Speech by Sheldon Mills, Executive Director, Consumers and Competition, delivered at the CityUK Annual Conference 2023.
Speaker: Sheldon Mills, Executive Director, Consumers and Competition
Event: The CityUK Annual Conference 2023
Delivered: 29 June 2023
Note: This is the speech as drafted and may differ from the delivered version
Sheldon was speaking ahead of Royal Assent for the Financial Services and Markets Act which is expected to be granted on 29 June 2023. The Act provides a new, secondary objective for regulators related to international competitiveness.
Highlights
- The FCA has always played a significant role in supporting innovation and growth in financial services and welcomes the codification of this role in promoting growth and international competitiveness ahead of the proposed new secondary objective
- We stand ready to embrace new opportunities to grow the UK economy: our adoption of innovative regulatory approaches, and our work to tackle harm, underpin sustainable economic growth and international competitiveness.
- Growth should never be at the expense of the wider economy or through defrauding vulnerable customers.
- Any new metrics to measure our contribution to growth and competitiveness must be ones which measure factors within our control.
Surprising sources of innovation
When Sir Geoff Palmer came to the UK from Jamaica as a 14-year-old in 1955, he was automatically classed as educationally sub-normal.
Later during a university panel interview, he was told by one prominent figure to ‘go back to where you came from and grow bananas’.
Sir Geoff’s intelligence, application and determination to prove his detractors wrong saw him obtain a PhD in grain science and technology. He became Scotland’s first Black professor[1] in 1989.
As a scientist, he revolutionised the brewing industry, knocking almost a third off the malting time.
Sir Geoff is hailed as one of the heroes of the brewing industry and alongside his academic work as Chancellor of Heriot-Watt university, he campaigns against racism.
He has a namesake across the other side of the world – Sir Geoffrey Palmer, a former prime minister[2] of New Zealand.
The constitutional lawyer was in power in the late 1980s when the Labour government embarked on a radical programme of economic liberalisation.
For the first time, the currency was floated, import licences were ended and the reserve bank was given independence from government to set interest rates.
The 2 Geoffs have played a role in the economic growth of their countries through their innovative ideas.
Innovation can come from surprising places – both at the FCA and from the example I just gave.
There is often a fine line between having enough rules or regulation to ensure markets work smoothly and not having so many that you stifle innovation. The Financial Services and Markets Bill[3] will require us to continue striking that balance by giving us a secondary objective to facilitate the UK’s international competitiveness and promote sustainable growth over the medium to long term while continuing to deliver on our primary objectives to protect consumers, enhance market integrity, and promote competition in the interests of consumers.
The case for protecting consumers, markets and firms to drive growth
Our financial services sector directly contributes to economic activity by making up around 8% of GDP, accounting for 2.3 million jobs in the sector and related professional services, and contributing around 100 billion pounds in tax.
Financial services also facilitates economic growth by channelling capital to start-ups, small businesses and the largest infrastructure projects – including the vital work of supporting the UK’s net zero ambitions. We recognise that achieving sustainable economic growth is a key economic policy challenge, which benefits consumers and businesses of all sizes.
We welcome the proposed secondary competitiveness and growth objective, and stand ready to do our part in contributing to this challenge. We have worked towards this, and we are ready to operationalise it through our regulatory work.
We are excited by this new role because this secondary focus isn’t entirely new to us; we were trailblazers in promoting innovation in financial services through our Innovation Sandboxes and Pathways[4], where start-ups and fintechs can test new ideas and products with our support, and our policy and tech sprints. We were one of the first regulators in the world to adopt this approach and many regulators have followed in our footsteps.
We continue to innovate and can confirm our Digital Sandbox[5] will be made permanent, opening up the platform to an even broader range of innovative businesses and start-ups.
It will include the ground-breaking use of synthetic transaction and market data. Participants will have access to over 200 data assets, including anonymised payments and transactions data, social media data, investment, Company House and credit data.
The sandbox will pull data from consumers and firms to offer an open API marketplace, providing access to academics, government bodies, venture capitalists and charities for support and input to Digital Sandbox participants.
And we know the Digital Sandbox works to foster innovation and growth: we found that nearly 6 out of 10 of the previous participants in the pilots experienced positive developments including launching new products, securing funding and partnerships, or receiving industry awards or recognitions.
Both our adoption of innovative regulatory approaches, and our work to tackle harm, underpin sustainable economic growth and international competitiveness.
There is no sustainable growth if credit is unaffordable, if consumers are trapped in cycles of debt and their participation in the wider economy is limited.
That’s why we intervened[6] to crack down on exploitative consumer credit and are working to improve competition in credit information markets.
There is no sustainable growth when insurance doesn’t pay out when people expect it to, corroding the trust in our markets.
That’s why we intervened to make sure that small businesses in the pandemic got the pay-outs from their business interruption insurance that they rightly expected and deserved.
These are just some examples of how our primary objectives of consumer protection, market integrity, and competition, drive growth, trust, and good outcomes.
Of course, regulation can hinder financial services if the costs are disproportionate to the benefits and if it stifles innovation.
That is why we have become less prescriptive, and more outcomes driven - for example with the Consumer Duty[7] which as you should know by now, comes into force in one month.
However, being less prescriptive does not mean more lax. it took 5 years for UK GDP to return to its 2008 level following the financial crisis, a crash many attributed to lax regulation and undoubtedly hindered growth.
Protecting the integrity of our markets
Regulation can aid growth by cementing the hard-won reputation of our financial markets as a safe and rewarding place to invest. Resilient, transparent, and efficient UK capital markets fosters trust amongst investors both from the UK and overseas. This ensures our markets can finance the investment into, and growth of, British businesses and the wider economy.
To do this, the UK needs trusted capital markets, operated by trusted financial professionals. We will continue to play our role in ensuring that we have safe, stable, and fair markets which are efficient and support the flow of capital and investment the UK needs.
This investment is needed to improve the UK’s growth prospects and take advantage of the opportunities of leaving the EU. It is vital to unlock capital to invest in infrastructure, public goods, and to work towards climate mitigation and climate adaptation.
This will require both public and private capital and investment, and we are working across the financial industry to support further change in regulations to release capital safely and effectively into the real economy.
This work includes simplifying our listings regime[8], to ensure raising equity investment in London to fund investment and growth is accessible to as many companies as possible. We know this is an area of particular public interest, and we are grateful for the input we have had on our recent consultation. We will act at pace to set out the way forward.
It includes broadening access to Long Term Asset Funds to help investors with the right risk appetite access illiquid assets such as venture capital, private equity and private debt.
It includes working with our partners in the Government and other regulators that peoples’ pensions are transparent, deliver value for money, and can, with the right risk appetite, invest in certain illiquid assets.
And it includes creating a simple, reliable regime for ESG disclosures, labels, and ratings, which will ensure investors and consumers can make informed decisions as to whether the companies and financial products they are investing in are supporting our societal ambitions of greening the economy.
The thread running through all of these, and so many others, is that we can help the flow of capital and investment by upholding the integrity and international reputation of our markets. The UK was the most attractive destination in Europe for direct foreign investment in the last year, according to an EY repor[9]t.
The UK extended its lead over second placed France, and attracted 76 financial services projects in 2022.
We are on the up – but we cannot and must not take that for granted.
Operational efficiency as a driver of growth
To effectively regulate and to drive competitiveness and growth, we must be efficient as a regulator. So, our own operational efficiency is - rightly - always under scrutiny. We will continue to increase the use of data, technological and human resources.
We speak with many FinTechs and finance businesses seeking to do business in the UK, and they say 2 things: first, they want to be authorised here because they know we have a strong stable system of regulation with high standards, second, they raise concerns about cost and time to get authorised. We’ve listened to this feedback, and we are tackling our authorisations backlog, reducing it by 60% recently.
We are trialling automated forms which should speed up the process and our future of data collections programme aims to make it more cost effective for firms to supply us with the data we need.
Future regulatory framework and our role
Our focus on efficiency and effectiveness extends to our rule-making.
At the FCA, we are responsible for transferring into UK law nearly 90 per cent of the EU files relating to financial services.
We can decide to repeal or replace them with rules better tailored to our needs. At all times during this mammoth task, we will remain focused on delivering against all of our statutory objectives, including how any changes can further growth and competitiveness.
We want consumers and markets to capture the benefits these changes will bring, while managing the costs regulatory change puts on industry.
Ultimately, we want our Handbook and our rules to be as clear and as they can be to for new entrants and existing players alike.
This is a significant opportunity for the UK’s financial services sector, to adapt to the demands of the future and support our global markets.
As we take on this challenge, we want to hear industry to be involved in shaping the future.
We have already worked with firms and the Government on replacing our rules in some key areas, such as the overhaul of the Prospectus regime, targeted change to the Securitisation regulation and reconsidering our approach to PRIIPs disclosures.
Together we want to continue to work to create a more competitive, streamlined and proportionate regulatory environment.
Metrics and accountability
So how will the public know we are doing well on this new secondary objective?
As a public body, we know we need to be accountable for what we do.
We are working at speed to embed the enhanced accountability mechanisms included in the Bill. We are in the process of setting up a new Cost-Benefit Analysis panel, which will advise and scrutinise our methodology for conducting CBAs. We know CBAs are critical in ensuring our rules are proportionate, and we are using the opportunity the new panel brings to become even more rigorous and analytical in measuring the expected effects of our work.
We will soon publish our updated Rule-Review Framework, which will lay out when and how we will scrutinise if our existing rules are working as intended. We will take a proactive, data-led approach to reviewing new rules, and we won’t shy away from amending or even rescinding rules if we find they aren’t working as intended.
As an outcomes-driven organisation, we already measure and publish our performance against over 80 metrics, such as increasing the proportion of consumers who have confidence in the UK financial services industry.
The government recently called for suggestions for new metrics[10] to measure how we deliver the new secondary growth and competitiveness objective.
We will of course await with interest to see those suggestions, and I won't pre-empt the outcome of what metrics will eventually be adopted, except to say that any proposed metrics need to be relevant and proportionate.
They should not create perverse incentives, should abide by National Audit Office guidelines, and need to be alive to the fact that we do not operate in a vacuum.
And it is important we are not held accountable for things that are outside our control.
Metrics which are strongly influenced by factors such as wider government policy, are unlikely to be a good way of assessing the effectiveness of our regulation.
In contrast, metrics which specifically link to our actions, as well as those key drivers of productivity which promote international competitiveness and growth, are likely to be far more informative and may well be more helpful.
Regulation is one cog
There are many factors we do not control when it comes to growth and competitiveness of the economy. Factors such as the geo-political environment, taxation, investment in infrastructure, immigration, demographics, and many more besides, are vital.
Firms tell us it is expensive and cumbersome to attract talent from around the world, or to move talented employees from one jurisdiction to another.
Fintechs often tell us that they are not eligible for the EIS tax schemes – a system which encourages investment in a tax-efficient way.
There are many reasons why more UK investors’ money[11] is held in overseas equity funds (£272bn) than those specialised in homegrown equities (£269bn).
And we have very different powers and remits to some of our international counterparts.
These are just a small number of many factors which have an enormous impact on economic competitiveness and growth, which fall outside our remit.
And as our CEO Nikhil Rathi has said[12], we are at the start of a long-awaited debate about the wider markets eco-system and the role we all play in supporting it.
No trade off between objectives
As the Financial Services and Markets Bill awaits Royal Assent, we are well advanced in developing how our upcoming secondary international competitiveness and growth objective fits with our existing remit.
We welcome the opportunity to continue to support economic growth, but there is no trade off. We won’t bend our supervisory and enforcement work, or distort our rules, to ensure competitiveness at all costs. But we will carefully assess the secondary competitiveness objective in the light of our primary objectives when carrying out our work.
We will continue to play our role in ensuring that we have safe, stable, and effective markets, which are innovative and support the flow of capital and investment as the UK seeks to drive economic growth for future generations.