Listening up to level up – regulating finance for the whole of the UK

Speaker: Charles Randell, Chair
Event: Centre for Commercial Law Studies, Queen Mary University of London
Delivered: 20 May 2022
Note: this is the speech as drafted and may differ from the delivered version

Highlights:

• The consumer’s voice needs to be front and centre in our regulation and in every Boardroom.
• Policy partnerships between Government and regulators are crucial to deliver good outcomes for consumers.
• It's essential for the Future Regulatory Framework to follow the Government’s stated aims of respecting the FCA’s independence and primary objectives, to ensure that the financial services industry continues to act in the interest of all people and communities of the United Kingdom.

Meeting people across the nations and regions of the United Kingdom is the greatest privilege of my job as Chair of the Financial Conduct Authority.

In Solihull, I met a single mother. When her father was dying, she gave up her job to care for him. She couldn’t meet her everyday costs and started taking on debt. She did seek help – but at her lowest ebb, she was sold a plan that charged her fees but didn’t reduce the debt. It didn’t even leave her enough money for food. It was only when she went to the voluntary sector – in her case, Christians Against Poverty – that she started to turn the corner. She got a new plan which meant she could keep her home.

You are who you meet

This and the many other meetings I’ve had up and down the country in the last four years are hugely motivating – farmers in Aberaeron, credit unions in Belfast, sixth form students in Blackpool, high street merchants in Cambuslang, StepChange debt advisors and their clients in Leeds and the Citizens Advice Bureau in Penrith, to name just a few.

They add faces and personal stories to the issues which the FCA has to tackle. They bring purpose and urgency to our work. Most of all, they show the gap which often exists between people’s real-life experiences and the liberal theories that have shaped financial regulation: theories that giving people more information is enough to protect them from harm; that the market always adapts to provide essential financial services to vulnerable people at an affordable price; and that self-regulation can be made to work if only the incentives are right.

All the major parties say they’re committed to levelling up the UK. At the FCA we need to play our part. But policy inputs based on received theories mean nothing if they don’t deliver better outcomes for people across the UK. That’s what we need to hold ourselves and financial businesses to account for.

An independent regulator for the whole of the UK

Parliament has given the FCA the task of authorising and supervising financial businesses, so it’s natural that we spend a lot of our time talking to them.

But listening to the users of financial services across the UK – particularly consumers and small businesses, whose voices may not be as loud as others – is an essential part of balanced and effective regulation. We have clear statutory objectives to protect consumers of financial services and promote competition in their interests.

We already have a range of different ways of listening to the users of financial services – including our Financial Services Consumer Panel, our consumer network and our own consumer research.

But we need to make sure that our culture is even more outward facing, that our meetings with people outside the FCA reflect the diversity of the UK, and that we are diverse ourselves. That’s why the FCA is growing its office in Edinburgh and opening a significant office in Leeds, as well as establishing a presence in Belfast and Cardiff.

The diversity of the views we listen to is an essential foundation of our legitimacy as an independent financial regulator. As the Organisation for Economic Co-operation and Development (OECD) has said[1]:

'Regulators have a crucial role to play in the economy and society. They ensure that clean water runs in our taps, the lights remain on, and that financial markets are sound. However, they can fail to deliver these public services if their activities are unduly influenced, whether by the regulated industry, government, politicians or outside interest groups.'

Importance of partnerships

Of course, regulatory independence doesn’t mean that we shouldn’t work closely and effectively with others. In fact, it’s essential that we do. We simply can’t address many of the issues we care about on our own.

People need to be able to understand the decisions they have to take about spending, borrowing and saving and be confident to make them. People need support to avoid problem debt. People need access to broadband and devices in a world where more and more services are only online. And people need incentives to use suitable financial products, and protection from fraud and scams.

To tackle these issues, the FCA needs to partner with a range of other actors – including the Government, Parliament and other regulators.

Partnerships to promote understanding of financial decisions, from school to the point of sale; partnerships to address digital exclusion; and partnerships to fight financial crime more effectively.

During my time as Chair, I’ve seen some very effective partnerships with the Government. We worked closely together to ensure that the transition to life outside the EU didn’t disrupt financial markets or the supply of financial services to consumers. We responded to the coronavirus (Covid-19) pandemic in partnership, taking swift actions to give people breathing space for their mortgage and other debt payments when they needed it. Most recently, we’ve been playing our part in implementing the Government’s financial sanctions following the start of Russia’s war of aggression in Ukraine. We’ve done all of these things in the spirit of partnership, without compromising our independence.

At the same time, we have been strengthening our partnerships with other regulators and public bodies, including the Financial Ombudsman Service, the Financial Services Compensation Scheme, the Money and Pensions Service and The Pensions Regulator, and digital regulators through the Digital Regulators Cooperation Forum.

Importance of policy coherence

But I’ve also seen examples where partnering with the Government and others wasn’t as strong as it needed to be.

Let’s take pension freedoms.

As I've previously said[2], the speed with which pension freedoms were introduced in 2015 gave rise to a very big execution challenge for everybody: trustees, The Pensions Regulator, the FCA and the Money and Pensions Service, or Pension Wise, as it then was. The policies and procedures necessary to mitigate the potential harm to consumers from the pension freedoms were still being retrofitted six years later.

With hindsight, more could have been done to protect people from risks introduced by the pension freedoms policy, particularly if more time had been given to prepare. It’s clear from the steps taken since 2015 that the policy itself and the broader system to implement it were found wanting.

Another case study is high-risk investments.

We’ve accepted the recommendations[3] of an independent review into the case of London Capital & Finance, and we’re implementing them in full.

But combatting the huge number of unsuitable and sometimes fraudulent investments which are out there, particularly online, requires a much broader set of measures. It’s simply not something the FCA can do its own.

Closing the loopholes that enable these investments to be marketed to people who are neither sophisticated nor wealthy enough to take the risk.

Preventing these investments from being marketed online.

Restricting government incentives, like the Innovative Finance ISA, to investments which have an appropriate level of oversight and are likely to be suitable for consumers.

Providing consumer education and information to counter the lure of high returns which so often turn out to be an illusion.

The lesson from these case studies – both where partnerships have worked well and where they haven’t been as strong as they needed to be – is that addressing many issues in financial regulation requires not just more effective regulators, but also more collaborative action across policymakers to deliver the right outcomes in the real world – policies that are based on real human behaviour. And policies that are only introduced when the system is ready to put them into practice.

We need to apply this lesson to the future.

Let’s take crypto. The Government has recently announced that it will consult on a world-leading regime for the crypto-market, including the trading of tokens like Bitcoin.

I’ve previously said[4] that stablecoins – but only if they are strongly regulated to stay truly stable – may have the potential to reduce costs and frictions in certain types of payment transaction, and to challenge the very strong position occupied by a small number of players in the payments market. I’ve also said that distributed ledger technologies have the potential to produce efficiencies in various parts of the financial system. The FCA is already engaging successfully with these innovations.

But what would success look like if we also took on regulation of the issue and trading of purely speculative crypto tokens? Should people be encouraged to believe that these are investments, when they have no underlying value? When the price of Bitcoin can readily halve within six months, as it has done recently, and some other speculative crypto tokens have gone to zero? Should a couple with retirement savings of £250,000, which would buy them an annuity of perhaps £6,000 at age 65, be treated as 'high net worth' and encouraged or permitted to speculate on crypto or other high-risk products with these savings? Should people without any significant savings or financial experience be encouraged or permitted to buy speculative crypto at all?

If the success of the FCA in regulating speculative crypto is going to be judged, and in due course no doubt it will be, these fundamental questions need to be properly and openly debated and answered well before responsibility passes to the FCA, rather than afterwards.

The project to bring speculative crypto into regulation also needs a workable operational plan which the FCA – and other regulators where appropriate – are fully signed up to delivering. That means realism about how long we need to prepare. Realism about how far many crypto firms will have to improve before they can be authorised. Realism about how consumers will actually behave online, supported by testing. And realism about the challenges of supervising a decentralised global activity which is an increasingly attractive conduit for organised financial criminals and money launderers.

Regulating crypto also means deciding how the FCA will raise the money to pay for the very significant costs of this additional regulation, including the question of whether the financial services industry as a whole should be exposed to the costs of failing crypto firms through the Financial Services Compensation Scheme. I think it shouldn’t, and that consumers should have to acknowledge that fact before an adviser helps them to buy crypto.

Last month I met a group of year eight and nine students at one of the academies in Newham near our Stratford office. They acknowledged that crypto was like gambling, but some of them had also been convinced by the internet that they could predict price movements and make money from them. They were very able students, but the hope of getting rich was stronger than any facts or rational arguments I could give them.

With celebrities as varied as Kim Kardashian and Larry David willing to take money to promote speculative crypto, how do we curb people’s enthusiasm to do something that may seriously harm their financial lives?

To summarise: just like the challenges of financial literacy, digital inclusion and financial crime, a challenge like crypto demands a well-functioning partnership between Government, Parliament and regulators. A partnership where all the partners deliver consistent policy and action to achieve defined and measurable outcomes.

And it’s critical that within that partnership there are strong safeguards to ensure that all interests – not just the interests of people making money from pushing crypto products, but also the interests of the people whose savings will be put at risk – are heard.

That requires a strong and independent financial conduct regulator.

Future Regulatory Framework

Which brings me to the Financial Services and Markets Bill which Parliament will be debating in the coming months.

This Bill will make significant changes to the relationships between the Government, Parliament and the financial regulators. Changes are needed, because the power to make some financial regulations is passing to the regulators, when previously it sat with the EU institutions, with accountability through the European and national parliaments. So it’s important that Parliament has more effective oversight of our work. Appearing before the Treasury Committee is not always a comfortable experience, but it’s an essential part of our accountability and we should provide as much support as we can to enable Parliament to scrutinise our work.

Because Parliamentary accountability is central to our role. But so is independence from the Government, which put the position very well in its October 2020 consultation document[5] on the Future Regulatory Framework:

'When combined with the valuable experience that comes from the supervision of financial services firms and markets, policy-making and the design of regulatory standards can be informed by the ’real-world‘ conditions and developments closely observed by supervisors. As observed by IMF studies, when regulators make these judgments independently from government, they are likely to deliver more predictable and stable regulatory approaches over time. IMF studies have also found that the response to financial crises has been less effective in countries without independent regulators.'

These views were echoed in the IMF’s assessment of UK financial regulation[6] a few months ago, which stressed the importance of ensuring that the independence of the FCA continues to be preserved and of ensuring that the final set of accountability mechanisms adopted under the Future Regulatory Framework review will pose no constraints for independent and effective oversight of entities and financial markets.

The independence of the FCA not only makes us more effective domestically; it’s a crucial part of our global reputation, enabling us to play a leadership role in the international standard-setting process. 
It’s also a key part of strengthening a culture of confidence and agile and assertive action at the FCA, which we’re determined to continue to build.

So although I recognise that the relationship between the FCA, Government and Parliament must change as a result of Brexit, and that decisions about the changes are for Parliament rather than me, I have some thoughts on how to make sure that the Bill achieves its aim as set out in the Queen’s Speech: ensuring that the financial services industry continues to act in the interest of all people and communities of the United Kingdom.

Growth and competitiveness objective

First, there’s a growing debate about one of the proposals which the Government is taking forward after its consultation on the Future Regulatory Framework: to 'make provision for the regulators to facilitate the long-term growth of the UK economy, including through the lens of international competitiveness.'

I've spoken in the past about a competitiveness objective[7]. We’ve shown how we can pursue our existing primary objectives – of protecting consumers, market integrity and competition in the interests of consumers – in a way which supports growth and competitiveness: through Innovate and the Sandbox; through moving swiftly to implement reforms to UK equity markets; through the pursuit of open global markets following Brexit. We’re embracing the suggestion to establish a ’Scalebox‘ to further help good businesses with innovative ideas to grow.

But I very much welcome the fact that the proposal on which the Government has consulted would be clearly secondary to our three primary objectives. In February, the Economic Secretary to the Treasury said[8]:

'I am very clear that this new objective must not conflict with the regulators’ primary focus: the need to ensure safe and sound firms, well-functioning markets and to protect consumers and promote competition.'

These are wise words, with which I agree.

I don’t think that we can achieve long term economic growth if we put the interests of the financial services industry ahead of the interests of other people in our society – producing an island of prosperous financial services professionals in a sea of inequality. That type of growth would be the opposite of levelling up. We saw that type of growth in Ireland and Iceland before the financial crisis – and to only a somewhat lesser extent here in the UK. It leads to economic and social instability and damage. The damage is often borne by those least able to bear it, not by those who inflict it.

The cost of living crisis brings this into focus. People will get into difficulty with their debts. People will be at risk of taking poor financial decisions about their savings. People will be more vulnerable to scams. We need a regulator focussed on protecting them.

It's now essential to follow the Government’s stated aims of respecting the FCA’s primary objectives to ensure that the financial services industry continues to act in the interest of all people and communities of the United Kingdom.

Government powers of intervention

The Government has also proposed taking new powers to intervene in the FCA’s processes. These include a power to direct the FCA to review areas of its rules and submitting FCA policy proposals to a new panel which would scrutinise in advance the cost-benefit analysis which the FCA already undertakes.

These proposals could be more difficult to get right than the proposed secondary growth and competitiveness objective. Difficult not just for the FCA, given the loss of independence and agility they could involve, but also difficult for the Government and Parliament.

The Government has said that it would only use a power to direct the FCA to review rules in exceptional circumstances. Nevertheless, there is always the risk that 'exceptional circumstances' turn out to be surprisingly frequent, or that the mere existence of the power could bring pressure to bear on the FCA to change its priorities. We have a very broad remit and limited resources. We currently set our priorities and allocate our resources based on our public interest objectives. If Ministers direct us to prioritise other areas, we may have to take resources away from issues which we consider to be more important. That would undermine our independent judgment and accountability. So it’s important to be very clear that these interventions really will only happen in exceptional circumstances.

The risk that the Government and Parliament need to guard against is creating a strong channel for lobbying by vested interests who want to bypass our public interest objectives of protecting consumers and promoting competition, using politicians to get the rules changed in their favour.

Similar risks arise with the proposed advance scrutiny of cost-benefit analysis. The FCA already has a published framework for both ex ante cost-benefit analysis and ex post evaluation of our policies and is committed to continuously improving these. We are ready to hear any suggestions for further improvement and transparency. However, we also need to ensure that we can continue to be agile in responding to harm in a fast-changing world, as we’ve shown during Covid-19 that we can be. So any measures relating to cost-benefit analysis should be designed with that in mind.

As I have said, we have enjoyed strong and effective partnerships with current Treasury Ministers to address issues of EU withdrawal, Covid-19 and the financial sanctions to respond to Russia’s war of aggression in Ukraine. But legislation should be robust enough to cope with the political cycle, which can bring changes of Ministers and changes of government. In the current framework, the FCA as an independent regulator with a strong consumer focus provides the balance that is needed to reduce the risk of lobbying and interference. The Future Regulatory Framework must preserve that balance and reinforce the ability of Parliament to play its role in holding regulators and the Government to account.

Conclusion

The last four years have been a challenging time to chair the FCA, accounting for a series of events that started more than a decade ago, at the same time as the FCA has been given more and more responsibilities. Not to mention the major change of the UK’s relationship with its largest and closest trading partners, a global pandemic and a war in Europe.

Despite those challenges, we’ve successfully made the transition to a new board and management team and launched our strategy for fundamental change of the organisation.

In the last four years I’ve been energised to drive this change by meeting people across the UK. These meetings have been humbling and inspiring, helping me to understand what financial regulation needs to deliver if the financial system is to better serve the needs of all people and communities of the United Kingdom.

I’ve also been fortunate to work with some exceptional colleagues at the FCA in the last four years whose public service values and resilience have contributed to what the organisation has managed to achieve in this challenging period, including three outstanding chief executives.

I’m optimistic that the changes that we have put in train at the FCA will ensure we play our part as best we can. We are already taking a more assertive approach to rejecting unfit businesses seeking authorisation. We are already acting faster to eject businesses that are no longer fit. We are already taking and succeeding in difficult enforcement cases against businesses that fall short. And I’m confident that in the coming years we can be even faster, more assertive and more successful.

But we can’t achieve our full potential on our own. We also need stronger partnerships with the Government, Parliament and other regulators and coherent and consistent policy action from everyone involved in regulation, to deliver measurable outcomes in the real world.

As Parliament debates some critical changes to these relationships, we must ensure that the UK financial services industry is the servant of the people of the United Kingdom, not their master. It should prosper, but it should do so by providing the services that people across the UK need at fair value. Delivering that outcome requires fair competition, including innovation and market access. And that means strong and independent regulation with clear public interest objectives. Consistent regulation which endures longer than the political cycle. And regulation which is ready and willing to take on powerful vested interests.

Above all, regulation that listens up to the diverse needs of people across the nations and regions. That’s how we can play our part in levelling up the UK.