Speaker: Andrew Bailey, Chief Executive
Location: The QEII Centre, London
Delivered on: 19 July 2016
Note: This is the text of the speech as delivered
Retrospective
I want to start by recording my thanks to Tracey McDermott for her work both before and during her time as acting Chief Executive. Tracey has been an example to many people for her dedication to public service and the rigour of her thinking and actions.
This is my third week at the FCA. I am greatly enjoying the challenges of the role.
Can I start by thanking all of you for taking the time to attend our Annual Public Meeting. For us, it is a very important opportunity to set out what we are doing and to hear from you all, as people who are directly affected by our work.
There are two parts to my remarks today:
• overview of the work of the FCA
• my first thoughts on future challenges for the FCA, including the impact of the referendum
Overview of the work of the FCA
The core work of the FCA centres around:
• supervision, including thematic work and the authorisation of firms and individuals
• policy, including competition, and
• enforcement
I’d like to highlight a few major issues which the FCA has dealt with in each area this year.
Supervision
Supervision starts with getting firms and individuals authorised to work in the financial services sector. This includes examining the sustainability of firms’ business models and assessing the fitness and propriety of individuals, in both areas to meet our standards.
We took over regulation of consumer credit in April 2014. To deal with the transfer of consumer credit from the OFT, the FCA put in place significant extra resources to deal with the firms that were granted interim permission and went on to request full authorisations as well as anticipated new applications.
However volumes were higher than expected for new firms wishing to enter the market. By March 2016 we had authorised 31,000 firms.
We maintain high standards for firms wishing to enter the market. In certain areas of consumer credit, there is a high risk of consumers experiencing unfair outcomes.
In some cases, it has taken considerable time for us to rigorously assess some firms and for those firms to be in a position to demonstrate to us that they meet our standards. We expect that 99% of all applications that are closed by the end of September will be determined within the statutory deadline.
Once authorised, firms are subject to our supervision regime. The largest firms are subject to the closest supervision, with a programme of supervision tailored to their business.
Thematic reviews
During 2015/16 our thematic reviews included looking at the quality of debt management advice; and the fair treatment of long-standing customers in the life insurance sector.
Consumer credit thematic reviews
On debt management advice, the review looked at the quality of advice, transparency and disclosure, cross-selling and incentives, and systems and controls.
There are currently around 400,000 people on commercial debt management plans in the UK, and the review showed that debt management firms pose a high risk to consumers, particularly the most vulnerable.
We are currently undertaking a firm-by-firm assessment through our authorisation process to decide if debt management firms meet our standards.
Staying with consumer credit, our thematic review on high-cost short-term credit looked at how payday lenders and other providers collect debt and treat customers in financial difficulty.
We found unacceptable practice from many lenders including failure to recognise customers in financial difficulty.
However we also recognised that some firms were making changes to improve their practices, for example through staff training or improved monitoring of problems. We will be looking for this practice to become general.
Life insurance thematic review
In the life insurance sector, we published a report in March setting out findings from our thematic review of the fair treatment of long-standing customers in life insurance.
Our review used a sample of 11 firms with around £153bn held in closed-book products for around 9.4 million customers. We found a mixed picture in one or more areas and poor practice in others.
Our report, Fair treatment of longstanding customers in the life insurance sector, detailed our expectations of firms against a range of customer outcomes which we consulted on in advance of publishing finalised guidance for firms in 2016.
Markets
In the primary financial markets we have looked at the operation of debt markets and the processes in Initial Public Offerings. We also undertook a substantial piece of work on regulating benchmarks.
LIBOR
LIBOR has been regulated since 2013, and seven major benchmarks entered the regulatory perimeter in April last year following the Fair and Effective Markets Review recommendations. We have been working to improve governance and controls across regulated benchmark activities.
As part of our supervision activity we carried out visits to each of the 20 banks which submit the data that sets the LIBOR rate. We assessed the systems and controls in place in each bank.
We also looked more widely at the approach firms were taking to benchmark activities and in July 2015 we published outcomes from our thematic review of the financial benchmarks oversight and controls.
Our review suggested that, although firms have made some positive changes to improve their governance and controls around benchmark activities, significant further work is needed to ensure that all the risks are managed appropriately.
We expect improvements to be made where we have identified shortcomings.
Senior Managers Regime
Let me turn now to the work which has been done to improve accountability at the senior level of firms.
The Senior Managers and Certification Regime and Senior Insurance Managers Regime started on 7 March this year.
The regimes are one of the most important reforms in financial services since the start of the financial crisis. One of the concerns coming out of the crisis was the lack of clarity within firms about who held responsibility for failures within firms, which meant that individuals could not be held to account.
These regimes represent the beginning of a new era of increased individual accountability. They will hold individuals working at all levels within relevant firms to appropriate standards of conduct and ensure that senior managers are held to account for misconduct that falls within their area of responsibility.
We are now in the early stages of considering the best way to implement the SM&CR across all firms, recognising the variety of activities and different sizes of the firms that will be in scope of the regime.
We are conscious of the need to implement a cohesive yet flexible and proportionate regime across all FSMA firms that embeds accountability and provides a credible deterrent for misconduct.
Policy
I’d like to talk about some of the areas where we have implemented or consulted on new policy in the past year.
PPI
Since 2011 nearly 17 million consumers have complained resulting in the payment of £24bn of redress. In the last financial year, over 2.3 million consumers have complained and over £4.5bn of redress has been paid by firms.
Our current rules and guidance on PPI complaint handling have been in place since 2010.
Last November we published proposals to set a deadline by which consumers would have to make PPI complaints, preceded by a major communications campaign telling consumers about the deadline and how to make their PPI complaint.
The campaign would be funded by a levy on the firms who sold PPI and the deadline for complaints would be set for two years after the proposed rules came into effect.
The consultation closed in February. We are considering the responses and undertaking additional work. We will publish our findings and set out next steps shortly.
Pension reforms
Since 2012, the pension and retirement income market has undergone the most profound change in a generation.
The UK, like other nations, is dealing with a huge challenge to ensure that our ageing population is able to make the right choices about how they save for and fund their retirement.
This is requiring us to work closely with a range of organisations within and outside Government.
I regard this as the biggest single challenge ahead in the provision of financial services in this country.
The Government has introduced widespread reforms which give firms greater responsibilities to support employees in accumulating retirement funds and consumers greater flexibility in how they access their pension funds.
In this complex landscape it is essential that we are clear about where we are focused. So let me offer some examples of our activity in the past year.
The starting point is consumer protection. We reviewed our pension and retirement income rules in the first half of 2015 to ensure our regulatory requirements provide appropriate and proportionate consumer protection.
We consulted on proposed changes in October and published our final rules and guidance in April this year.
The changes focus on ensuring that consumers get relevant, timely and adequate information to help them explore the range of options for accessing pension savings and enable informed decision-making both at their intended retirement date and beyond.
In January the Chancellor announced that the Government would place a new duty on the FCA to cap early exit charges for consumers eligible to access the pension freedoms. The objective of the cap is to secure appropriate protection against early exit charges deterring consumers from accessing the pension freedoms.
In May, we proposed that, for existing contract-based personal pensions, including workplace personal pensions, exit charges will be capped at 1% of the value of a member’s pot.
We also introduced rules to implement the Government’s 0.75% charge cap on default funds of workplace pensions and to stop providers using differential charges based on contribution status in workplace personal pension schemes.
We have taken steps to ensure that schemes have appropriate governance. We require regulated firms operating workplace personal pension schemes to ensure minimum governance standards for these schemes.
We also published the final report of our retirement income market study and this year are following through with the retirement outcomes review.
And we have continued to warn consumers of the risk from scams. Our ScamSmart campaign is a crime prevention campaign aimed at retired consumers and those approaching retirement.
It stresses the importance of rejecting cold calls, checking our warning list before making an investment and getting impartial advice. Since we launched the ScamSmart campaign in 2014 over 350,000 people have visited our campaign hub and more than 26,000 have checked an investment on our warning list.
Advice
In August 2015 we announced jointly with the Treasury the Financial Advice Markets Review (FAMR). The aim of this review was to address concerns that the advice market was not working well for all consumers.
FAMR found that affordability of advice was a barrier to the less well-off. Full, face-to-face advice can be expensive and not always cost effective for consumers, particularly those with small amounts of money or simpler needs.
Many consumers who want guidance or limited advice cannot find it or end up paying for advice, even if their needs are straightforward.
In simple terms the Retail Distribution Review has achieved its objective of removing opaque charging through commissions and improving the training and qualification of advisors, but had – along with a number of other significant developments – contributed to an advice gap opening up for the less well-off and those in need of single event type advice.
Some firms do not provide these services because they are concerned about potential liability and uncertainty around regulation.
The vision which FAMR offers is to ensure that all consumers have access to appropriate, affordable advice and guidance, at all stages of their lives.
It recommended intervention in the following areas:
• affordability: develop cost-effective ways of delivering advice and guidance to consumers – focus on technology
• accessibility: increase consumer engagement with financial services and stimulate demand for advice/guidance
• liability: give firms more certainty regarding costs/liability
The recommendations were principally for ourselves or the Treasury.
We have already begun work on a number of areas which fall to us including:
• establishing an Advice Unit to support businesses who are looking at low-cost automated advice solutions
• the creation of a new Financial Advice Working Group, and
• the recommendations from the review have already been fed into the ongoing work looking at how the FSCS levy is funded.
I know that the recommendations and their implications are of huge significance for those who operate in the financial advice market. I will work with stakeholders as we progress this agenda.
Competition
Promoting effective competition in the interests of consumers is one of our key operational objectives.
Where we find barriers to competition, either within sectors or as a result of our rules, we take steps to remove them.
Three market studies were completed this year on cash savings, general insurance add-ons and credit cards.
On cash savings we want to address the problem that savings providers paid, on average, lower interest rates on longstanding accounts than on new ones.
We are shining a light on this by regular publication of the lowest interest rates that firms offer on savings. We are also introducing rules which will require firms to provide clear information on cash savings rates and a prompt and efficient service to customers who want to switch to a better account.
In the general insurance market we have focused on add-ons – where additional products are sold alongside the principal product. We have introduced new rules to ban opt-out selling. Instead consumers must make an active choice to buy an additional product. And we have also issued guidance to improve the information provided to customers.
We also conducted a detailed market study into the credit card market; one of our largest scale studies to date.
We analysed five years’ worth of accounts from 34 million anonymised customers and carried out in-depth surveys with 40,000 customers. We published our interim findings in November.
Nearly 2 million customers are in arrears or have already defaulted. A further 2 million have persistent levels of debt and a further 1.6 million are repeatedly making only minimum repayments.
We concluded that competition is working fairly well for most customers, but we had significant concerns about the scale of problematic debt for others. We will shortly be publishing our full findings, and consulting on how we can implement our recommendations.
We have established jointly with the PRA a New Bank Start-up Unit. This sets out to help new banks make the transition through the authorisation process and supports them in their first two years.
As well as looking at how existing markets operate, we also encourage competition by helping innovative firms to enter financial markets.
Project Innovate
Project Innovate is our response to the wave of innovation taking place in financial services. It helps firms of all sizes develop innovative ideas that meet consumer needs, and so promotes competition in the interests of consumers.
Project Innovate was launched in October 2014. The aims are to provide direct support to innovators, both start-ups and incumbents, and identify areas where regulations need to adapt to foster innovation.
Our regulatory sandbox, a ‘safe space’ in which businesses can test out their ideas, is now open for its first round of applications.
The UK attracts innovators from around the world, both because of vibrant local networks and because they can use the UK as a springboard to launch their businesses internationally and bolster their competitiveness.
In order to support this we have sought to enhance our international engagement in this area. In March 2016, we signed a Co-operation Agreement with the Australian regulator, the Australian Securities and Investments Commission, to allow each of us to refer innovative firms to our respective Innovation Hubs.
A further such agreement was signed with the Monetary Authority of Singapore in May 2016, and we have others in the pipeline.
We are also working with industry to support the development of technology to enable more efficient and effective regulation and compliance, thereby reducing the regulatory burden on firms while delivering greater compliance.
Enforcement
Ensuring market integrity is one of our key objectives. Addressing market abuse is essential to achieving that objective.
The sophistication of market abusers and advances in technology, as well as the changes to regulation mean that we need to constantly review our approach to detecting and investigating market abuse.
Our scope covers all instruments admitted to trading on regulated and prescribed markets, and related instruments. We receive an average of 19 million transaction reports per day.
Recent market volatility has led to a spike in transaction reports. We are now frequently seeing daily volumes in excess of 25 million per day.
Identification of potential market abuse, a strong pipeline of public outcomes, and educational and engagement measures all support our credible deterrence agenda.
More broadly on enforcement, this year has seen the largest retail fine for a firm, £117m, on Lloyds Bank Plc, Bank of Scotland Plc and Black Horse Ltd, for their failure to treat their customers fairly when dealing with PPI complaints.
We’ve had the largest fine for financial crime failings, £72m on Barclays Bank for poor handling of financial crime risks.
It has also seen the culmination of the FCA’s largest, most complex insider-dealing investigation to date – Operation Tabernula – which is likely also to be the largest, most complex insider-dealing case to be brought outside the US.
Eight suspects were charged, including one highly-placed insider, which resulted in five convictions, including three guilty pleas.
The FCA’s investigation team and its workings were under the microscope for the three months of the trial. The outcome – following eight years’ of painstaking and meticulous investigation - demonstrates the FCA’s commitment, diligence and in-house skills and experience.
Future issues
I am going to focus on two major challenges ahead: Brexit; and the FCA’s mission.
Brexit
Like many organisations we are working hard to respond to the challenges ahead post-Referendum.
As a starting point I would emphasise that the UK remains a member of the EU until such time as things change, and so all of our rules continue to apply whether they originate from the EU or not.
Likewise, we will continue to implement EU legislation until the future is clear, something that is again a legal requirement.
Looking beyond that, I welcome the Chancellor’s statement that the UK will seek access to the single market through the coming negotiations. We will support the Government’s work to put in place new arrangements, and I would include in that, alongside access to the Single Market, seeking to have in place trade agreements with other countries.
From an FCA perspective, there is, for instance, no doubt that our objective of ensuring healthy competition in UK financial markets is supported by cross-border trade in these financial services.
More so than for trade in goods, for internationally traded services of the type we regulate the key to sustained international trade is robust global standards of regulation. These can operate simultaneously at both EU and global level.
These robust and consistent standards of regulation are embedded in our rule book. Unlike for trade in goods, we will not need to scour the world to find experts in a long forgotten skill – we are familiar with equivalence standards.
Finally on Brexit, the FCA is no different from many organisations in the UK in having a highly diverse staff, something that I value.
I have put on the public record that I will support our staff who come from around the world because I know what a valuable contribution they make to our work. These are unsettling times, and we owe it to people who work so hard to support us to put their minds at rest.
Our mission
Establishing and embedding a clear mission for the FCA is in my view critical to the success of the organisation. Like all public bodies, the FCA has objectives given in statute, and these are critical, but they are necessarily very high level and leave important questions unanswered.
Also, and again in common with best practice in public bodies, the FCA publishes an annual business plan which provides a map of the main work priorities for the year. But there is a larger piece missing in the middle which puts more substance to the statutory objectives.
This is particularly important for the FCA in view of the size of the landscape on which it operates (over 56,000 authorised firms is one metric to size the landscape).
It is therefore not feasible for the FCA to be everywhere on the landscape at all times. It has to make choices when it is seeking to ensure that relevant markets function well, that consumers have an appropriate degree of protection, that the financial system has appropriate integrity, and that effective competition is promoted in the interests of consumers.
In order to make those choices it needs a clear mission, and this mission has to tackle the big and hard questions that underpin financial conduct regulation.
The most obvious of these is how to establish a clear understanding of its obligations to consumers and to firms. The FCA is required to take account of the general principle that consumers should take responsibility for their decisions. This sits alongside other important principles, including establishing a level of care for consumers appropriate to the product risk and consumer capability.
How to balance the duty of care towards consumers, the duty of responsibility of consumers for their decisions, the role of firms and the role of the regulator, is an inherently difficult question to which there will be many potential answers. It lies at the heart of the FCA’s mission. So far, I would say it has not been adequately answered.
Establishing the mission of the FCA is vital to enable effective public accountability and in doing so to establish a stronger public understanding of the role of the FCA.
We have experienced, and continue to experience a crisis of financial conduct, which has had damaging consequences for the economy and society. Financial conduct regulation has been criticised heavily for allowing this misconduct to occur.
Out of this experience we must establish and embed the mission of the FCA, and give it the much needed underpinning. This mission should also be the basis of answering a number of other very important questions which shape how the FCA operates. Among these I would highlight whether we should prioritise some consumers over others and how we would do this and the need to explain and justify how the FCA decides among its tools when it sees a need for action.
The FCA has more tools than many financial regulators: supervision; competition powers; enforcement; and cross-sectoral approaches. The mission should help to explain the choices made.
Work has begun to put together a proposal on the FCA’s mission which I hope we will be able to publish in the early autumn, to be followed by a period of intensive public consultation.
I recognise that there will no doubt be sharply contrasting views on these issues, but it seems to me that the success of the FCA depends on being able to establish its mission and thus a basis for public accountability.
Conclusion
There is a lot to be done – but I can assure that I have never shirked from hard work. For me the challenge is to get the FCA firing on all cylinders and by doing so supporting the public interest and the people of this country. Thank you.