Financial conduct regulation in a restless world

Speaker: Christopher Woolard, Executive Director of Strategy and Competition
Location: Deloitte conduct risk roadshow 2019, London
Delivered on: 8 May 2019

Highlights:

• To continue to meet our objectives in a constantly changing environment we need to be ready to respond and adapt.
• The FCA’s business plan focuses on both our longstanding regulatory concerns as well as considering what the future of regulation will look like.
• Technology and innovation are changing not only the markets we regulate but also the way in which we regulate.

Note: this is the speech as drafted and may differ from the delivered version.

Thanks to Deloitte for inviting me to speak about the FCA’s Business Plan and our priorities for the coming year[1].

I also want to spend some time beyond the next 12 months and consider the future direction of the finance sector and the regulation that governs it.

Now, I know, forecasting is a fool’s errand. As Niels Bohr said ’prediction is very difficult, especially if it’s about the future’.

This is particularly so now. It has quickly become cliché that constant change is the defining feature of the landscape in which we work.

However, to meet our objectives, we need to respond to that change.

That is why so much of our business plan was concerned with the future of regulation, anticipating what we need to do different, to think differently to regulate effectively.

Longstanding regulatory concerns

I’ll come on to this shortly.

But first I want to talk about some of those things that will continually occupy us.

These are the things that, whatever change comes our way, we will always care about as the conduct regulator.

4 of our cross-cutting themes reflect this:

• financial crime and anti-money laundering
• firms’ culture and governance
• operational resilience
• the fair treatment of existing customers

From culture to fraud, market abuse to mis-selling, there are a number of priorities that are guaranteed a place in our Business Plan, even as other themes and issues vie for our attention.

We will be extending the senior managers and certification regime to more firms.

We have a major market study underway looking at insurance pricing practices[2].

And we are strengthening partnerships to tackle financial crime.

Innovation, data and data ethics

But while they have a constant presence on our agenda, the way we tackle them is evolving – as technology, data and analytics bring their potential to bear on these perennial concerns.

This is typical of the wider FCA.

For example, we’re increasingly employing machine learning techniques to identify firms or individuals who could pose a risk to our objectives.

We’re also supporting the development of real world technical solutions through our TechSprint events[3], especially around anti-money laundering (AML). Later this year we will host the next stage of the process, with regulatory and law enforcement colleagues from around the world.

It’s also why we’ve embraced technology and its ability to better consumer outcomes – for example, through FCA Innovate[4] and the Regulatory Sandbox[5].

It’s also at the heart of the Global Financial Innovation Network[6] – or GFIN – an international network of 35 regulators, working together to share knowledge and provide an environment in which firms can trial their solutions across multiple jurisdictions. Last month we announced the first propositions being considered for these cross-border trials[7].

We want to explore not only how technology can drive new products, services and firms in consumers’ interests, but also what it can do to reduce the compliance burden of existing ones and make them more effective.

This is the thinking behind our work on digital regulatory reporting[8] or, in other words, how can we use technology to make our regulation more efficient.

To give a sense of why this matters, we currently receive 500,000 scheduled regulatory reports[9] from firms every year, not to mention those sent to us on an ad-hoc basis.

That’s a huge amount of information for both the regulator and regulated to process.

Our current, manual rulebook also leaves the job of understanding our rules open to ambiguity, as firms and professional services manually interpret regulations, creating a room for inconsistency.

In 2017, we developed a proof of concept which takes a regulatory requirement – whether that be to report or a conduct rule – contained in our handbook and turns it into a language that a machine can understand.

We issued a call for input and published a feedback statement on how this might work last year. In March this year we published a report[10] with the Bank of England and 6 financial institutions providing an overview of the work we are doing to develop a working prototype.

This commitment to innovation is one we’re making for the long term.

To make sure we have the skills to take on the challenges of the future, we’re strengthening our focus on science, technology, engineering and maths graduates to increase our capability in areas like cyber security, data science and technology.

Having this capability in-house will become increasingly important as we grapple with the huge ethical and social questions these new technologies bring up.

How do we ensure algorithmic decision-making is bias-free?

Should we develop a policy framework for how firms collect and use data?

How ‘explainable’ should these technologies and their outputs be to consumers?

And how do firms react to changing circumstances as data a digital business models become the norm?

Future of regulation

The argument about considering our use of technology to deliver better regulatory outcomes while managing the impact of our regulation fits closely with the wider questions on the future of regulation, which Andrew Bailey explored in his speech last month[11].

This is about considering some of the fundamentals of our regulation: our principles.

Some argue that they should be replaced by – or supplemented with – a duty of care or duty of responsibility. Others, that the principles are sufficient as they are.

As Andrew said in his speech, neither view is wrong or easily dismissed. Instead, the spread between the views demonstrates different world views.

Principles should be bedrocks, not something up for continual debate. But now seems the right time for us to consider how these function, as part of our work on duty of care.

We also need to be alive to the cost of our regulation. In our business plan, we announced a specific piece of work on the regulatory costs borne by small authorised firms. This is part of a wider consideration of the impact our regulation has, and the eagle-eyed amongst you will have noticed the increase in our work assessing how changes we have made are working in practice.

This has to be matched by a consideration of the cumulative impact of change facing firms. We are not, after all, the only ones writing the rules of the game.

We have gone through a period of significant reform, and we have managed – by working closely with our colleagues at the Bank of England and in Government – that process.

Don’t get me wrong, for many firms that period of reform has been burdensome. Frankly, it was supposed to be, post-crisis. But we were always alive to considerations of how the process is managed, the air traffic control if you like, to ensure it should not become overwhelming. That is something we need to continually keep in check.

Intergenerational changes

Looking further ahead, and touching on some work we published last week[12], if we are working on a financial sector fit for the future, we have to consider the needs of each generation.

Baby Boomers, Generation X, Millennials and Generation Z all experience financial services differently, with different needs and different resources with which to manage them. The way I engage with my finances will be very different from how my parents did, and how my children will do in the future.

As a regulator operating in the public interest, we have to adapt to ensure our regulation meets the changing needs of the people it’s there to protect.

That means first testing our assumptions to ensure our regulation is relevant for tomorrow’s consumers.

It means bringing stakeholders together and exploring a combination of solutions from social policy, to industry action, through to regulation.

The intergenerational challenge is a task for public policymakers at large.

And it means identifying the specific action we can take to help industry meet user needs in this changing context.

The changing international landscape

To finish, a word on Brexit.

First and foremost, our focus is on ensuring Brexit is implemented in a way that delivers on our objectives – ensuring we maintain market integrity, protect consumers and make competition work well. The FCA takes no position on the substance of Brexit itself – our starting point is continuing to deliver our objectives and do the job we’re here to do.

And while Brexit, of course, will require us to think differently, there are central tenets to our approach that will not alter.

We are a global regulator, advocating open markets underpinned by international standards. The UK plays a leading role on the world stage – as a global hub for a finance sector whose markets are increasingly interconnected.

So even as the wider context changes, international engagement will remain a cornerstone of our work.

Post-Brexit, we will look to strengthen this – building strong bilateral relationships with regulatory partners and international standard-setters so we continue to shape the global regulatory agenda.

Conclusion

The transformational challenges we’re living through – the ethical questions posed by new technologies, fundamental demographic change and a shifting international landscape, apply to the regulator as much as they do the regulated.

As a forward-thinking, technology-driven regulator, we have to react to the world as it changes around us, but remember also what stays constant.