Regulation as a spur to growth

My Lords, Deputy Lord Mayor, ladies and gentlemen, it is a great pleasure to join everyone tonight.

And thank you for that kind introduction Douglas. One of the great strengths of the IMA is its ability to look outwards – to look towards clients and demonstrate a positive picture of financial services.

We should never be afraid to promote industry where it is warranted. Nor should we be afraid to highlight the steps we are taking to improve – and that’s why I was delighted to hear Douglas talking about the work the IMA is doing on transparency and on trust and confidence.

It is a point I want to focus on tonight because it goes to the heart of a conversation being held right across the financial services. How do we earn back the confidence of consumers and respond to challenges like increased competition and higher expectations?

The key issues in the above are ‘confidence’ and ‘trust’. Trust is not dispensed like water from a tap – trust is slowly earned but quickly lost.

In this fiercely competitive world, trust has to be merited, deserved, earned – however you want to put it – through the strictest levels of professionalism and that is exactly why the UK asset management industry has been so successful over the years. The highest ethical standards and professional excellence are what set an industry apart.

Those high standards help explain why this industry remains one of the most successful in the UK. Indeed, it helps to explain why it remains one of the most successful in the world – managing total investments valued well north of the combined GDP of the UK and Germany.

But the truth is that these are difficult times. Much of the trust in financial services more broadly has been damaged in the last few years. Successive scandals, a seeming detachment from the society it serves – pay levels that the average citizen cannot understand. All these have damaged the level of confidence that people need to have in financial services.

And they need to have that confidence because people need financial services – whether to save for retirement, borrow for a car or a house, or to insure against risk. People need confidence and trust that the providers of these services act with fairness and integrity.

And that is why you have a new regulator – the Financial Conduct Authority (FCA) – to help with that process of repair.

The FCA's responsibility

It is my responsibility – it is the FCA’s responsibility – to ensure that this market continues to work well. Good regulation is a feature of all high-performing industries and should act as a catalyst for economic progress, rather than a brake.

In other words, regulation is not a zero sum game. It is not like a tennis match or arm-wrestling contest where for one side to win, the other has to lose. It is, and always should be, in all our interests.

The most important point to make is that the FCA has been given a very clear, uncomplicated remit by Government. Our overarching strategic objective is to make markets work well.

And just to be clear – a market that works well has to work for all players in the market. It’s not a market where consumers never lose money – markets are about risk and in the appropriate product, consumers may gain or lose. It’s also not a market where firms never make money – the provision of services is rarely for free and firms have to be allowed to make a profit.

So, a market that works well must work well for all – profits for good firms; exits for bad ones. Innovation and choice for consumers – hopefully good products that meet consumers’ needs and not bad products that simply obscure cost or risks.

To make markets work well we have a new style of regulation – not just new formal powers embodied in legislation, but a new philosophy of regulation.

Not regulation through the rear-view mirror – but forward-looking regulation:

• What trends are we seeing?
• Where are product sales growing fastest?
• What parts of the industry are seeing most innovation?

Not regulation based on historic data collection but much more real time:

• What are we learning from social media?
• What are the consumer groups or media seeing today?
• What are the most searched terms on Google?

Not box-ticking regulation, but regulation based on judgement:

• Not is this sale compliant with a set of rules, but is the outcome good?
• Not just whether a firm has an adequate three lines of defence, but is the culture right?
• Is the fair treatment of consumers put at the heart of a firm’s business model?

So that is what to expect from our regulatory philosophy – forward looking and judgement based. People have worried a little about this more intrusive form of regulation. But when faced with the prospect of early intervention – such as our position this week on Unregulated Collective Investment Schemes (UCIS) or our statement last month on interest-only mortgages – people will take that every time over the clean-up bill from problems not dealt with early.

The clean-up bill for payment protection insurance (PPI) will pass £10bn this month.

To put this into a little more into perspective for asset managers, let me outline the ‘3 Cs’ – cooperation, competition and client focus – that specifically relate to your firms.

Cooperation

The first of those ‘3 Cs’ is cooperation.

This means we need to work closely with investment managers. It should be a productive, predictable and transparent relationship that supports growth and supports growth in the right way. That is, by delivering innovation and valued services to clients.

What does this mean in practice? It means we work alongside all participants, including the Government and asset managers, to support your market and to allow you to contribute to the UK economy.

It means the FCA should be easier to access and engage with in critical areas like fund authorisation and implementation of new policy like the Alternative Investment Fund Managers Directive (AIFMD).

And it means we should be more transparent and collaborative about what we are doing and what it might mean for asset managers in future.

So we should – and will be – working more closely with the IMA and its members as we move forward – seeking out your advice and support in any analysis work we do.

The IMA’s White Paper on outsourcing is a good example of this constructive engagement with the FCA.

Competition

Linked to this objective of efficiency is the FCA’s competition objective.

We have the responsibility to promote effective competition in all aspects of our work. Markets that are competitive generate lower costs, keener prices, greater choice, innovation and economic growth, all of which result in better consumer outcomes.

One of the major lessons of this, and previous, financial crises, was that markets rarely conform to strict textbook models of classical economics. It has been recognised for a long time in other sectors that unregulated competition does not always deliver good outcomes. Resources are not always allocated efficiently. Nor do prices always respond efficiently to new information.

Markets can go wrong for a wide range of reasons: sometimes it is their structure that inhibits rivalry between firms; in other cases it is consumers’ behaviour that does not discipline firms sufficiently.

The FCA is also taking a much more active interest in insights we can gain from newer disciplines like behavioural economics – and asking what they have to offer us as regulators.

But we should remember Adam Smith was always upfront on the limitations of the ‘invisible hand’ – he talks about ‘prodigals and projectors’ and recognised very early the importance of regulation in operating against anti-competitive behaviour.

So it is important that regulators have a sophisticated understanding of how markets work. We should understand and query the weaknesses, as well as the strengths, of all the features of markets that influence competition – whether those features relate to firms active in markets, or to behavioural biases among consumers. They can both inhibit markets.

We need to ask whether disclosure really is the key to ensuring consumers make rational decisions. Do consumers genuinely pore over terms and conditions that are longer than Hamlet? 

Do the criteria consumers use to choose products or managers create the right incentives for suppliers in this market? For instance, is it right to rely solely on past performance when making investment decisions?

The Government has given the FCA a very specific responsibility to ensure competition can work effectively across our financial markets, where complex pricing and products can make it difficult to constrain suppliers.

That is not a straightforward task and I am clear that we should use this power only in support of our main objective of making markets work well. So I certainly expect and hope that the IMA will be feeding in to this work in the months and years ahead.

Client focus

The third and final aspect I want to look at tonight, linked to competition, is client focus. It is the point Douglas picked up on in his address and one that the FCA will be looking towards in the years to come.

The overwhelming majority of asset managers in this country operate to the very highest levels of integrity and client focus. That is, they avoid conflicts of interest; they act in the interests of the client; and they manage the money of investors prudently.

I am delighted that Daniel and his team are exploring how the investment management industry can explain costs to customers more efficiently.

I would also like to applaud the enormously positive response and engagement to this work by IMA members – and would like to offer my sincere thanks to everyone here this evening for their support in this work.

Conclusion

I said at the start that investors have a choice as to where they invest their money. We are competing in a far smaller world than we were 20 years ago.

Clients and customers are not tethered to the UK. They are not required to place assets here out of a sense of civic loyalty. Your success, the IMA’s success, is based on exacting professionalism – operating to some of the highest industry standards of any market, in any sector, in any corner of the globe

Good regulation should complement the trust and respect you earn through professional conduct, by providing a measure of confidence in our economic structures.

It should work on behalf of firms. On behalf of your clients. On behalf of the UK economy. And it should work for and with the IMA.