Nov 18 – The future of our regulator

With certain world leaders shifting societies backwards, it can at times feel like we have a bleak future ahead.  I wonder if our regulator is moving the industry in a similarly ominous direction.

When the FSA split to be come the FCA and PRA in 2013 we were promised that the new regulator would be different.  Quicker and more efficient regulatory action on mis-selling scandals.  Better forward-looking supervisory work.  Less time spent “in trench warfare” with firms’ lawyers.  At the same time the Treasury Select Committee had said that there was a “much needed fundamental shake up of regulation” and that the regulator must “develop a markedly better culture than that of the legacy FSA”.

Fast forward five years and £30 million has been paid out by mortgage brokers because of one firm’s mis-selling, there’s an unwillingness to issue regulatory guidance for fear of judicial review, and an African drumming event held for 400 staff to understand “the power of group energy”.

It seems that the regulator is unphased.  Despite the Davis inquiry in 2014 and repeated concerns from the statutory panels and Treasury Select Committee, there is still an unnecessary focus on a communications strategy and public relations.  More consultations are purely to comply with a legal obligation rather than a willingness to consider feedback.  And they’re now being issued with a misleading spin so that the regulator can justify its decisions.  For example the recent paper on a global sandbox was the first time this had been consulted publicly.  However the FCA claimed that it had consulted earlier this year, mis-labelling closed discussions it held with innovative firms.  The positive feedback from these selected firms has been used to form the basis of why international firms should receive one-to-one regulatory support to become authorised in the UK.  It is unusual the FCA did not publish a cost benefit analysis as part of this consultation; a further concern about its direction of travel.  Setting out estimated costs and how these will be allocated is a fundamental part of being a transparent regulator.  If the approach to the current sandbox is anything to go by, we’ll see the global sandbox also being marketed as “free” despite the cross-subsidisation of costs borne by regulated firms.

I don’t think that the FCA should be discouraging innovation.  In the digital age we should expect technology to come to the fore.  But rather than objectively look at how it can both benefit and disadvantage customers, particularly those who are vulnerable, we have a regulator who appears over-excited by tech and its advocates.  As a result it has lost perspective of its purpose and who funds it.  The attention and favourable treatment given to unregulated firms means we’re moving to an anti-competitive market against established firms.  All firms should see tech as an opportunity rather than a competitor and consider the need to adapt in order to continue to be successful.  But this should not be within a regulatory landscape that differs depending on whether a firm is authorised or new.  Since the FCA moved to a ‘flexible’ and ‘fixed portfolio’ approach to supervision, the majority of firms no longer have access to a supervisor.  But the FCA does provide a dedicated contact to ‘innovative’ firms for support and specific feedback on their proposition.  Even though many of these firms do not contribute to the regulatory bill.

The Mortgages Market Study is also being carried out with a rose-tinted view of tech.  It is toying with the idea of watering down advice because some new entrants have complained that regulation makes it difficult for them to develop an innovative model.  But what’s been missed is that allowing all online transactions to be carried out on an execution-only basis, as suggested, will increase the risk of consumer detriment with the ombudsman and compensations scheme unable to provide redress.  Three years ago the late Linda Woodall said that loosening regulation to encourage new players to offer advice “is not the right way forward” and instead “what’s important is that advice is of the right quality to help people make appropriate choices.”  This would unfortunately not appear to be a widely held view.

My hope is to have a transparent, collaborative and inward-looking regulator with effective authorisation, supervision and enforcement.  But this cannot be done until there is a fundamental change in its culture and a shift in priorities.  Otherwise I fear we will see a regulator focused on protecting its reputation, be distracted by tech and ultimately lose sight of market and consumer issues.

Aileen Lees

Head of Policy
October 2018