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The cycle of deregulation, crisis and regulation is particularly damaging not just because vulnerable people’s lives are hit much harder by financial crises than those of financial executives, politicians and regulators. Constant regulatory change can sap the confidence of the public and industry in the regulatory process. Constant regulatory change can also damage competition: the largest firms with the best lobbyists often seek to influence the process; and the bigger the firm, the bigger its economies of scale in absorbing lobbying and compliance costs. Constant regulatory change can also damage the quality and efficiency of regulation, because the changes are often patched on to the existing regulatory framework, which becomes more and more complex and less and less coherent.
We do not want regulatory changes to inadvertently heighten the risk of operational failures. Firms have finite resources to meet regulatory change demands as well as the need to adapt their businesses in a world of changing consumer expectations and business models. Smaller firms in particular have a more limited ability to respond to our consultations and policy changes, so we need to ensure that our communications and timetables take their needs into account.
That’s not to say that we should go soft on the industry. But we must be guided by the objectives and the principles of good regulation set out in our statute. So we should try to ensure that the total programme of regulatory change is phased and coordinated in a proportionate way.
We must acknowledge that there are a number of problems in our society we can’t solve through FCA rules. There are pressing social issues such as the cost of housing, low financial resilience in general and unsustainable personal debt in particular, and inadequate saving for retirement and care in later life. Solving these issues extends well beyond financial regulation. We need to continue to speak up about the limits of what we can and should seek to achieve by ourselves.
And where new areas of financial activity emerge, we need to be able to draw attention to gaps in protection which may require lawmakers to act.
We will need to redouble our engagement with our policymaking and regulatory colleagues in Europe and across the world, to continue to influence global standards of financial regulation. As last week’s IRSG Report on Global Regulatory Coherence within Financial Services rightly emphasises, strong global standards dampen the cycle of deregulation, crisis and regulation because they reduce the opportunity for individual jurisdictions to race to the bottom, and for firms to engage in regulatory arbitrage. Strong global standards also reinforce the competitiveness of the UK financial services sector.
We must keep an open mind about our existing regulation and be ready to make it better where it is not producing the outcomes we need to produce. Confident enough to be open minded and transparent, listening to the unique resource that consumers, businesses and industry professionals in Europe’s largest financial market provide us with.