Thank you for those kind words Robert. It’s a pleasure to join everyone this evening. It is not quite a hundred days in the formal job yet, but I have been around the organisation long enough to have gained a healthy respect for how difficult a job it is to be a ‘good’ regulator, but short enough to remember how it felt to be on the receiving end of regulatory edicts.
I thought I would use this opportunity to offer some broad observations on how both leaders in financial services and the FCA can work together to ensure markets work well, our overarching objective.
But before I reflect on those issues and suggest how we can make things better, I wanted to make the point that in aspiring to make markets work well in the years to come, I am a long way from suggesting that all of them work particularly inefficiently or poorly today. Changes in some areas are most definitely needed, as the Parliamentary Commission on Banking Standards report due imminently will no doubt affirm, but we do not start from scratch.
The new wording of the FCA’s statutory objective in FSMA is positive, to ensure markets work well, rather than negative, to prevent markets working badly. This is important. Financial services remain a critical driver of the UK economy, they are not just a big industry in their own right, but they are fundamental to the economy as a whole from the high street to the home: more than one million jobs, 14% of GDP, five trillion pounds of managed assets (three times UK GDP) and a global insurance centre are but a few of the well known facts.
But with size and success comes responsibility. Today, London is an international financial centre of choice, not a financial centre of necessity. And to be chosen, all the parts of the operation need to work well together, as cogs in an expertly designed, exceedingly complex machine.
We may be proud of the fact that the gravitational pull of the London machine is still strong enough to draw in firms and financiers from across the globe.
But we are all only too aware that pride and complacency have turned out to be two sides of the same coin. This time, we must learn this lesson.
This time it must be different. And, as leaders, we are responsible for making sure that it is by making some changes to what we do.
And when I say ‘we’, I don’t mean ‘we’ in the regulatory sense – but in the collective sense of everyone in this room tonight.
And so I want to focus tonight on three broad areas of change which I believe could be of the greatest collective benefit.
- What the regulator could do differently
- What firms need to do differently
- And what a difference that will make to the market as a whole, if we both change.
Changes for the regulator
We, the FCA, start life as a new regulator with new objectives. Our overall objective ‘ensuring markets work well’ is supported by three operational ones:
- Protecting consumers
- Promoting competition
- Maintaining integrity in the market
With the split of the old FSA into two, we will be able to be much more focused on our task in hand, while maintaining a close relationship with the PRA as we proceed.
I am frequently asked what success will look like. From the public’s perspective this is rather clear, to be more effective at prevention; this presents us with the major challenge of how.
The lesson from the past decade for us is that it is relatively easy to sit back on our perch waiting for things to go comprehensively wrong before arriving with mops, fines and if appropriate handcuffs. Easy but extremely expensive.
Both the financial crisis on the prudential side (whole percentage points of GDP) and PPI on the conduct side (in excess of £10 billion) are living testament to the fact that regulation by hindsight is not the best way forward. In our document , the Journey to the FCA published at the back end of last year, we made it clear that we would seek to be more forward looking, a prerequisite of successful prevention. We have already taken some important steps on our journey.
We have set up our PRR, policy risk and research division, the radar of the organisation, our means of looking forward as well as outward. One of my colleagues wisely pointed out to me that a radar machine is only as good as the operator’s ability to interpret the blips on the screen. We have many blips on our screen, typically around 4,000 a year to our Whistleblowing team. But we also have skilled operators working for us, and many incoming reports do not require rocket science for interpretation. I have myself found that by touring the country, Leeds, Edinburgh, Birmingham and of course the City, it is possible to pick up on the major themes of the moment.
Properly organised, the channels of data that we have, ranging from the media and their post boxes, our firm and customer contact centres, direct informants, the work of our supervisory staff, sophisticated IT market monitoring equipment, effective data sharing between regulators, firms self-policing their segment of the market and no doubt others, should give us the knowledge and opportunity to intervene much earlier than has sometimes been the case in the past.
Opportunity to act is one thing, willingness to act is another. We have been given a few, but important, powers the old FSA did not have to help us here, temporary product bans, advertising bans, very significantly a competition objective, but the proof of this pudding will be in the eating. You will have to hold us to account in due course rather than tonight. But I can at least point to some early signs of our direction of travel:
- Our pronouncements on interest only mortgages.
- Our occasional papers on behavioural economics.
- Our use of more thematic supervisory inspections.
- Our modification of the approval process for new banks to encourage new entrants.
- Our agreement with the banks announced last week on the retry system.
A couple of words of caution, however. The earlier the intervention, the more contentious it is likely to be. Where the existence of a problem has not been established beyond all reasonable doubt, there will be vested interests with money at stake opposing our intervention – so you will have to be careful what you wish for occasionally on this point.
Secondly, I do not think it reasonable to expect us to prevent all future financial misconduct any more than you expect the police to prevent all future crime and we shall need to distinguish the big from the small.
In summary, whatever your natural inclination, optimism that the FCA will do better, or cynicism that nothing will change, I only ask one thing at the moment; give the new organisation the opportunity to show that it will be effective in its role. The survey of firms just completed by our Practitioner Panel gives us the perfect baseline to judge ourselves against going forward. In it 80% of firms said regulation needs to be clearer for the FCA to be more effective.
Just before I leave what we may do differently, I do not wish to give the impression that everything will change. I have deliberately steered away this evening from any specific recommendations the PCBS may shortly make. These will require a considered response. Evolution, continuous improvement is the order of the day in many other areas of our work that I have not touched on above. Not least amongst these, and a subject of much cross examination at current meetings, is our ongoing commitment to influencing international regulatory developments.
The future of LIBOR may be the hot topic of the hour - as you all know Martin Wheatley sits in the centre of that particular debate. Brussels has its supporters and critics, but the fact remains that the majority of future UK regulatory change is going to come through Europe and indirectly from global agreements. We will therefore remain committed to being active participants in the European rule-making process at all levels; on a technical basis and in support of HMG as the UK’s lead negotiator. We will also continue our work in the global committees and standard setting bodies such as the FSB and IOSCO to encourage the development of a consistent and coherent global regulatory framework.
Enough of the FCA, what about the firms we regulate?
Changes for firms
The key challenge for the firms is to bring about a significant change in behaviour. This challenge does not come primarily from the FCA, but from the public at large. It is, I think it is fair to say, aimed primarily at the banks just at the moment, but of as much significance potentially to all others. My mind, instinctively, divides the need for change under two headings, although others may choose to present it under differently.
My first is cutting out outright bad behaviour. I am not suggesting that this is necessarily widespread, but it is deeply damaging when it is found and paraded in public. The cause celebre here is of course the LIBOR scandal, which to be fair to London was a thoroughly international affair, but the L has undoubtedly landed the reputational hit at our doorstep. Meanwhile we must not lose focus on the need to eliminate other unacceptable practices in all their various guises, ranging from price manipulation, insider dealing or money laundering to any practice that amounts to a criminal offence.
My second heading is the more challenging of the two, the promotion of good behaviour. This is closely linked to the many cultural change programmes underway in firms at the present time. I know from personal experience that getting many thousands of employees to change long-standing behavioural patterns is no quick fix. However consumers are, as you know, impatient for change.
Impatient, and insistent. Insistent that firms will build the principle of treating customers fairly into every transaction they enter into. This is the desired outcome today. By the way it always has been, there has been no recent change of the goalposts in this regard. However, while the outcome is relatively easy to state, the changes in inputs required are more complicated to achieve. These range from ethical standards through incentive arrangements to acceptance of responsibility at all levels, proper controls over sales channels, board governance, shareholder engagement and much else besides.
In particular there is a lot of focus on basic ethical standards for the industry, and on our effective enforcement when unethical behaviours lead to breaches of our regulatory standards.
Again these are not new topics, and there are plenty of wise people who have their doubts about whether this is a case of leopards and spots, as opposed to a recognition of the absolute need to change.
As with the FCA’s future, I suggest that we all keep an open mind around the likelihood of material change in the behaviour of firms in the financial sector.
Third challenge
Why are the changes I have outlined by both us and the firms so important, and what will be so different if they come about successfully?
Based on now over 200 conversations I have had with business leaders, consumer groups, politicians and as many again within the FCA, the most important thing I detect we lack in the market at present is sufficient trust in each other. That is trust between the three players in the triangle, regulators, consumers and the financial institutions.
Does this matter? Why yes it most certainly does. It goes to the very heart of our objective. How can we expect markets to work well unless there is enough trust?
But rather than catalogue the downsides of a lack of trust, which I think we all know, let me be a little bold and suggest what improvements could naturally flow from greater trust.
First, and most importantly, would be the narrowing of the gap between consumers and firms as to what a product that treated customers fairly actually looked like. There will always be some fact specific differences of opinion, but the existing state of affairs, where you have caveat emptor protagonists at one end of the spectrum, and consumer protectionists at the other makes for a difficult game for us to referee. Every time we blow the whistle half the players on the pitch accuse us of not knowing the rules. The result, less predictable regulatory outcomes, more rules and less principles and probably less product differentiation – none of which sound like markets working especially well.
Secondly, I believe we could make more progress in protecting those consumers most disadvantaged by the asymmetry of knowledge of financial products, without restricting the choice – and responsibility that goes with it – for those in a more fortunate position. Issues such as simple products, basic bank accounts and the need or otherwise for advice would be much easier to progress in such an environment.
And thirdly, we could escape in part from the dilemma that currently surrounds longer term financial products, namely the amount of small print flexibility that the manufacturers want to protect themselves from many eventualities that could occur versus our general inability to read, let alone understand all the implications of the terms on offer.
This is particularly acute for hugely important transactions, such as pensions and mortgages stretching over decades, where the outcome for the consumer can only be seen several years after the deal was struck, by which time it is too late to rewind and hugely expensive to compensate. Whilst the parallels are not exact I cannot help but make comparison to other industries, particularly medicines, where the customer is able to take advantage of product enhancements whilst the industry is appropriately given some protection from past prescriptions.
This building, perhaps rebuilding of trust is no nirvana. There are many small steps to be taken, and as others have pointed out trust is a lot easier to destroy than it is to create. But now, five years on from near financial meltdown, with a new regulatory regime and the findings of the PCBS about to be published, seems as good a starting point as any.
Conclusion
So to conclude. Do we have a choice? Of course we have choices. But for me Martin Wheatley hit the nail on the head a month ago when he said that regulation was not a zero sum game. As I said at the outset we have a statutory objective of ensuring markets work well. We are not charged with ensuring the competitiveness of the UK market per se but it does seem logical to deduce that the better our markets work the more competitive they will be and the more benefits there will be to share around.
I hope you accepted my earlier argument that we are all cogs in a complex machine. If so it remains for me to leave you with a single closing thought.
We employ 3,000 people at the FCA to regulate an industry that employs directly over one million people. Will we get a better regulatory result by one million people playing cat and mouse with 3,000, or by one million and three thousand working together for the common good? It is the responsibility of financial service leaders to decide.