21 October 2019

FCA: Regulation in a changing world

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, outlined the three factors at play on the future of regulation: taking stock of the first wave of post-crisis regulation, a change in consumer needs and attitudes, and the fact that innovation has gathered pace.

[...] I’ll outline 3 in particular.

First, the first wave of post-crisis regulation is done. Firms are better capitalised and the personal responsibility of their leaders is more embedded. This is a good time to look at what has worked well, and what could be improved.

Secondly, there is a change in consumer need and attitude. Long-term low interest rates mean the search for return is stronger, just as the tolerance for loss lessens. Consumers are getting older, have less saved and inherit assets later in life.

And, lastly, innovation has gathered pace. We’re moving from an era of digitisation – services moving online – to a truly digital industry – one drawing on artificial intelligence (AI) and machine learning. This digital transformation is reflected in the new products finding their way direct to consumers over the internet (some good, some bad, some downright fraudulent).

The socio-economic, technological and regulatory change we’ve seen across financial services has, in many ways, brought great benefits.

The financial system is safer. Consumer credit is better controlled. And conduct, culture and customer outcomes are increasingly recognised and understood around Boardrooms.

But one thing is already clear – we are moving from a narrower compliance with the rules, to a focus on delivering the outcomes we want for the users of financial services.

This means doing things differently.

What does this look like in practice? I believe there are a few key factors.

The first step is to clearly state what outcomes we want to see in markets. [...]

The second step is to use everything available in the regulatory toolkit Parliament has given us.

In recent years, we have used our tools and powers more creatively in things like the Senior Managers Regime, Project Innovate and price caps.

Nonetheless, we must face up to the fact that disclosure has been the go-to solution of regulators and politicians in the UK and Europe for the last 20 years, making up the bulk of our requirements. But behavioural economics suggests its impact is limited.

We also have to think about cost effectiveness when it comes to delivering outcomes.

For one, regulatory cost is typically passed to consumers through higher prices. A ‘lighter’ solution like disclosure may have some positive impact, but may not solve the root of the problem. Where problems persist, we will ultimately have to return with a more interventionist solution.

In the meantime, consumers may still be harmed, and public confidence eroded. Firms will have invested in better disclosure, only for us to go further later. Far better, cheaper and more effective to go for the ‘tougher’ remedy sooner.

The demand from the public is clear – they don’t care if a set of rules has been followed, they care about the outcome they receive.

The third step concerns working with other agencies. As a consumer, you don’t care whether the problem lies with legislation, regulation, or industry practices – you simply want them all to work in your interests.

So we are increasingly working with Government, fellow regulators like the Information Commissioner’s Office (ICO), and enforcement agencies to think about the right outcomes, rather than each body delivering narrow solutions in respect of their mandates.

The fourth step is to look again at our requirements. We have our Principles, our Handbook and a lot of rules. Not to mention, the hundreds of pages of binding technical standards onshored as part of Brexit preparations.

We know this affects small business – those lacking compliance departments –  most. While they see the benefits that regulation brings to their firms, many struggle to understand how FCA regulation applies to them.

They find the Handbook difficult to navigate and rely on external compliance advisors to interpret new rules. Often these advisers have a disincentive to make things simple.

We are exploring if there is more we can make of our Principles to be clearer about our expectations.

The fifth and final step concerns technology and the opportunity it presents to bridge the information asymmetry between customers and providers.

Much of our Handbook is technology neutral, and we have enabled innovation over the last few years.

But our rules feel increasingly analogue in a digital world.

Many practices firms use are simply digitised versions of analogue processes – like PDF statements – rather than truly digital services.

Technology may help us deliver solutions that meet customer needs.

We have the opportunity to re-shape how financial services regulation works in the UK.

The FCA has a key role to play – improving how markets operate, preventing harm from occurring and serving the public interest.

It is only right for us to constantly assess the direction of travel and tailor our approach to ensure we continue to deliver on our objectives.

To achieve this, we need regulation that is agile and doesn’t become outdated as domestic and global markets evolve, resulting in inefficiencies and consumers being unduly exposed to risk and harm.

This requires a bold approach and the full use of tools given to us by Parliament. It also means a focus on simplicity, clarity and real-world effectiveness.

By putting outcomes at the heart of the debate in the coming months we want to ensure financial services markets serve the public interest, now and in the long term.

Full speech

 

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