage and so on, so being able to kind of have a wider net I think there's a bit of constructive uncertainty that you create and the longer you control that and it's not too broad I think it's quite healthy and it creates a debate about what should and shouldn't be regulated and that degree, you know, how tight that regulation should be that I think we don't have enough of.
David
I wonder does it just rubber stamp the existence of a grey area that recognises there will be grey areas that will be changing in shape, probably over time and this is just a way of making sure that there are powers on the books to delve into those grey areas but I guess if you're undertaking those activities, usually there's a new layer of uncertainty, potentially, in terms of when and whether it gets pulled into supervisory activity. We shall see now, the consultation, I mentioned February to get responses back and then when they're talking about early to mid-2023 to get the legislation on the books that would flow from this.
Gavin
Yes, which I think assumes nothing significant gets in the way. I'm told that, you know, there should be no significant kind of Parliamentary holdups. 2000 and in 2012 both took quite a lot longer than originally envisaged so I'm personally a little bit sceptical, but we will see.
David
Okay, that's enough on the FR for now. I think there will be an unfolding story for 2023
Gavin
A Bill in 2022 actually.
David
Sorry, I lost track of which year I'm in, well if we’re not talking about the World Cup. we'll be talking about the FRS. Other developments in the month, I suppose before we segue from the future regulatory framework as you know, the FCA produces annual what was now an annual perimeter review, recognise some of the changes that have happened from previous firms that are vital ,BTL was being pulled into buy now pay later, I should get my terminology, right, being pulled into the regulatory perimeter, etc. and a few proposals included within it, including things like extending the senior managers regime to the money payment services, providers, which seems logical one would...
Gavin
That was, I mean, you could argue whether it's logical or not, that was a strange one for me, both because I guess it's another extension of the senior managers regime which was originally designed back in 2013, defects, you know, some of the problems in the financial crisis and now we're saying it's a new money thing and those problems, by the way, were kind of, you know, at the time were seen as largely to do with major clearing banks...
David
Absolutely it was the SMR regime for banks.
Gavin
So, as you say it's come a long way and I think the other thing is, I suppose I struggled that it's one of the biggest priorities to do with the perimeter, it doesn't strike me as that big a deal given you've got things like crypto which look much more significant in terms of the, you know, FCAs objectives.
David
Yes, to that extent it was a relatively unambitious I guess a take on perimeter review
Gavin
Because the FC had been going on about how finance was un-supervisable, so I was expecting to see much more about, you know, how do we do this, and they've also just issued in September their consumer investment strategy. And again, a big part of that is what do we do with high-risk investments, but we don't have the powers through Finn proms, and you know, it's crypto now a particularly younger generation and it felt like I mean, it's sort of talked about in the paper but it's not flagged like this is the next big thing.
David
No, this has cropped up a few times this idea that, you know, the way social media was used to advertise and promote, you know and to the extent to which their powers might fall short of where they would like them to be to go through to deal with that so that was definitely talked about but yeah, again, I'm not sure it translates to...
Gavin
By the way, I see that crypto exchange has now bought advertising and naming rights for the Staples Centre in Los Angeles.
David
Oh, right ok.
Gavin
So, I'm waiting for you know, the next crypto exchange to be all over the Premier League.
David
Oh, yeah, it’s only a matter of time.
Gavin
Which would, you know, put the FCAs advertising budget a bit in the shade.
David
That's true, that's something to look forward to. Okay, so there was a perimeter review, not to be life changing, potentially more so we had the COP 26. It will take a while to get up to speed, the FCA rolled out its ESG strategy.
Gavin
Indeed.
David
Sorry I wrote this down because it has come up with five themes, transparency, trust, tools, transition and team and I think that's quite impressive actually to come up with five workstreams that all start with the letter T, congratulations to the regulator for coming up with that, highly useful.
Gavin
There is this thing about the Government currently having three-word strategies, isn't there.
David
Yeah, well they've come up with five so they're completely blowing their mission. What's your take on it, I mean there's quite a bit in there, you know talking about international collaboration and there is clearly, I'm really kind of waking up to this is clearly an agglomeration of international regulators and other bodies developing and working together to develop new standards. So, this is the international dimension there's a shot or two and fund management industry and their need to do a better job around ESG and certainly justifying and evidencing whether the ESG are famous at delivering the things they claim. More disclosures, consumer disclosures and also a new division within the FCA, a whole new division called the ESG division. Have do you think that last one's going to work out? It's not clear to me what it necessarily will do or what its powers will be. Have you got a view on what it says for a critical success?
Gavin
So, by itself it only tells you so much clearly so what you don't know are things like, you know, what really is its resourcing kind of make its own policy, is it taking activities from other divisions where they currently sit or is it focusing on new activities that the FCA doesn't yet do but will start. I think there's also something about how it's paid for, so is it from savings elsewhere and reprioritization or is it going to lead to an increase in fees? Both have pros and cons and I think there will be something about you create a new division in the middle of the existing organisation, how does it join up with the rest of it., so when that's happened in the past the FSA when it was formed created a consumer division which is meant to, right we're going to do all this consumer stuff but it really struggled to connect with, let's say, supervision as an example and persuade supervisors that actually they needed to talk about consumers more when they talk to firms and also actually train them in terms of how they should do that and what they should focus on. They also tried the same with financial crime a few years later and pulled all the financial crime stuff into one place and again that had a pretty mixed result. So, we'll see. I think more broadly the international stuff and the analysis that the FCA and the Bank of England PRA are doing together should be quite successful and influential. Obviously, things can go wrong, but they definitely have the capacity and the track record to do that. I'm a bit more dubious about the fund management stuff, partly because I think it will take a lot of work to create a level playing field that you're then raising the standard on things like disclosure across the board and persuading the industry that actually the whole thing is coming up in a fair and equitable way and you know, fund management traditionally hasn't been a well-resourced part of supervision so that will need to change, I think. I'm not sure where the resource comes from which takes me back to the earlier question.
David
I know, it's interesting, isn't it? So, you know a resource constrained regulator where I am for instance, you know, taking enforcement action against an organisation that's caused real customer detriment is hit and miss in terms of having the bandwidth to be able to pursue that kind of thing. Does some of that resource get diverted to going after fund manager because then their ESG disclosures are a bit iffy. That's an interesting prioritisation chord, isn't it?
Gavin
Yes. You know, we're still really, in some ways waiting for our first big SMCR case five years later, so yeah, we'll see.
David
Okay. Interesting times, the ESG featured the regulatory initiatives grid so that was another publication bit later than we expected it so running a bit behind schedule so for those that don't know, I think we're on the fourth iteration now, it’s meant to be six monthly, isn't it? A consolidation of all of the regulatory initiatives that all of the UKs FS regulatory bodies, Bank of England, FCA, PRA, Pensions Regulator are pursing, it's a very useful read because it essentially sets out the complete universe of regulatory change and the timescales also sets the prioritisation stakes of prioritisation. What can we say about this one? Well, there's now 11 ESG initiatives on there and three of them I knew, I mean, yeah, actually, to that point the number of initiatives just doing a straight count is up to 134 from 128. There are 24 new initiatives this time around.
Gavin
This is my very quick count.
David
Yeah, so anyone listening to podcasts is more than welcome to check, Gavin's maths and send us an email so we can make fun of him next time. So, 24 new and actually 33 of the existing ones have been delayed or something fishy...
Gavin
Their timing has been updated.
David
Updated in the same direction.
Gavin
Indeed, I don't think any of them have ever been brought forward.
David
Yeah, so some of the absolutely biggest things, the LIBOR transition in the new investment professionals they are still happening on schedule but quite a lot has been delayed somewhat. So, anyone expecting a quieter or lower regulatory change burden based on those numbers at least are going to be disappointed.
Gavin
I think so, I mean, we've, you know, so I think if you think about the FRF we've just been talking about and you fast forward three or four years, I think it would be interesting to see what that number looks like, then. We've talked since the start of COVID and since the grid first came in about the likelihood of dates moving to the right and I think that's still you know, 33 being, you know, being updated, I think tells that story so we'll see, I think the other big thing for me was the impact assessments look, to be honest, a bit haphazard, there's high, medium, low and there's uncertain or whatever and I think it would be good to know how they come to those judgments.
David
Yeah, so the new ones this time around are the sustainability disclosures, requirements and the second is the NetZero transition plans, just bring up the headline names there both of which will happen in 2022, both of which are high impact and there are other ESG ones so yeah, a case could be made that actually the most impactful developments in the environment over the next year are going to be ESG related if that plays out.
Gavin
There's a lot of milestones in there, it would be really interesting to see, you know, challenge for the new division.
David
Yes. We've got new ESG division, are we going to get an energy security division at some point?
Gavin
That's probably more interesting, I hadn't thought of that, but I think there is something about the extent to which we can talk about this another time, maybe, the extent to which some of those types of developments in the real economy flip across into financial services and you know, the financialization of the way the economy works generally.
David
Yes. I mean, it's an extreme case of what's different in my case but yeah, we obviously saw the extent to which, you know, regulatory decisions were made in the light of the COVID pandemic and lockdowns, you know, I wonder if there are any energy security issues in the short term, whether that's will somehow manifests itself in direct regulatory action, kind of encourage the investment managers to invest in energy generation capability as much as the ESG disclosure but we shall see, sufficed to say is that, you know, if you if you if you compare the regulatory initiatives of today with the one that was only two years ago, then there's a substantial amount of new material in there a lot of ESG, not all, that shows how the regulatory agenda is changing. Let's park that for now. One thing I wanted to raise on this podcast was the Treasury Select Committee is written asking some fairly probing questions of the FSA in relation to a conviction of NatWest relating to some money laundering charges going back quite some time and those who don't know that NatWest pleaded guilty, so you know, it was a slam dunk in terms of the court case but the TSC is asking the FCA some rather pointed questions about why it was taking so long? Why have they just prosecuted the bank and not individuals? How do they work with some of the other agencies that would have had an interest in a case like this, like the National Crime Agency? Yeah, I don't know, what was your view of that? You think there's anything...
Gavin
Well, I suppose I saw it mainly in the context of the future framework and the TSC trying to expand its role so I think writing at this sort of timing and with such specific questions, I don't remember happening very often but I'm assuming now it will happen more often in the future and it might, you know, it's potentially quite interesting in terms of getting a much more real time understanding of how the regulator operates and what it takes into consideration in high profile situations. Wait and see the FCA has kind of pushed it back until the Courts sort of decided on the fine and suddenly we next month, but it would be interesting to see what sort of detail it comes back with and whether this becomes a bit of a precedent.
David
Yes, yes, I can see that it might be although going back to our earlier reference about the extent to which the TSC have got bandwidth to do this very often which might be problematic if they do want to make this a regular occurrence. We are probably looking at some interest rate rises in the very near future. All of the lead indicators, not to mention the kind of speeches that central bankers are making kind of point to that. Do you think the regulators are well positioned to understand the impact of rising interest rates, I'm not I'm not a prognosticator on economics, do they know how long this period might last, how high they might go, etc? I don't know. Although certainly some scenarios could be quite painful.
Gavin
So, yes, in some respects, no, in others, I mean it's interesting that a year ago they were consulting on the possibility of negative interest rates so the world does change, and I think they'll have quite a lot of insight from that on the operational ability of the industry to make the changes and the likely impact they would have so that's all great. It's an awful long time though since we've had any meaningful inflation, I mean you're probably going back to the early mid 90s so there's no experience to speak of in the PRA or the FCA there'll be a few people but not, Andrew Bailey was around but it's that sort of thing, so I think there'll be a lot of steep learning curves if we do get proper and sustained inflation.
David
Yeah. Yeah. It has implications for something we've talked about in the past around banking competition and they kind of, the ongoing, almost rhetoric sometimes about you know, we need more competition in banking but the actual realities of making it happen seem to be challenging. You know, when push comes to shove it's difficult to break up the big banks, it's difficult to get consolidation going even within the smaller players, scale, etc. Yeah, I mean the interest rate environment, in theory might make that easier to achieve if the banks are making more money. Are they still allowed to make money, I'm not sure?
Gavin
I think they are I don't think it will make much difference that I mean, that's a long story, I was just struck by a couple of articles about starting with, I think Carlisle pulling out of potential investment in Metro Metro and I suppose the gap between rhetoric and reality in terms of competition in the banking market in particular and how that's been the case for over 20 years.
David
Yeah, one was the Cruickshank report.
Gavin
2000, I think.
David
So, it's been, you know, a bit of blue-ribbon kind of focus on this but yeah, it just seems the actual meaningful deals, transactions or launches is hard to achieve, I mean, you know, you look at JP Morgan are not exactly a challenger bank are going to probably make the biggest impact on the retail banking sector in the UK over the next few years.
Gavin
I mean, post COVID, you know, the large incumbents seem even more kind of cemented in their position and also, actually, they've adapted very successfully to digitization, and you know, the supposed threat of FinTech and so on over the last 10 years so, you know, it still feels like consolidation to me if I'm honest.
David
Yeah, I think we maybe stop talking about banking competition for a while until evidence suggests it's actually going to be you know, a thing certainly in terms of sort of the challenge of space. The last sort of item I was going to end on today in terms of sort of news roundup would be the CFCOs new Head of Data gave speech, some fairly optimistic sounding statements about what data is going to be done. I know you had a bit of a retrospective blog on what was being said in the kind history there. Yeah, are you were optimistic that this transformation and it is a key part of the transformation programme that the FCA are hanging their hat on is to move to a data led regulation.
Gavin
So, I think long term I am optimistic about data led regulation, I'm a bit worried that we talk about it as though you just flick a switch, and it happens. The problems that have been in the past without going into the details are around things like how do you calibrate your systems to pick up the right things, you know, the important ones, but not overwhelmed it with being too sensitive and so on, then what do you do? How do you triage? Likewise, who really leads the analysis? Is it led by data scientists? Or is it led by the supervisors with some help? And that has always been a struggle and I think it also potentially raises some questions about judgement based regulation which we talked about a lot for the last 10 years or so but actually, if you start using data properly you will, I think, inevitably narrow down the space where you are taking those judgments and I think that's quite a challenge to how we perceive good regulation, or we seem to perceive good regulation at the moment where there's a real human element to deciding what's important and how you approach it.
David
Yeah, well you know the firm's we work with our clients more often than not you know, thrilled to be able to actually talk to the regulators and have some human interaction and be able to frankly talk to a human whose got a chance to understand their business model so, you know, if the role of data scientist is going to be a significant one, maybe that some of those personal interactions although already relatively limited become even more so, only time will tell.
So, I'm going to wrap our podcast there and I will say to everyone listening, thank you for joining, I will direct you to Grant Thornton's financial services web pages where there's a lot of information around regulatory change and focus areas and our regulatory handbook, I think it does a great job of summarising, you know, most of the major impacts on our industry in the forthcoming year. We will be back in December where we will be doing a review of the year podcast, things like you know, why do my suits no longer fit me and other essential matters that have played out in during 2021, I hope you'll be able to join us then this podcast will be available as will that one on all of the major podcasting platforms. Gavin, I would like to say thank you very much and I'll see you next month.
Gavin
See you next month.