Watching speeches is an unusual experience when we’re limited to communicating virtually. It is strange to give them in this way, too. Especially as in this case it is my last opportunity before I step down as interim chief executive of the FCA. But the next few minutes do allow me to take stock and also offer some brief thoughts on the future of regulation. First of all, what lessons can we take from Covid-19 so far? In terms of society, technology and the manner in which we regulate?
- Second, how the FCA itself might change to meet some of these challenges, and what constants may remain?
- And third, given the backdrop of the UK’s exit from the EU, what’s the kind of regulation we need?
Starting with Covid, and this isn’t an original thought, the pandemic is bringing the future forward. The economic impact of the measures taken to curb its spread – has (and will) speed up some of the long-term trends that are shaking up work, society and the financial system that underpins them all. Whether that be the commercial retreat from the high street and the city centre, a lack of financial balance between the generations, fewer secure jobs and the impact of technological innovation.
Covid-19
Covid has accelerated consumer adoption of tech-enabled business models. It is not just Amazon that has experienced a significant increase in internet traffic, it is banking apps too. Consumers’ and businesses’ retreat from cash has immediate implications for the bank branch and ATM network. But while the tech savvy benefit, a whole range of people, not just the older and poorer, risk being left behind. During the Covid-crisis we have seen greater co-operation between us as the regulator and industry than I’ve ever known. That, coupled with the extraordinary public spiritedness of branch and call centre staff, helped ensure people could continue to receive in-person and phone banking, even as the rest of high street switched out the lights.
That co-operation must be the model for ensuring the digitally excluded do not become the cash excluded.That will require both co-operation and public understanding. With net interest margins under real pressure, the challenge of how banks re-shape their business models to keep them profitable can’t be placed solely at the door of each individual, if we want a better outcome for society. Some things will need greater collective effort.
Covid has created other challenges for business models across financial services
The unprecedented measures we put in place provided support for those on mortgages or in other debt who were adversely affected by Covid. Over 80% believe they would have struggled without them. Yet many other people have taken the opportunity afforded by lockdown to pay down debt and increase savings. We can see a real difference in terms of impact on the haves and have nots in this crisis that doesn’t conform to the patterns of previous economic shocks. But for the poorest and most vulnerable in society there is still a demand for credit.
Increasingly some of that demand is being met by changes in business models and new developments in unsecured lending including the growth of unregulated products in retail and the workplace. That shift poses fundamental questions about the unsecured credit market. I’m delighted to have been asked by the FCA Board to review how regulation can support a healthy unsecured lending market. The Review will also take into account the impact of the pandemic on employment security and credit scores.
The wider low interest rate environment is also having a profound impact on pensions and consumer investments. Enabled by the internet we see scammers take advantage of people’s search for yield in the absence of healthy returns from safer, better-understood products. The FCA has made consumer investments a business priority and we’re determined to see better outcomes. We have banned or restricted some of the riskiest products and we have investigations under way into some of the bad advice we have seen. But there have been too many scams and too many scandals. We are open to making some major changes in our regulatory approach, and are calling for input to help us consider these.
In the insurance industry, I welcome the judgment by the High Court on action we took with the co-operation of insurers to resolve uncertainty in the Business Interruption market. There is still far more to do here, and at pace, but I think that action substantially achieved its aim of removing uncertainty and therefore many of the roadblocks to claims being made and assessed. Longer term, the industry will face the challenge of deciding how it will cover pandemics, not just in business interruption, but travel and other segments. Simply not writing cover may not be the answer here. And we as consumers we will need to decide if we’re willing to pay, and how.
Finally, before I move on, technology. I know I have said a lot on this subject in my time at the FCA, but we need to be even more conscious of the changes technology is having on the sector we regulate, and will have in the future. And there are some big questions for us to answer. Take machine learning and artificial intelligence. Smart algorithms are often portrayed as some sort of panacea, solving business need and consumer service.
Algorithms have come in for some bad press lately, but they are only as good as the inputs and data they rely on. What outcomes do they deliver? What outcomes were intended? Do they exacerbate the biases inherent in society?As Andrew Bailey hinted at in his speech on Stablecoin at the beginning of the month, the answer to new tech is not to pull up the drawbridge. Rather it is for the regulator to discriminate. To do that effectively, we need a fuller understanding of the tech and its benefits, weighed against inevitable risk.
It was to develop that understanding that I proposed Project Innovate, the FCA’s regulatory sandbox and latterly the global financial innovation network of over 60 regulators and other organisations. Our aim is to better understand novel business models and tech usage, both to encourage new entrants and to ensure we have the knowledge base to rule against innovations we doubt are in the markets’ or consumers’ interests. Faced with greater innovation at bigger scale, in my view the sandbox should be expanded in terms of scale and ambition to handle occasional very large tests, if need be backed with more flexible authorisations powers. Greater use could also be made of calling for specific cohorts to test answers to specific issues, which the FCA has already tried successfully. What we have also found is large datasets are often a barrier to new entrants being able to design and build products – the partnership with the City of London on a digital sandbox presents an answer to that problem.
FCA reform
Innovate was one example of how we have changed as a regulator and I was incredibly proud to have sponsored our work and built the team from an initial 2 to over a 100 colleagues focussed on fintech and our own use of innovative technology. The team has already helped 1,700 firms and our data science units won its spurs during the last six months as the need to develop urgent and rapidly updated information has grown. But there are more ways the FCA is changing and needs to change to be ready for the future. The first is how we use data and analyse the intelligence we receive. You cannot hope to effectively regulate 60,000 firms, most of them small, as we do, unless we make progress on this front.
Last year, we put in place a new data strategy to make sure we brought in the analytical skills we need, to raise the minimum standard of data understanding among all our staff, to ensure we have the kit to take full advantage of the skills we have and the huge amount of data on which we sit. Embedding this is well under way. To build on this, earlier this year, we conducted a review of how effectively we source and receive, assess and prioritise, task and take action in response to intelligence across the organisation.
As a result, we are establishing a new, more empowered function to manage intelligence coming into the FCA. In the first phase, the team will integrate the way we prioritise and manage key and potential harms across the organisation, bringing together a number of local teams doing this task. We know we have more to do. In the autumn, we will see the results of a number of reviews into potential failures of the regulatory system. I have no doubt there will be painful lessons and the FCA will need to learn from them. The context we operate in is we handle 204,000 calls a year from consumers and firms, and through our online system we receive half a million data submissions from firms. We receive and monitor 38 million markets transactions a day.
I have 4,000 colleagues willing to make judgements. They are good people. Some routinely put themselves in the way of harm for the public they serve. We deal with individuals who you would not like to meet – some are dishonest, some corrupt, some dangerous. We seek to help millions of ordinary people – and we have during this pandemic. But the nature of the work we do means the odds are there will be times where we cannot stop failure or where we call a finely balanced judgement wrongly or miss something. And yet, understandably, there is an expectation from the public that we will not do so. This expectation gap manifests itself in a number of ways: The first, and most obvious, what is the degree of protection that people have. In a highly regulated market, which finance is, should consumers enjoy no risk? Are all failures and losses within the sector, at least in part, regulatory in nature?
The second is what regulation covers. The perimeter, in regulatory speak. What is in, and what is not. And how does this accord with the public’s expectation? This is an area that is arguably too complex, but also lacks simple answers. Third, what regulatory tools we should use and how fast results can be seen. Every person who has been wronged wants swift justice, everyone who believes themselves innocent wants a fair trial. Let’s say that the FCA suspects an FCA-authorised firm has been involved in serious misconduct. Whether we can bring a case is not a question of what we think has happened, but what we can prove has happened. As a public authority, we need to carry out an investigation that looks at all reasonable lines of inquiry, including those that may be consistent with innocence.
In the context of white collar or regulatory misconduct, this means a sea of documents (many investigations involve hundreds of thousands of documents) and competing versions of the truth. Once we think we can prove a case, litigation can take longer than the investigation.
A regulatory case proceeds through our internal processes, established by law, there to ensure we are using our powers judiciously, before it may come before the Upper Tribunal. A criminal case can also take just as long, if not longer. A recent insider dealing trial led to a hung jury which meant the case had to be retried before a new jury, and only then were convictions ultimately secured. We’ve proven in the last few weeks that where we can use the Courts to resolve uncertainty swiftly, we will as we have done the Business Interruption insurance case. But when it comes to criminal cases, they are very different matters – there are no short cuts to good cases. The question then for us – and for wider civil society – is what sort of regulation do we want? What tools do we have available and when will we use them? And how clear is the public we serve about what the system can deliver, the protections they enjoy and the risks they run? None of these challenges, however, should lessen our commitment to change for the better when we get things wrong.
The future of regulation
I want to close with my third topic, the future of regulation. In October, last year I gave a speech on regulation in a changing world. In it I argued we needed to think about more outcomes-based regulation – looking at what the regulatory system was trying to achieve and whether those outcomes were being met. That as regulators, we need to use the full range in our kit, not just have disclosure as a go-to tool. If anything, the last six months have shown we can think creatively about what we do and how we do it. That we need to work closely with other agencies and regulators as product boundaries become blurred. That the FCA’s own requirements should be more straightforward, especially for smaller firms. And we need to make sure the rulebook isn’t analogue in a digital age.
I believe those arguments still hold and Covid-19 has shown they are even more urgent. We need to look at whether our handbook of rules is doing what it needs to do, and amend if necessary. I discussed too the potential impact on regulation of the UK’s departure from the EU. The UK left on 31 January 2020. The transition will end at 11 pm on 31 December. We have worked closely with the Government and Bank of England to minimise the potential for disruption, and firms, particularly the large ones, have made their own preparations. And negotiations on the UK’s future trading relationship with the EU continue, including decisions on equivalence. Our message to firms is, therefore, to continue to prepare – indeed to ramp up preparations – for a range of scenarios.
The question for after December is how will the regulatory system look once transition ends, whatever the outcome. The FCA has long been a multilateral player, demonstrating our commitment to the highest international standards and playing a central role in shaping what those should be. We also do what is right for UK markets. The two are not mutually exclusive. Indeed, they are mutually supporting. Maintaining a strong and robust regulatory and supervisory system, and our commitment to achieving the highest international standards, go hand in hand with the UK’s position as a global financial centre.
Conclusion
So, as I step down as interim chief executive and away from the FCA board, I recognise the scale of the challenge for the FCA. I’ve served with some exceptional colleagues and the FCA is lucky to have them. We’ve changed and improved many things about how we work, including in the last six months as we sought to protect markets and millions of consumers.
But the FCA finds itself – like the industry it regulates, like the society it regulates on behalf of, and the polity its regime is designed by – at a cross roads. The coronavirus emergency, business models, technology and consumer expectations are coming together to pose a series of dilemmas that society, business and regulators will need to tackle. As, if it does, the FCA must look ahead to the future but also behind it to take lessons from its past. I wish all of my colleagues the very best as they rise to that challenge.
This is a speech recently given by Christopher Woolard, FCA Interim Chief Executive, about Covid-19 at the 10th annual International Financial Services Forum. Source: the Financial Conduct Authority (FCA).
