Hello and welcome to Grant Thornton Financial Services latest regulatory update.
Well podcast, I was about to say webinar because Gavin Stewart and I have been performing this exercise as a webinar for as long as Coronavirus has been a thing, as previous listeners will know we indicated we were going to be moving to a podcast format. Gavin “say hello”.
“Hi”, here we are, this is the first podcast and we got together again never to be parted in real life in Grant Thornton's offices here in central London.
For those that haven't joined before Gavin and I both work in Grant Thornton's regulatory advice practice. My name is David Morrey by the way and each month we get together to chat through the developments in the regulatory environment over the previous month, very much driven by what the regulator's PRA, Bank of England, Financial Conduct Authority have been up to.
The timing of this podcast is just after the Financial Conduct Authority issued their annual Business Plan. It landed in our terms yesterday. I know the podcast will probably take a few days before it gets onto the site but the intention for today's session is to give our initial reactions to the Business Plan. The first Business Plan under Nikhil Rathi’s leadership. Obviously, that shows through in several ways for instance the page orientation has changed from the last plan, and you've got a new CEO. When you see that kind of thing happening. Gavin, I know you've been asked by a few people now including something in the media, your headline reaction to this plan in terms of the vision it is setting out for the Financial Conduct Authority.
So, there is a lot of ambitious language in there. The key thing I always look for is how is how is this going to be paid for and resourced and the budget has gone up 4%, which on some levels is quite generous. But you have an organisation that is probably 70% staff costs so there is wage inflation in there. They are talking about a three year £120m data strategy and lots of other new things. So, on the face of it they are going to have to be doing a lot of things a bit less of quiet, a lot of stuff. But it is not clear what that is, and I think the other thing was, I know we are going to talk about later and I think Nikhil Rathi repeated this at least three times in his speech about testing the FCA, powers to its limits, willingness to take greater legal risk and obviously that is going to carry some risk of its own.
Yes, risk of its own and potential cost. There are a few elements which will cost real money and then you mentioned the £120m data transformation, it's £40m a year, so £20m over three years, yes, let's call it £40m a year out of a budget of £600m or so which, as you say, is only increased slightly so the Business Plan doesn't say what's going to be scaled.
And you have other increased costs so the PRA budget also went up 4% which gives your idea and they cited inflation post Brexit because you have more direct supervision of firms because you can't rely on EU supervisors, operational resilience, cyber and so on. So, there are concrete things that will cost more money anyway and on top of that the FCA wants to do a whole lot of different stuff.
Let's just talk about it a little bit maybe about the structure of the Business Plan. Only in the sense to draw a line between what Business Plans have certainly under the previous leadership included and this one, how this one differs, because you are right, there are some very big messages and very interesting pointers as to the direction of the Financial Conduct Authority in it, but what's not in it? Well, it's a shorter document than previously and what's not in it compared to previous plans are, for instance, sort of a detailed review what they have done in the last year.
There are references clearly, but then you would expect more of an annual report but obviously it was just published the same day. Yes, the follow on there is clearly some kind of clean break.
Yes, that they would like to indicate an exemption, so we don't get a sense, as we have in some business plans. The past here is a review of last year, here’s how we spent your money. We also don't get down into the sort of the sector focus pages of the Plan, you won't get what you would have seen in the past potentially which was essentially an agenda with thematic reviews, supervisory exercises, consultation papers that can be expected. So that's sort of quite granular, setting out of activities isn't present, we've got high level themes and objectives they must be seen to achieve in those sectors.
So, I think there are a few things going on. One is the pandemic, frankly I think we should give the FCA a bit of a pass on that account because clearly, they have been pre-occupied with all that stuff that we would expect them to be doing. So, it won't have been as thorough a planning process as it would be normally and I think the FCA board minutes from a few months ago talked about this, one being a sort of transitional plan. I think they are trying to do a much more, baseline build-up of activities, what are we going to do for next year. But having said all that, I think there is a sort of stepping away from the detailed commitments that you might have seen in previous years.
I mean I remember working on this back in the early 2000s and there was quite a lot of emphasis on accountability for how the fees we were raising from regulated firms were being spent and almost a kind of a line for line attempt to justify in the annual report, what you had said you were going to do in the Business Plan and that kind of accountability and transparency stuff seems quite weak. I think if I was looking forward and writing next year's annual report, I think I'd struggle to say, “well actually what did we really commit to in the Business Plan”?
Yes, and to do that I don't think we will spend much time in this podcast talking about that sort of sector specific sections, because if you look at the wholesale markets, one, you will see the objective being restated if they had ever been felt to undertake activity to prevent market abuse, reduce financial crime, in respective you know wholesale firm, I mean there are things detailed.
I think there are things we know about. So, we do not have generally the Regulatory Initiatives Grid, I kind of read the handbook and talked about all that so we have good regulatory initiative, which does have layout, you know, various things with a timetable, initiatives, new bits of regulation that are coming in and so on. So, there are things like LIBOR and so on that we know are coming down the line and Basel III etc. But like you say we will do a piece of thematic work on this aspect of potential mis-selling in whatever sector. That's not there.
Yes, and then the Regulatory Initiatives Grid, I'm sure most of our listeners think that is incredibly useful and is a big step forward and that is a real plus. I think there is no reason to replicate that in the Business Plan, historically, we would also have seen sort of the non-big ticket supervisory themes, activities that were going to be pursued.
And there used to be spreadsheets that scheduled those and there used to be quite a lot of negotiation over what was in those and which quarter they were done in because in an attempt not to overburden particular firms or particular sectors with a view to all that then going into the Business Plan.
Interesting. I mean it's not to say that that thinking isn't still there it is just no longer being spelled out in quite the way it was said. But that means that is kind of what is not in the Business Plan.
Let's focus on what is in the Business Plan. The really interesting parts are, I think, that the high-level messaging in the direction of travel, statements of intent, simple, however, you want to spin it and there's a few to pick through.
Testing limits has got to be the one we start with of those in the group because if anyone's looked at the Business Plan, the FCA has set out quite clearly that in order to get things done to deal with harm that they perceive this is happening. They wish to test the limits of their powers in the regulatory perimeter to deal with those harms and we talked about this in a previous webinar but then we have seen in the FCA board minutes relatively recently this expression that the organisation should be willing to take a more legal risk, which is consistent with the testing limits, so that was interesting seeing the document. I know Nikhil Rathi’s speech in announcing the Business Plan that was referenced multiple times, so this is clearly a significant change they are trying to signal.
Yes, I think it will be fascinating to see how far it goes. So, the sea change in the FCA is the FSA’s enforcement took place back in 2005/2006 with the Legal and General case which they had partially lost, but mostly it won and that triggered the Strachan Review, which put in place lots of checks and balances and transparency around time enforcement that would happen in the future. And that by and large has kept the FSA and then the FCA on the right side of subsequent judgments? There's undoubtedly questions over “Do you take the most important cases”? “Do you take the most egregious cases”? Because there might be a greater risk of losing because you don't have all the things that would make it a slam dunk?
But by and large that there is that, in parallel, there has been a greater willingness to take more individual cases and obviously they tend to be more litigious because people are fighting for their careers, so they tend not to settle, and certainly not settle early. And then in 2017, the FCA Mark Stewart said he was going to open more cases and I think they now have a very, I think, clogged is probably not the term, but a sort of clogged pipeline of self-enforcement cases. So, if you are talking about taking more legal risk, I think that must mean things are more likely to be contested. You run a decent chance of having longer and more expensive cases and obviously, if you start losing a few of them, yes, it's much easier to say we have an appetite, but we are not going to win them all when it happens in practice. Unless something has changed dramatically since I was there, it is a really big deal internally.
And then Nikhil Rathi, in his introduction to the Business Plan references - this is literally the opening paragraph, I think that within a day or two of him walking into the building, the business interruption court case was launched.
I think that was a good judgement because he arrived last October. They may have launched it.
Sorry, no you are right, well, I will have to check, we are going to have a disagreement now, we will check back to the phrasing. Okay so this is clearly a case or an example of testing the limits of the law in this area and winning, winning big,
Although interestingly they put it in the context of “we just want to clarify what the position is”, but then obviously, once you are in court you are arguing one side that it will be interesting to see what the headlines would have been if the FCA had lost as it is they wanted and I think we are all in as you know a clear position about what the law says.
So, on one level, I heartily support what the FCA is doing, because we will get things done in a way probably that hasn't happened in the past. I think there are genuinely points that would benefit from being pushed and clarified to the benefit of everyone's understanding. However, I think it does change the dial for regulated firms. You mentioned individual enforcement cases tend to go forward every step of the way regardless because some person is probably losing their livelihood but for firms most regulated firms it seen you are a long, long way, in your own line usually from feeling you should open a court case against the regulator to challenge their decision.
No, you settle early and take 20% discount.
Exactly, however, if you are the regulator saying no, we are pushing the limits, we are testing the boundaries then does that not move that dial a bit? Does it not say to regulated firms well actually the regulator draws its statute, there are sensible legal questions that need to be determined here. I think you are right. I think in some cases they won't in some scenarios, they will get into some quite interesting and long running and expensive cases, if regulated firms push back and if they lose those cases, what that does to the strategy we'll see.
On a slight tangent but an interesting one, and I don't think it has been heavily reported, but last week, the Upper Tribunal handed a decision down in the case of Stuart Forsyth. This is an impersonal enforcement case. Stuart Forsyth had been banned; I remember seeing the notice in 2018 I think it was made. It was a small insurer, the facts were he was accused of diverting some of his salary to his wife, who was also working for the organisation paying her more than the work was worth, in order to reduce his own tax bill, he was also accused of fabricating documents that suggested the Board had approved all of this. Yes, this is a serious case. So, on the facts they slam dunk. The Upper Tribunal last week found the PRA and FCA say he was banned and fined by both BI and FCA because it is an insurance company. The Upper Tribunal found on the facts there was not insufficient evidence and strongly worded insufficient evidence to support findings of fact on any of those points and that he should be completely exonerated. I know the PRA has already apologised. The FCA will have to issue a statement at some point. But I just mean it's a small individual case, however as you mentioned it losing cases brought that to mind.
There is clearly reputational damage over something like that for a regulator and so you know that is why the checks and balances are in place internally which slows down cases but hopefully this eliminates the chances of something like that happening but clearly not quite even now. We will see but I think there is a real challenge for the FCA to be more efficient in how it prosecutes the enforcement of cases that are worth prosecuting but actually getting it right all the time or nearly all the time, it’s difficult.
In one of the tweaks, it was mentioned in a Business Plan, although we haven't got details, it appears to suggest that the FCA Executive will have more authority to make decisions relating to enforcement and bands and other measures, moving the balance basically away from the board or I should say the Regulatory Decisions Committee, which is a Sub-Committee of the Board and moving that back. We haven’t got a lot of details. I don't think we have details anyway of exactly what that means but the implication is, decisions will be easier to make.
There is a transparency and accountability issue around all of this because you've got a regulator who has significant powers, you know, can take cases on the basis it can raise fees, taxes from regulated firms and so on. So, there is clearly a high hurdle of responsibility it has to satisfy in terms of all of this stuff. We will see, it will be quite interesting to see how the whole accountability debate runs through the Government's future regulatory framework, proposals and so on. But you know, accountability and transparency are clearly going to become a bigger issue over the next couple of years.
Yes, you are right, tying the wider strategy. So yes, to whom is the FCA going to be accountable and to what degree, time will tell. Another big theme related in some ways to the sort of testing the limits discussion we just had, but his concept that the data will be used to make the regulator much more rapid and responsive. As you said, under £20 million being added over three years to transform data. Yes, it will transform it, FCA generally has £40 million I think for data, several £10s of millions at least so I am not sure how much we could sell. This is clearly the plan that has just been tried in other speeches as well. I am not sure how much we can say by way of detail because it's just a thing. It's just the thing that's going to happen again.
I think it’s inevitable and I think it's a positive move for the FCA to become more data focused data led interestingly, Nikhil Rathi said in his speech that they were now as much a data regulator as a financial regulator, and I think that is an interesting statement. We will have to see how that pans out. The only other thing I would say is that I think that the assumption that having more data will enable the FCA to make clearer decisions and to intervene earlier, I think, needs a bit of a caveat. My experience of having more data is that it becomes harder to sift through and work out exactly what you rely on and also doesn't necessarily make it easier to intervene earlier because you are always waiting for something else. You are also going to see more things, you will have more leads, you'll uncover more stuff, but some of it will be red herrings and you have more of a kind of decision to make about what you follow and what you don't, so it doesn't solve all the problems. No path is no panacea.
I think the Business Plan tempers the messaging, I don't think it implies that we are going to see a difference immediately, it is a long-term game, and it must happen because that's the way the world is moving but doing it successfully.
I think putting all this data in the cloud, having a data lake that in theory you can search and sift and assess stuff has always been a problem where you have systems that don't talk to each other, so cross- referencing data in different systems has always been a nightmare.
Yes, and this will include the new technology to scrape data from websites, read unstructured text email,
Which is what you would expect the modern regulator to do so I think that is all positive, but I don't think it is necessarily an easy road.
I suppose sign off on the data by saying that hanging their hat on it in a major, major way. So, to say it's a programme that has to be taken seriously and from their point of view, it must show results, is it a safe statement to make? So, it won't be the last time we are talking about it, in other words, so other sort of high-level changes I set out. I mean, they kind of pick out raising the bar and authorizations is the way I would describe it, but you make it harder for firms to become authorised, or at least ensuring that they are appropriate. Before they do so. I'm focusing energies on them during that period just afterwards, about authorization.
So, there was a commitment to hire 100 extra people which again, we can put in our kind of “where we spend money” column, there's not a lot in “what are we spending less on”?
There's nothing and so there's that authorization?
I have always been a fan of authorizations and I think the regulator should have used it more over the years but there has always been even a certain amount of resistance. But certainly, difficulty in tracking what happens to newly authorised firms, whether they get into trouble or not, which would allow an understanding of the weaknesses of business models that you could then cycle back in a feedback loop and look at for authorizations cases. So, the question is “how easy is it to say no”? How much information do you really have about what works and what doesn't work? I mean, I don't get the impression that authorizations have been willingly letting bad guys in for the last few years. Spotting bad guys isn't always easy. What I would say is I think more resource will probably help because it is probably the area that has borne the greatest share of “efficiency” now and campaigns in the past so actually get, you know, seeing it as a growth area and so on, this is not a bad thing.
Time will tell what it means in practice. I would like to think that 100 extra staff would improve turnaround times as well. I am quite comfortable with the aspiration. It's a difficult hurdle to get through but it's a real test to be immortalised. I think that's the kind of challenge that firms need to have in terms of making sure they are ready to do what they want to do.
Interestingly it doesn't necessarily help some of the innovation stuff so if you have a new business model from FinTech or whatever, you are going to need some time to understand that and the potential risks that it carries and how robust it really is. I think that complicates the job of authorizations quite a lot.
It does, yes. There isn't a one size fits all that's for sure, but certainly it says sort of the UK being an attractive place to do business. Whether you look at that through a Brexit lens or not, the speed and the turnaround time in authorizations it would be helpful. I think as rapid and as safely possible.
Another theme, I guess this starts to play back into is what we might expect in transparency terms moving forward, the idea here is going to be very clear outcome measures that are published, reference to the impact evaluation programme and I think we are not going to see necessarily any sort of who is willing to pay back until next April, I think.
At this point we don't really know what kind of things are going to be measured but some things I think mentioned in this in the speech where we will say no to authorizations. I think it's clear to me that I think financial services and compensation scheme pay-outs will probably end up being an outcome measure. So, if low compensation scheme pay-outs are an outcome measure for the FCA, authorizations, heavy supervision of retail, retail advice, prudential requirements in the sector, I think that probably gets a mention in the Business Plan. There is a new investment firm Prudential rules but the idea that these will contribute towards a euro your law firms are able to bear the cost of redress. Should that come up? I guess we await detail on exactly what the outcome measures are, but I know will evolve.
I carry the scars of trying to introduce these two or three times over and I think one of the things you need real persistence over time to get pattern. It is also sensitive to the micro economy so if the economy is doing well the regulator appears also to be doing well, in broad terms. And obviously, if the economy isn’t then the reverse, it's very hard to keep consistency with them. I have to say, EXCO and board aren't always that interested over time, they also take quite a lot of interpretation.
So, it's very hard to get a specific measure of regulatory performance effectiveness that doesn’t potentially create unintended consequences and perverse incentives and all that sort of stuff. And also, to understand, something like your complaints, so it might it's quite easy to say, “oh the lower the level of complaints, the better” but if people don't bother to complain then they don't trust the system then that's not great, you know everything has a flip side to it.
It's funny, I mean for me I think the outcome measures are I am probably less interested in what the numbers you know, that might be associated with them are I am more interested in what likely behaviour they would drive, knowing that those exists, what behaviour.
Would it potentially be something like London’s capital of finance, you know, automatically shifts the reputation of the organisation, so all the outcome measures might look great and another LCF comes along.
Do you think Dame Elizabeth Gloucester will be invited to do the next one? Okay, moving on. Just picking up really the last two high level themes, although it does make reference in the Business Plan to the statutory objectives, you know that guide the FCA is trying to achieve, it also talks heavily about diversity and inclusion both within its help as an organisation and in terms of driving that agenda programme, improvements within the financial services sector and it also mentions ESG in a couple of perspectives, helping drive to sustainable finance, also dealing with investment firms, financial services firms that maybe greenwash their misleading information on their own ESG standards. So, yes, neither is a surprise.
There is some quite broad language used about ESG, in particular, I think there will be, I am sure, some leaders who document or people who listen to the speeches saying why the FCA doesn't have enough to do, I think there is something quite specific which I think the PRA can speak clearer about on climate risk, transition risk, pricing, dry scale, ultimately can buy some stuff there. I think that that's genuinely important. The D&I stuff, I suppose I've got no problem with the motivation; I struggle with how you are going to be able to formulate and then enforce meaningful regulation to help it.
The one thing that gives me a bit of pause is because it's a joint thing with the PRA and the Bank of England, there is obviously quite a lot of people who are trying to work this side but wait and see. I am sure the feedback to the discussion paper will be a fascinating one.
Yes, various discussion papers on D&I. I don’t think the rules will come forth overnight to anything but yes it has been featured so prominently by so many of the regulators that something is going to happen.
The other thing I was going to say is that it's almost not a major theme of the Business Plan, when you might have expected it to be is, is the kind of the post Brexit strong onshoring of EU regulation. Hill Review, The Kalifa Review in terms it is a bit about regulatory sandboxes and so on. But it is a sort of a backdrop to the whole thing. The FCA doesn't come across as being as much of a markets regulator as I would necessarily have expected given what's happening with all the various reviews going on and in Nikhil Rathi’s background with the London Stock Exchange. It is much more of a kind of retail type Business Plan than I was probably expecting. He does name check. Yes, Kelly football, It's sort of in there but it's not as dominant.
We're going to end on to two points which are of interest, the Business Plan confirms the FCA are going to expand their Edinburgh office and they are going to open in Leeds, which is a good thing which the Bank of England is also doing, and they are also going to look at getting bases in Cardiff and Belfast.
Yes, I will put on my best Ulster brogue. I think those are both good. I think they will be quite small to start, and I think they are expanding Edinburgh to I think over 200 people, so I think that's overdue, frankly. I think it will be good to have one or two other branches even I think with consumer credit from the 60,000 firms it makes complete sense to not have people just concentrated in London.
And not many of those lenders are sitting in Mayfair or central London. Their owners might be!
Yes, I agree but there is something about being a kind of a UK regulator as opposed to a London regulator.
No, I agree. So that what is going to be happening and the last one was actually in the report and accounts which was issued at the same time, just included the skilled person review numbers and we talked a few months ago about trends in numbers we were seeing as a firm that does quite a lot of school person work and that the overall stats just confirmed what we thought so there's about a 20% increase, this is in the FCA's numbers year on year, which in turn was an increase on the year before that. Increases has happened despite the fact I can tell you for certain basically they stopped issuing skilled persons reviews for about three months during the early part of the pandemic so yes that is the trend we have observed.
We talked about this. I think there are two underlying reasons. One is resources where effectively section166's are paid for specifically by the firm. The resources obviously come from the skilled person. And expertise where actually when you are talking about things like cyber is probably the most obvious example but there are others. It's a very difficult stroke, not possible for regulators to create and then keep those teams of highly skilled, highly marketable people because they just get head hunted by the private sector.
Yes, I mean the logic could well be that trend will continue and we will see I guess, if I was putting a bet on our data we would continue to. Okay, we are going to close there. Thank you, Gavin. For those who are still with us we've got up on our website our response to the FCA's Business Plan, summary of it if you don't fancy reading the 60 odd pages of the document in total you can read our summary.
Also, in terms of publications we have up on the website if you haven't seen our financial services regulatory handbook. Please check that out - it's where we put our own analysis on all the sectors, regulatory initiatives that are coming down the pike. Thank you all for spending time with us today, we will be returning soon in September.
Does that mean I get to go on holiday then?
Won't be going this year!
Thank you all very much, we will sort out our holiday plans and then we'll let you know what we did when we see you again in September.
Goodbye.