While we are all, in the words of Harold MacMillan, at the mercy of ‘events’, it is the clear responsibility of the FCA to anticipate these events as often and reliably as possible.
It’s a great pleasure and honour to join everyone for the first conference of the Wealth Management Association.
We are almost exactly six months into the new regulatory regime so I wanted to offer a personal view on what has been, by almost any measure, a full-on start to life for the new FCA.
Being a regulator can at times feel as if you’re living on the slopes of a volcano.
But while we are all, in the words of Harold MacMillan, at the mercy of ‘events’, it is the clear responsibility of the FCA to anticipate these events as often and reliably as possible. To look forward so we can help create orderly and trusted markets in the UK.
So if you look at the wording of our statutory objective, it is very deliberately positive – ‘to ensure markets work well’.
And this, in turn, is supported by three customer-focused objectives:
- to secure consumer protection
- to protect market integrity, and
- to promote competition
And while I believe we have got off to a reasonable start, and much is far from broke, that is somewhat overshadowed by a problem we all face. So let me try to do three things.
- Explain the problem.
- Why it matters.
- What we can do to fix it.
What is the problem?
The problem, at its core, is the lack of trust by quite a lot of people in quite a lot of the financial sector. Not all of the people in all of the sectors, but enough to keep my seismic antennae on high alert.
I am not talking necessarily about those with the deepest pockets, but about the average consumer. The man and woman sitting next to me on the tube today who’ve spent the last five years of their morning commute reading about issues like:
PPI; CPP; London whales; tracker mortgages that may not track; trail commissions; interest rate swaps; investment mis-selling, and LIBOR.
And these are the same people who have to make choices about savings and pensions and about who to trust for advice.
They are finding that difficult, which provides the FCA, as the regulator charged with protecting their interests, with a challenge to the way we work going forward.
Two challenges actually.
Firstly, waiting for things to go wrong then arriving after the event to do clean-up has proved low value-added and low confidence-boosting.
And secondly, rule-making before the event did not prove a panacea either
If that was the answer, the 27% increase in the FSA rulebook – from over 13,800 provisions in 2005 to more than 17,600 in 2008 – might be expected to have prevented issues like these.
So the search for the Goldilocks regulator continues.
Why does it matter?
It matters a lot at the macro level because it is very, very expensive.
The redress bill from payment protection insurance alone is now around £11bn. In the case of LIBOR, we have seen – and are still seeing – huge dollar settlements between regulators and firms. Even in smaller product-specific scandals, the bill quickly tops £100 million in the ombudsman service or the FSCS.
And it matters a lot to individuals, because they cannot unwind long-term investment decisions with the benefit of that most powerful analytical tool – hindsight. So to them the issue of trust is fundamental. Indeed, the Reputation Institute’s annual index last year included only two financial service providers in its top 50 firms.
Interestingly, both businesses that did make that cut operate in the wealth management spectrum, highlighting rather neatly I think that this sector can be different from the rest, indeed should be, since trust is a ‘sine qua non’ of your long-term sustainability.
It is, I like to think, no accident that total assets under WMA membership reached a record £500bn+[1] earlier this year.
That said, the problem of the financial services industry as a whole means there is no room for complacency here or anywhere else.
What can we do to fix this?
We employ some 3,000 people at the FCA to regulate an industry that directly employs over one million people in the UK. Will we get a better result for consumers by one million people playing cat and mouse with 3,000, or by one million and three thousand working together for the common good?
From my own perspective, this is – very firmly – a shared responsibility. My argument has always been the following:
We employ some 3,000 people at the FCA to regulate an industry that directly employs over one million people in the UK.
Will we get a better result for consumers by one million people playing cat and mouse with 3,000, or by one million and three thousand working together for the common good?
Clearly, it makes sense to do the latter – to share the workload between firms and regulators.
Starting with your part.
Essentially, what we want to see from you is consistent evidence of clients and consumers being placed at the heart of business models.
Treating customers fairly, knowing your client, principal/ agent obligations being understood and honoured, proper disclosure.
None of these are new concepts, and to the extent they are alive and well in wealth management, please keep up the good work.
Indeed we are hearing, from all quarters of the financial services industry, a strong tone at the top.
The consumers are now waiting to see how that translates into tone at the till.
Deeds speak louder than words.
So, the FCA will expect firms to look at improving their conduct and culture at all levels of their organisation with senior management taking greater individual responsibility to ensure business models place consumer interests at their heart.
Wealth management specifics
We expect the sector to arrange investment portfolios that meet the needs and circumstances of its clients. Key to proving this to the regulator and the client is documentation. Not documentation for its own sake, but as a tool to safeguard the treatment of customers suitably and yourselves.
Let me mention three topical wealth management specifics for you to keep focused on.
Clearly, the introduction of the Retail Distribution Review (RDR) is a concern – even if the nature of wealth management income streams mean its introduction has had less impact on you than some areas of industry. What we have now is clearly better than what we had before.
Over the coming months we will monitor developments in the market very closely. In particular we are alert to the ‘advice gap’ issue, and interested to see where you, as part of the competitive market place, may go for new solutions that might meet such customers’ needs.
The second challenge for the WMA is suitability. Or more specifically, the FCA interest in suitability.
At the centre of this debate we find questions from industry over areas like advice and execution only – where the one begins and the other ends.
As you would expect, these kind of details are firmly on the FCA radar. But the major point remains essentially unchanged: we expect the sector to arrange investment portfolios that meet the needs and circumstances of its clients. Key to proving this to the regulator and the client is documentation. Not documentation for its own sake, but as a tool to safeguard the treatment of customers suitably and yourselves.
The thematic work we’ve done suggests there is room for improvement. So suitability – the idea of placing the consumer at the heart of your business – will remain a live issue going forward.
Thirdly, we expect you to keep focused on anti-money laundering controls – as I am sure you would expect. This is so important to the restoration of confidence in London.
The FCA’s responsibility
So much for what you can do on your side - what about us at the FCA?
The very large majority of WMA members will not have the regulator breathing down their necks under the new supervisory structure. As I understand it, only about 20 of the largest, most systemically important firms in the WMA will be relationship-managed by the FCA. For the rest, the contact will be through thematic reviews, roadshows and periodic, but not over frequent, visits.
One of the key developments in our approach is to signpost our direction more effectively than in the past. So, for example, using regulatory levers like thematic reviews to pull in data from across markets. The rationale here is that it makes us more predictable and it forces us to look at the big picture – to understand whether there are broad issues to address.
Clearly, this is very different from the old approach of inspecting individual firms one by one – and it has the great benefit of allowing markets to respond en bloc before there is any widespread call for enforcement action or redress.
It certainly shouldn’t pose difficulties for firms that are already operating to the highest standards. So while I can sympathise with professionals in the wealth management space who spend time wading through consultation papers, guidance documents and calls for evidence and data, my sympathy is tempered by pragmatism.
By all means keep challenging us on the volume of requests, but don’t lose sight of the value of good data as a precursor to better regulation.
I would also like to emphasise that the FCA is making significant headway against its new competition objective.
As many here will know, in September we launched our first market study into the £1tn UK cash savings market, looking at range of issues – including the effects of teaser rates and whether they weaken competitive pressures.
We will learn as we go, but already I can see the potential for fair competition as an important supplement to, and sometimes alternative for rules.
In particular, different adviser models, different asset classes, different structures and of course different charging methods are all welcome to compete with each other, provided that they work in the interests of the customer.
What’s happening in Europe
Before I finish, a word on European developments.
As we all know, the European machine is also working on reforms in the industry. Top of the list at the moment are the new disclosure regime for Packaged Retail Investment Products (PRIPs) and the revision of the Markets in Financial Instruments Directive (the ‘MiFID 2’ package).
I think we would all agree on the need for an effective but proportionate regime building on the existing reforms we have invested into in the UK.
So, on PRIPS, we would want disclosure on those complex products which are hard to understand, but not necessarily on all individual shares, bonds and savings accounts. This should also avoid duplicating distribution aspects and practices which are already covered in other objectives such as MiFID.
And speaking of MiFID, our priority is to maintain the standards introduced through RDR although such reforms are relevant across Europe.
We will continue to liaise with you as we negotiate our way through the EU landscape – as you know, this is not always so easy to accomplish
Conclusion
This brings me to my final point, which is that effective regulation – that anticipates problems and doesn’t just deal with their aftermath – is in all our interests.
Fewer consumers suffering losses. Fewer firms suffering reputation crises or significant redress packages. More confidence in regulators and the broad structure of UK financial services.
We want the best outcomes for consumers – as do you.
Also, there’s the not insignificant advantage that good regulation can, in its own right, make a potentially substantial economic contribution.
PwC released a report over the summer that estimated a well-regulated financial services sector could create some 47,000 new jobs in financial services, and 218,000 jobs in the wider economy by 2020 – while adding between two and three per cent in GDP terms.
Clearly, then this is not a zero-sum game. Good regulation – which is exactly what the FCA is striving to achieve – can genuinely benefit all parties.
The key ingredient to that success? Respect for the consumer, respect for the markets, and mutual respect between regulators and firms.
This recipe will make for a strong financial services sector and rest on trust and confidence in a crucial part of the UK Plc.