Ben Mason, CEO, My Compliance Centre

27 September 2022

The future of regulation is of interest to us all; from the boards of regulated companies trying to work out a future strategy, to those with compliance responsibility wondering what the future holds and to people like me who have a strategic interest in the development of the financial services industry.

And, given current political developments, it is increasingly difficult to call. The conflict between the rhetoric of politicians and the carefully constructed statements of senior regulators are very much at odds. 

But, if I was a betting man, I think I would back the regulators as being closer to the truth. 

What is the political landscape and it’s context?

It has been front page news over recent weeks. Liz Truss apparently supports a return to a single regulator and Kwasi Kwarteng has been meeting senior industry leaders to discuss dismantling the red tape holding the industry back. Alongside that, there is still a need to deliver a Brexit dividend to the financial services industry. The UK has lost jobs and trade to the EU, having exited the single market, while also not benefitting from reciprocity of access to EU markets that the UK has offered to EU companies wanting to trade in the UK.

The political principal is to promote growth by reducing the negative impacts of regulation. However, unless I have missed something, the only specific changes in regulation proposed to date are a dilution of the Solvency II rules, which ensure insurance companies maintain enough capital, and the proposal to remove the bonus cap for bankers. There may be merits in both proposals, but they are not going to change much.

The conversation about cutting red tape is one I always enjoy. You know the one, where someone says, “we should cut regulations!”, and you say in response “Absolutely! Which ones should we start with? The ones that ensure we have enough capital and liquidity in banks, so we can weather a pandemic and a war without a financial crisis? Or the ones that prevent mis-selling of financial products to vulnerable consumers?  Or the ones that prevent our personal data from being stolen, traded and abused? Just list the regulations we should get rid of, and we can start straight away!”. Of course, it is easy to state a principal of reducing red tape but working out which regulations can be lost, while offering significant overall benefit to all parties, is not so easy.

Making it easier to do business via a reduction in regulation is the political angle. So, what do regulators think about that?

The Regulators Angle

How do regulators, and the FCA in particular, see the future?

There are plenty of hints for us to go on, both observing how regulators are currently operating, as well as what they say and write. 

Firstly, let me go back a few years to an interview I had at the FCA. 

As an external stakeholder, I was being interviewed as part of a project to help the FCA understand how they were viewed. “State 3 words that describe the FCA” they said.

I had to think about it; I was not expecting the request.

After a period of reflection, I replied “‘dedicated’, ‘professional’ and ‘nervous’”. If I was asked the same question again today, I would give the same answer.  

The dilemma for regulators is that there is very little positive appreciation for their work. No one ever says, “thank God for the regulators who have prevented mis-selling to vulnerable customers”. Or “aren’t our regulators good?, bank capital and liquidity standards are such that there is no financial crisis to make the pandemic even worse.” And so on.   

Instead, what happens with every regulatory failing is a massive finger pointing exercise. In turn, this naturally has the impact of making regulators more careful, less open and tougher on firms they deal with. 

So, while the FCA’s staff are unquestionably dedicated and professional, in my opinion they are also, very nervous (quite understandably) about getting anything wrong. This impacts strongly on how they behave. 

Given all of the above, what is the future of regulation in the UK?

Well, for innovative entrepreneurs and for those wanting to get new firms authorised, then life is simply more difficult and more expensive.

The FCA is preventing future harm by making authorisation for new firms far more challenging. It has been crystal clear about this and has even made increasing the number of failed applications one of its leading KPIs. The recent experience of firms applying for authorisation strongly underlines this position. Most frustratingly, consultants supporting applicants’ firms report that the regulator simply is not predictable. The FCA’s risk appetite can change mid-application, making it very difficult to invest in a new business with confidence.

For those already authorised, a more intrusive approach is where it is at (and how many times have we already said that in the last 20 years?). Everyone in a management position within regulated financial services should reflect on the FCA’s stated measures of their own performance (reference FCA CEO Nikhil Rathis’ speech in July 2021). One of the measures is:

“Increasing the number of firms whose permissions we remove either permanently or temporarily”.

As I read it, the FCA is targeting itself with putting more firms out of business. Measures like Consumer Duty will facilitate this. 

To do this, the FCA needs to intervene much earlier, meaning that where it sees the potential for a regulatory failure it will step in early – even if that failure would never have materialised in reality. 

The implications for regulated firms are that they need to be forward looking, to test their business models against potential regulatory failures and to be able to accurately predict where the FCA’s gaze will settle. Practically, this means compliance and risk functions need resourcing for monitoring against future risks as well as executing current compliance responsibilities and the ability to respond decisively to any FCA investigation or information request will prevent a lot of pain.

My apologies if this does not read very comfortably. I believe it is also at odds with our new politicians’ position of deregulation to facilitate growth. 

Politicians or Regulators – Who will “win”?

Unfortunately, I cannot see how our politicians can affect any major reduction in regulation without a real shake up and reversal of the policies adopted in response to the numerous regulatory failings over the last 15 years. The government may be desperate, but it will require a brave government to rip up the current playbook and abandon commitments to protect consumers, ensure the integrity of markets and reduce financial crime.