Open regulators and open markets

Speaker: Ashley Alder, Financial Conduct Authority Chair
Event: UK Mission to the European Union
Delivered: 20 February 2024
Note: this is the speech as drafted and may differ from the delivered version

Highlights:

• Global cooperation amongst regulators is vital for cross-border risks.
• The FCA’s three primary statutory objectives are fully aligned with an open markets philosophy.
• The FCA is committed to finding consistent international responses to challenges that increasingly give rise to cross-border risks, including ESG, Fintech and NBFI.
• The 2023 UK-EU MOU on regulatory cooperation on financial services will enable us to deepen relationships with our EU counterparts as we pursue similar reforms.

Introduction

Deputy Ambassador, it’s great to be able to join you in what I gather has become a regular Embassy event the day before Eurofi.

I joined the FCA as Chair exactly a year ago today. And since then, I’ve come to understand the challenges to global cooperation amongst regulators in a world where market fragmentation and shifts towards protectionism are an undeniable trend. 

Effective cooperation matters hugely to enable us to manage the considerable risks that accompany extremely large volumes of cross-border financial activity. And of course, this includes activity between the EU and UK, whose financial services sectors remain closely intertwined. 

Whenever possible I have sought to emphasise our strong commitment to our relationship with the EU, especially with our counterpart financial market regulators. 

In fact, only three weeks ago I attended ESMA’s Board of Supervisors to exchange views on some of the many topics we have in common. These ranged from AI and digital markets to sustainable finance and the risks that arise from the sizeable shift of financial activity into so-called “non-banks” and private markets.  

These discussions demonstrated to all who were there that close cooperation is more essential than ever in a world facing what some have called a polycrisis.

Commitment to Open Markets 

It’s hard to overstate the turmoil we are all attempting to navigate. Conflicts in Europe and the Middle East. The climate crisis as the defining challenge for generations to come. And the lasting economic drag of COVID with higher living costs for many across the world. 

The IMF has pointed out that these challenges have resulted in an increased threat of fragmentation and decoupling of trade, resulting in a significant impact on global GDP.  

In 2021, Ipsos polled people across the world on their attitudes to trade. 

Unsurprisingly most people, regardless of where they lived, thought that an expansion of trade was a good thing. At the same time, in most countries, more people agreed that there should be greater barriers on imported ‘foreign’ goods and services. 

This illustrates vividly some fundamental tensions which can even impact our effectiveness as regulators of global financial activity.  

The FCA’s primary statutory objectives are to enhance market integrity, promote competition and protect consumers. Each objective is fully aligned with an open markets philosophy where healthy competition lowers costs for consumers and high, consistent and proportionate standards reduce unnecessary, expensive frictions across the financial services landscape.  

This approach enables centres of excellence to develop, which provide benefits well beyond national borders. And it’s true that the UK has been an historic beneficiary of open markets.

Despite some recent pessimism about the future of the UK’s equity capital markets (which I personally think is misplaced), we remain the largest market in the world for debt issuance, the largest centre for commercial insurance, number one in foreign exchanges, the second largest base for asset management and the second largest fintech hub.  

Financial centres in Europe are, understandably, incentivised to compete for some of this business.  

In the UK legislation was passed last July to give us a new, explicit secondary objective to pursue the UK’s international competitiveness and growth. This is reflective of a healthy ambition shared by many national regulators to pursue policies which are aligned with long term economic success. 

But we also know from experience that there is often a strong temptation to intervene in ways that build barriers which ultimately result in costly fragmentation of global activity. Among other effects this increases the cost of capital in a world where financial flows have outsized significance – not least to finance the transition to net zero.  

So, to be clear, our new competitiveness objective does not imply isolationism or a dialling back on our commitment to cooperation and open global markets. In fact, just the opposite.  

In an interconnected global economy dependent on international investment, the FCA knows that it can’t achieve its consumer, market integrity and competition objectives alone.  

We have made clear that cooperation around international standards and cross-border collaboration is closely tied to efficient capital formation and greater productivity. And we believe that this holds just as true for our EU counterparts as it does for the UK.  

In short, the FCA is committed to finding consistent international responses to challenges that increasingly give rise to cross-border risks, collaborating with our EU and international partners to foster open and competitive global economies.  

I’ll touch on just a couple of examples of how we are doing this. 

Overseas Funds Regime 

First, last month the UK Government announced its decision that EU states are deemed equivalent to the UK under our Overseas Funds Regime.

This enables EU UCITS funds to be marketed to UK retail investors, supporting the existing global operating model of asset managers and facilitating greater consumer choice. 

As with any properly implemented equivalence regime it also ensures that foreign funds sold to UK investors meet high standards of transparency, investor protection, and regulatory oversight. My hope is this initiative could be a pathfinder for additional findings of equivalence in years to come, to include principles of reciprocity. 

In this spirit the recent financial services agreement between the UK and Switzerland signified an ambitious attempt to push the envelope in terms of what can be achieved in developing more formalised financial services cooperation agreements. 

This deal delivers enhanced market access with closer regulatory and supervisory cooperation, with each jurisdiction recognising that the other’s system of regulation delivers equivalent outcomes across a suite of financial services’ activities. This approach is fully aligned with competitiveness and economic growth objectives for each side. 

ESG, Fintech and NBFI 

More broadly we see a cooperative approach as a necessary condition for the collective effort required to tackle the challenges and opportunities posed by the climate crisis, developments in Fintech and the growth of financial intermediation outside banks. I’ll take these in turn.  

Financing the transition of our economies to a low-carbon future demands a global approach to a problem which, more than any other, transcends borders. Many countries have announced ambitions to be competitive centres of green finance, including the UK. But for any of us to realise the full extent of these ambitions it is crucial that we agree the rules of the game globally.

Without sufficient global consistency investors lack the ability to compare and make informed choices, resulting in sub-par capital allocation decisions which fail to align with the climate transition.  

So here I’ll point to the impressive progress made by the International Sustainability Standards Board[1] (ISSB), which was set up as recently as 2021. Its baseline disclosure standards are now being adopted across the world, and we were impressed to see how willing the EU authorities were to incorporate these standards into their own frameworks.  

We are similarly committed to the work of the EU’s International Platform on Sustainable Finance[2] (IPSF). This is where the FCA is participating in a transition finance working group with a view to leveraging the UK’s new Transition Plan disclosure framework[3] to inform a globally coherent approach.  

The FCA has also drawn on the EU’s experience to adapt our regulatory expectations to meet the needs of a sustainability-focused market for financial products.

Our recently published Sustainability Disclosure and investment labelling regime[4] is fully aligned with the ISSB’s drive for global interoperability, enabling firms to rely on overseas standards when reporting to stakeholders, including the EU’s green taxonomy.

Fintech 

Fintech is another example of how international cooperation among regulators can support firms and consumers, whilst managing a set of novel risks. This sector is now a major disruptive force, challenging traditional financial institutions and driving innovation across the industry. 

In each of the seven largest European economies there is now at least one fintech among the top 5 banks. The attitude of most regulators to these innovations is fairly binary. First, by fostering an environment that encourages fintech ideas to flourish we aim to promote competition, enhance consumer choice and protection as well as encourage economic growth. 

Many of us have launched successful regulatory and digital sandboxes and have set up mechanisms to learn from each other as innovation develops.

But we must also be alert to new risks where the development of common international approaches to protect financial stability and competition is essential.  

The failure of SVB and other problems with banks last year was a prime illustration of how technology has massively accelerated the speed at which bank runs can develop. This requires smart policy responses which don’t increase moral hazard.  

Important questions are also being asked about the evolving role of Big Tech and social media across financial services.  

For example, last November the FCA issued a call for input about the way in which Big Tech firms could gain advantages from their digital activities when they combine core business data with financial information sourced from different data sharing mechanisms. 

When this combined data is leveraged through advanced analytics and AI, the result could be that these firms gain entrenched market power. 

We recognise that there could be benefits arising from a concentration of customer data in Big Tech firms. But my overall point is that a handful of them have already achieved unprecedented global reach, meaning that incentives for regulators to learn from each other and pursue common approaches are hugely compelling.  

Here I’ll just point to the UK’s recent proposals enabling financial regulators to directly regulate how Big Tech firms provide critical services to financial firms, such as cloud storage. This is a good indication of how our remit is likely to expand into sectors which have not traditionally been classed as financial services. And I know that our European partners are looking at similar issues. 

NBFI 

I’ll finish with a word on so-called non-banks. These comprise a vast range of globally active public and private investment funds, money market funds, pension funds, insurers and the like, which have grown to intermediate around 50% of global financial assets.  

Their activities have led to a wall of worry, with the Archegos episode, disfunction in global nickel markets, the LDI incident and concerns about hedge fund activity in treasury markets all seen as canaries in the coalmine for potential global financial stability risks.  

In my view the priority for regulation of this vast and diverse non-bank sector should hinge on a global effort to improve the data needed to spot risks in private markets and supervise them credibly. This should include a good understanding of hidden leverage, a better assessment of liquidity risks, and better information on exposures between private markets and traditional banks. 

To this end we are working with our international partners in the FSB’s Leverage Working Group, which we co-chair with the ECB[5]. This aims to identify gaps in existing data and policy tools to address the build-up of systemic risk arising in opaque markets where interactions between leverage and poor liquidity can signal trouble.  

The point, once again, is to recognise that none of us can hope to manage the cross-border risks implicit in the shift of activity into private markets without close international coordination.

UK-EU collaboration 

To sum up, I believe that the UK and EU must lead by example. 

As two of the world’s largest economies, our actions reverberate far beyond our borders. We should demonstrate an unwavering commitment to high standards, openness and cooperation, not only in our bilateral relationship but also in our interactions with other trading partners.  

We may have left the EU, but the ties that bind the UK and Europe together - economic, cultural and relationships forged over decades - remain incredibly strong. 

You should naturally expect that the FCA will take full advantage of its ability to pursue a major reform program to tailor financial services regulation to suit UK markets, using powers newly given to us in legislation passed last July.  

But in doing so we recognise that in key areas the EU and UK are pursuing similar reforms which, although not identical, signal common causes. We are fully alive to the dangers of regulatory fragmentation, and while I believe that we should avoid talking about reforms in terms of ‘divergence’ between the UK and EU, I can also say that we won’t be pursuing change for change’s sake.

Last year’s UK – EU MOU on regulatory cooperation on financial services[6] was an extremely welcome development, enabling us to deepen relationships with our EU counterparts which are already close and collegiate.  

By strengthening our partnerships, enhancing our cooperation and upholding our shared values, we can build a more prosperous future for generations to come.