Aiming for calm seas in our market reforms

Speaker: Sarah Pritchard, Executive Director, Markets and Executive Director, International
Event: City Week 2024
Delivered: 20 May 2024
Note: This is the speech as drafted and may differ from the delivered version

Highlights

• We are committed to making sure that regulation supports the UK’s position in global wholesale markets as well as facilitating the UK’s economic growth and international competitiveness.
• Our outcomes based approach will continue to support innovation, helping our markets remain efficient.
• We welcome views and engagement on our reform agenda and the way we operate, so that we can support the continuation of effective and efficient capital markets.

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I’m going to let you into a secret.

A fact not known widely about me is my hobby of outdoor cold water swimming.

While getting up early sometimes to delve into icy waters is not everyone’s idea of fun, for me there is a certain exhilaration about those first steps into the water and braving the elements.

This is not a risk free activity – quite the opposite in winter without a wetsuit.

The challenge is in preparing for the elements, being alert to the level of risk, looking at the water thermometer, listening to feedback from my fellow swimmers and my body to work out how long to stay in for – and keeping to a steady rhythm whether the water be covered with ice, or a comparatively balmy 20 degrees.

I have developed a rather consistent and predictable technique for maintaining stamina throughout the winter months – rounding off each swim with a nice warm drink to gently warm up.

I take the same approach to my job. While the economic and financial weather may not always be calm and sunny, we need to make sure that our rules work and can adapt for all types of challenges and can cope with some serious buffeting, at the worst of times.

I also know that regulatory certainty and predictability is important – as well as our ability to adapt and focus on outcomes – whatever the external environment.

Regulation to support efficient capital markets

The size and scale of the UK financial sector is worth reflecting on. It employs more than 2.5 million people and produced £278bn of economic output, which is 12% of the entire UK’s economic output, contributing £100bn in tax revenue.

Its importance is what fires me up every day while doing my job.

So, an efficient and effective capital market underpins the success of the financial sector which is a mainstay of the UK economy.

The FCA is committed to making sure that regulation – and the way we operate as regulators – supports the UK’s position in global wholesale markets as well as facilitating the UK’s economic growth and international competitiveness. As we look to our ambitious agenda for regulatory reform – we start from a strong place.

London is second only to New York in the latest Z/Yen rankings of global financial centres.

But that does not mean there is no scope for further efficiency or indeed reform, and reform which involves a different balance of risk. You will have seen that across the capital markets agenda we are doing just that, through a package of reform which has been well signalled since various government led reviews examining the strength of the UK’s wholesale markets in 2021 – and which are now at the implementation phase.

The reforms include the most significant changes to our listings regime in 40 years, with proposals that would do away with the current separate categories of premium and standard listings for commercial companies in favour of a single category, which will operate with more of a disclosure based philosophy instead of ex-ante controls.

The proposals aim to support investors to make their own decisions on risk and where to invest, based on appropriate disclosure and other safeguards to preserve market integrity and investors’ decision making.

We hope that these reforms will help to boost the UK growth and competitiveness by making our regime more attractive to a wider range of companies, so they are encouraged to list and grow here and so that our framework better aligns with international comparators.

But as we know that these reforms will involve a different balance of risk we have sought to engage extensively across the market, including with investors, to build as much consensus as possible before we reach our final decisions by the summer.

We also know that while regulation can provide the foundations for a successful capital market, it will not necessarily by itself achieve that – other factors are relevant too.

Proportionate capital markets reform

As we take the opportunity of the new smarter regulatory framework, we are busy working on incremental changes where change is sensible to support our objectives – albeit this is not simply change for change’s sake.

We are grasping the opportunities and ambition set out by the government in the Edinburgh reforms. Through reforms that establish a new consolidated tape for bonds, which should result in cheaper, higher quality and more accessible data for its users. To changes to the bond and derivative transparency regime – which aim to recalibrate the regime to drive greater transparency but at a lower cost, for trading venues and investment firms, through more proportionate and better calibrated requirements.

Our work seeks to support transparency through disclosure of relevant, prompt and quality information to investors. This would strengthen investors’ abilities to make decisions and support price formation, market participation and confidence in markets. But in a proportionate manner and cost.

We also know that one size doesn’t always fit all – which is why we have acted quickly in response to the Government-commissioned Investment Research Review, chaired by Rachel Kent, to support greater optionality around how firms can pay for research.

Our proposed reforms seek to give asset managers and others greater flexibility on how they buy research. This greater choice should suit firms of varying business models and sizes, helping to promote competition. It will allow the ‘bundling’ of payments for third-party research and trade execution, and would exist alongside those already available, such as payment from an asset manager's own resources or from a dedicated account.

The new plans are also compatible with rules governing research payments in certain other major jurisdictions, making it easier for asset managers to buy research in the same way, across borders.

Predictable but future focused regulation

Markets are never static and to be efficient they must be able to adapt.

Our shift to outcomes focused regulation is deliberate – we believe that this approach will better support innovation and changing markets, supporting the UK’s growth and competitiveness and helping markets remain efficient.

To be a success, predictability and agility is important. This is not as incongruous as it sounds.

We want to take the opportunity of the reform that is underway, to be as future facing as possible. I do not want us to be regulating for problems of the past – rather using the lessons from the past to help us set the framework and outcomes that we want to see – balancing our objectives for the future to support markets as they develop.

AI is a case in point. We will not be regulating for regulation’s sake and will be guided by our outcomes-driven approach. But we must provide certainty and encourage the safe adoption of AI in UK finance markets, so we must also look at digital infrastructure, resilience, consumer safety and data.

Innovation and international engagement

The FCA innovation services are world leading. Our innovation sandbox is 10 years old this year, and our sandbox model has been replicated by over 95 international regulators.

While the number of applications from wholesale firms, in comparison to all applications, is not as high as we would like as they may not be aware of the opportunities, wholesale firms are in the top 4 sectors that accessed our innovation services in 2023.

Areas where we are providing support are in Distributed Ledger Technology and blockchain technology, mobile application and web platforms, AI and machine learning and Application Programming Interface.

We are also working with leading industry and academic experts to understand future market developments. This year, for example, we have published a paper on Quantum Security[2] with the World Economic Forum, and a paper of Synthetic Data best practice[3] through our Synthetic Data Expert Group.

Our innovation offerings test and encourage innovation and future competitiveness and are a key offering which helps to support new market developments. Through our Early and High Growth Oversight approach we have supported more than 300 newly authorised firms to understand their obligations and meet the standards we expect, particularly innovative firms which may need more support.

The schemes help us understand and adapt to financial technology trends, provide expertise and insights, support agile regulation and enable global thought leadership on innovation. We support new beneficial and responsible business models and services being launched.

A recent paper[4] published in 'Review of Finance' Journal found that firms entering the Regulatory Sandbox[5] see an increase of 15% in capital raised and are 50% more likely to raise capital than their peers, as well as the Sandbox having 'significant positive effect on survival rates and patenting'.

Supplementing our domestic sandboxes and innovation offerings we lead and chair the Global Financial Innovation Network (GFIN)[6] – a global sandbox if you like – bringing together more than 80 members globally, from member jurisdictions which represent around 44% of global GDP.

The GFIN looks to give a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas. This includes the ability to conduct a cross-border test – a solution for firms wishing to test innovative products, services or business models across more than one jurisdiction.

It also aims to create a new framework for co-operation between financial services regulators on innovation related topics, sharing different experiences and approaches.

We have also taken a leading role in areas like environmental, social and governance (ESG) labelling and the Sustainability Disclosure Regime where industry has welcomed our proposals and asked other jurisdictions to follow our lead.

Innovation is key in ensuring our capital markets are, and remain, efficient. And we are committed to continuing to support this – whether that be through regulation (if that is needed) or by a test and learn philosophy through our innovation offerings and international partnerships.

Working together in a changing world

While we concentrate on supporting a healthy and efficient market sector in the UK, we cannot ignore what seems to be an increasingly turbulent geo-political world. Of course, we cannot control world events or the rapid pace of change across economies. We live in sometimes staggering times of technological change, changing demographics and international marketplaces.

There are often differing regimes in place internationally but as the world economy and financial markets are ever more global, we are leading the way in key areas where international cohesion is most important such as digitisation and crypto. We also maintain close relationships with international partners on market risk – which often arises across border.

Having worked in global roles in an international bank, I understand how important it is to be able to have as straightforward an operating model as possible across international borders – and how the ability to do so depends on as consistent standards as possible.

Agreements internationally are never easy and defining rules at home can be challenging too as firms often have different views about what the framework should be, depending on their operating model and geographic footprint.

So how we set rules, test them and engage with the market is vital.

You will have seen us increasingly convene roundtables to discuss our consultation proposals – and sometimes seek to test various options during our consultation process. We want to test that our regulation will drive the right outcomes.

Input from the market as we design our future facing rules is key to avoiding unintended consequences or worse, taking a hammer to crack a nut. Confidence in the market is essential, underpinned by a clear regulatory regime.

On that note, I want to say that I know there have been concerns about our proposals to announce the fact of some enforcement investigations earlier on in the process where it is in the public interest to do so. We recognise that this is a sensitive and emotive issue so we will take time to consider the feedback, engage further with industry and explore thoroughly the concerns and evidence shared with us, with an aim of reaching a broad consensus.

Be assured that we do listen. We are evidence-led so will only act where a failure to do so would cause harm to consumers and undermine the integrity of our markets.

Before I wrap up, I wanted to thank you all for your time today. And for your robustness in engaging with us on our reform agenda, as well as the way we operate, so that we can support the continuation of effective and efficient capital markets.

I welcome that input and engagement.

Please keep speaking to us. It shouldn’t be arduous work. I would like it to be more like the experience of having a warm cup of tea after a challenging outdoor swim.