Rebalancing risk for growth, the role of the Chief Risk Officer

5-year vision

In March, we launched a new 5-year strategy[2]. We want to deepen trust, rebalance risk, support growth and improve lives.

It has 4 key priorities: we want to be a smarter regulator, support growth, fight financial crime and help consumers navigate their financial lives. That’s down from the 13 we had in our previous strategy – a prime example of how we’re reducing red tape.

The strategy puts growth at the heart of what we do. It's mentioned 30 times in a 22-page document. Innovation, a driver of growth, is mentioned 15 times. That's deliberate.

Although it’s at the heart of our new strategy, growth has always been part of our work as a regulator. Our job – in legislation – is to make sure that markets work well. A fair and thriving financial services sector that delivers for the good of consumers and the economy does just that.

Help wanted

The strategy does, though, set a new direction for the FCA.  

We are firmly committed to outcomes-focused regulation. This is deliberate – the UK will be better placed to support innovation and developments in markets with an outcomes-focused rule set.  

Our existing outcomes-focused rule set is the reason that we are not regulating separately for AI. We do not believe that this is necessary or sensible – given how quickly prescriptive rules could be out of date.

This shift to outcomes-focused and less prescriptive rules may feel uncomfortable for some of you in this room. It requires a culture change – both in the industry and, yes, for us a regulator. And it requires more active risk management within firms.

But an outcomes-focused approach is essential if we are to be forward looking and supportive of innovation.

Some of you may have heard me say that we are in a problem solving, myth busting and risk adjusting mindset.  

By problem solving I mean that we want to work with others where there are broader issues that need to be solved. Take our previous work with the Information Commissioner’s office on how firms can communicate with customers to inform them of savings rates[3], and work that explains how firms can give guidance on retail investments as examples.

By myth busting I mean that we want to hear from you where you believe there are regulatory barriers getting in the way of you delivering the outcomes that we are seeking.  

To do that, we do need your help. You have a unique view of where there may be regulatory barriers - or dare I say - where your firms may be overcomplicating matters. Or where industry, as a whole, have established norms through custom and practice that are getting in the way.

I sometimes say that if everyone in a firm plays it 10% safe – at the front line, risk, compliance and legal – and then a regulator is added to the mix - you can easily find yourself 50% away from a rule set.

Let me give you 2 examples of what I mean. Where myths about what our rules say have arisen and have led to practices which are causing frustration.  

As you have hopefully heard, we have recently launched once-in-a-generation changes to our advice rules[4].

If you have not heard about this, please let me know, and I will come speak to you at length about it after this.  

Called targeted support, these rules will help more people navigate their financial lives and give them confidence to invest.

Because this is so new, and we need it to work, we have worked differently when it comes to writing rules. We hosted a policy 'sprint' and collaborated with firms to test consumer journeys and get a real, practical sense of where rules are needed and where they’re not. Even before we had written a single rule.  

During the sprint, firms had an important question: 'Why do we need to disclose risks before benefits, and why do we need to use clunky wording to disclose these risks?'  

Me, being curious and having seen how some of our more prescriptive rules are drafted, asked my teams the same.

It turns out that these warnings are not set by our rules – they’re simply custom and practice within industry. Given this, we could have just left it. Instead, we’re working with the Investment Association on mainstream investments to drive industry-wide consistency. And to bust those myths.

And if you take one, simple, clearly worded message away from tonight, let it be this: you can stop using clunky risk warnings.

We have also heard that listed companies are being forced into paying non-executive directors in cash rather than stock. We’ve heard concerns that this can stop listed firms attracting the best talent and that this leads to less alignment of interests between firms and their NEDs.

Again, this is not a practice driven by our rules. Yes, there is Financial Reporting Council (FRC) guidance, but it does not prevent this happening. Rather, it seems to be custom and practice, with the rallying cry of 'it’s always been done this way'.

Again, we have sought to bust this myth. This can be done.  

As CROs, you may have other examples of regulatory barriers (real or not) which seemingly get in the way of the strategic objectives we are aiming for. If so, tell us. We can then get to the bottom of those myths, and work to bust them. 

The balance of rebalancing

We’re not just busting myths. We’re taking practical steps to deliver and rebalance the existing risk in the system.

I’ve already mentioned our work on the advice guidance boundary – again, grab me afterwards if you want to know more.

We have acknowledged that these changes involved different risks.

Some people may get a worse outcome, but the risk of not acting is higher. This is rebalancing risk in action.

This is true of our recent mortgage work, too. Changes to our mortgage affordability rules[5] aim to support growth and help more people to benefit from choice in the mortgage market. That does come with some risk, but also the security of home ownership for more people.  

And in the wholesale space, we have introduced a world first, and new type of private stock market, the Private Intermittent Securities and Capital Exchange System[6], which will unlock capital. It supports growth by enabling companies to raise capital while staying private. And it will open the door to more opportunities for investors and facilitate their access to growth companies.

When finalising the rules, we thought hard about whether this should be subject to private market or public market safeguards. We settled on this being private market plus - we’ve disapplied insider dealing rules and put more emphasis on investors to do their own due diligence. We have been public about this risk trade-off. Things may go wrong, but we believe it's the right risk to be taking now to support growth. 

Smarter regulator

I have talked a lot this evening about changes to our rules.

But I’d like to touch briefly on how we are operating as a regulator, working smarter, more predictably, proportionately and purposefully. Taking on board feedback that we need to work more smartly as an organisation.

We have already made major strides in improving our authorisation response times, something which I know you and your predecessors have highlighted, Lord Mayor. We have recently pledged to speed up this process even more.

We’ve also eased frictions by removing unnecessary data returns, ensuring we only ask for the data we need and reducing the data burden on 95% of the firms we regulate[7].

We’re now looking at supervision, marking a fundamental shift in how we supervise the firms we regulate.  

We will use technology to reduce time spent on processes and lower-value activity. This will free up our supervisors to concentrate on what really matters in the firms they supervise and where they can have the most impact.  

Not a lighter touch, just a smarter one.

As well as thinking about how the rule set can be different, we are focused on how we can work differently, to support our strategy and our focus on enabling a fair and thriving financial services sector. 

Conclusion

As Chief Risk Officers, your daily life is a balancing act – managing internal and external expectations, the desire for growth and the fear of failure.  

But you see the value in calculated, controlled risk. Not hiding behind rules but embracing the opportunities that come from outcomes-based regulation.

As I hope is clear, we stand by you in this. We know that more risk is needed in the system – that it’s the key to driving the kind of growth we’d like to see.

So, if you see sticking points, myths that need busting, or opportunities that are being missed, come and tell us. We want to hear from you.