Nikhil Rathi, Chief Executive of the Financial Conduct Authority (FCA), recently delivered a speech at the launch of the FCA’s Business Plan. When I became CEO last October, I joined a purposeful organisation. Our people working round the clock with great energy and to great effect to stand up for consumers and businesses affected by the pandemic. Almost five million payment deferrals granted across credit cards, loans and mortgages to people who had suddenly little or no money coming in. Businesses forced to close or scale back operations won insurance payments of more than three-quarters of a billion pounds for COVID-related losses thanks to our efforts in the Supreme Court. And all the while, the global markets we oversee proved resilient at a time of unique stress and volatility – laying the foundations for record capital raising this year to support economic recovery.
This is on the back of other significant achievements over recent years by colleagues across the FCA dedicated to our public purpose. Achievements that continue to ensure our high standards sustain the UK as a great place to do business and an attractive place to invest. We haven’t always got it right. We know that. And we won’t always get it right. We know that, too. We are not, never will be, nor should we be a zero-failure regulator. But we know that there are areas where we need to raise our game considerably and prove we are a learning organisation.
Even more so as profound forces are reshaping financial services:
- the rise in vulnerability coming out of the pandemic
- rapid technological change
- rewriting the UK regulatory framework after Brexit
- transition to a net zero economy.
All these challenges feature in our business plan for the coming year, which is published today. To meet them and to prepare for inevitable future disruption, the FCA must continue to become a forward-looking, proactive regulator. One that is tough, assertive, confident, decisive, agile. One that acts, acts fast—and where we can’t act, engages enthusiastically with those who can.To get there involves making progress on three fronts.
First, continuing to be more innovative—taking advantage of data and technology to increase our ability to act decisively. Second, continuing to be more assertive—testing the limits of our powers and supporting others to bring their powers to bear. Third, continuing to be more adaptive—constantly learning and always adjusting our approach as consumer choices, markets, services and products evolve. And underpinning it all will be a regime of accountability and culture of transparency.
More innovative
Our transformation is based on a new approach to data. Data is the lifeblood of a modern regulator. Everything we do depends on the information that we collect – and how we use it. We have seen a 200% rise in the volume of data we have to process for investigations, including through encrypted channels such as WhatsApp. That’s only going to continue to increase exponentially. Financial services businesses themselves are increasingly becoming data-led businesses. So, over the next five years, we will become a data regulator as much as a financial one.
It’s why one of the first decisions I took was to put more resources into our data and technological capabilities—£120 million over the next three years. Modernising our systems—including becoming one of the first regulators in the world to move to the cloud—will give us the platform to succeed. Not only enabling us to scale our operations but to share intelligence more easily within the FCA and with our partners across responsibilities and jurisdictions. We do that in some domains already—for example, for market abuse and market oversight. And we need to do it much more systematically and much more consistently.
Better capacity and tools to collect, triage and store data will allow our people to have the right information at the right time. What will ultimately transform our ability to act is how we analyse it. Using techniques from data science and social science—especially behavioural science and economics—is already enabling us to make more robust, evidence-based decisions. Whether that’s predicting potential harm or identifying what works in terms of our interventions and the extent of our impact. Recent examples include behavioural science experiments to inform our final rules to address harm and improve the home and motor insurance market. And integrating techniques to generate insights and evidence that informed our response to the pandemic, including the design of payment deferrals and other support for borrowers.
We will bolster these capabilities—including in financial accounting, which was picked out in the Gloster Review. The UK is at the forefront of financial regulation and innovation when it comes to trading and clearing. Now we must build a best-in-class system for data. And I’m delighted that Jessica Rusu, our new Chief Data, Information and Intelligence Officer, brings expertise in artificial intelligence and a background in both big tech and fintech. Rapid technological progress is providing people with easier access to, and greater choice of, investment options than ever before.
Big tech is surging into financial services—more than 40 mainstream financial products today, compared with half a dozen a few years ago. We see huge value and opportunity in the growth of technology businesses and expertise in the UK. So, we will look to support those innovative companies wanting to test new products and services by opening our Sandbox to applications year-round and making the Digital Sandbox permanent. However, when technology is used to promote new investments to consumers, it is essential that the right controls are in place.
We’ve seen an explosion among younger people speculating on cryptocurrencies or other high-risk investments. In the last year, we published research that found nearly 2.5 million people in the UK had bought cryptoassets. Analysis this year found those “having a go” at this kind of investing were younger and, proportionally, more likely from an ethnic minority. There is evidence too that, as with the GameStop episode, more people see investment as entertainment—behaving less rationally and more emotionally, egged on by anonymous and unaccountable social media influencers. This is a category of consumer that we are not used to engaging with—18 to 30-year-olds more likely to be drawn in by social media.
That’s why we are creating an £11 million digital marketing campaign to warn them of the risks. And those risks are stark. As we have repeatedly made clear: investors in cryptoassets should be prepared to lose all their money. As technology collides with increasing consumer freedoms, we will be confronted with judgments and trade-offs we’ve not come across before. We’ll also be confronted with deep ethical questions brought on by the use of machine learning and artificial intelligence to target consumers. We need to be open about that. We also need to communicate clearly that these are not just questions for regulators but for society—for Parliament and for government.
More assertive
Which brings me to the second front: continuing to build a more assertive FCA. Our instinct will be to test our powers to the limit. To act decisively—and to be clear about what we’re doing, why we’re doing it and where the limitations lie. And even where we don’t have powers, we won’t turn a blind eye. The perimeter, which is decided by the government and Parliament, determines what we regulate. I have been clear since day one that in my view if a case falls outside this jurisdiction, it should not mean that we simply stand by.
While we must prioritise use of our resources on individual cases, where we cannot act, we should use our insights so that suspect activity can be stopped and punished by our partner agencies. The perimeter is a perennial challenge. And I am pleased that the government has agreed to jointly assess the state of our perimeter each year. Just as we will continue to support dialogue about the perimeter, so we will continue to call out wherever we see gaps in legislation and the potential for harm.
On which point, I repeat our plea for scam advertising to be included in the Online Safety Bill. This more assertive posture demands a major realignment of our institutional mindset. We want to be an organisation that runs toward the fires of complex, difficult issues—and to try to put them out. To do that, we must build a culture that embraces risk, is more curious and acts decisively to tackle harmful behaviour as soon as we suspect it. This involves difficult judgments. Desire for quick outcomes must be balanced with procedural fairness. Disrupt a fraudulent operation early to prevent more people being scammed—but potentially tip off fraudsters and lose vital evidence.
These are the trade-offs our colleagues grapple with daily and we have to accept that no course of action can satisfy everyone. Our actions will also be subject to scrutiny, including legal challenges. We constantly come up against very determined and well-resourced individuals and companies. And we will not always win. The FCA Board, under our chair, Charles Randell, is clear: for our colleagues that will not be seen as failure. Because history shows that where our perception of risk prevented necessary action, we ended up with a bigger problem. We are already being more proactive.
In the last few months alone, we started criminal proceedings under anti-money laundering powers for the first time. We removed temporary permissions for the first time to stop four EU investment firms marketing contracts for difference to retail consumers in the UK. We used a freezing injunction for the first time to secure several million pounds of assets on behalf of consumers with final salary pension schemes. And last year we issued 1,184 consumer alerts—up from 573 on 2019. This year, we’ve so far issued 808.
We appreciate the unique role we play in enhancing consumer protection and safeguarding trust in the financial system. With statutory limitations on what we can do we also need others to step in and step up. For example, nearly 2,000 fraud offences are committed every day. Yet less than 1% of police officers are directly involved in investigating it. This is not a demand for more powers. The powers are there in the system. But those with jurisdiction need to be supported with adequate resources if we are to work effectively together.
As part of a more proactive posture when it comes to market integrity, we are clear that there is no scenario in which we will return to a light touch, don’t-ask-don’t-tell philosophy. I’ve worked in markets and I was at the Treasury at the height of the 2008 global financial crisis. I saw first-hand the catastrophic consequences when a toxic culture in some firms was mixed with a laissez-faire regulatory approach and lack of meaningful systemic risk oversight. Major changes have taken place since then globally and in the UK’s regulatory framework and these withstood last year’s extraordinary market volatility well. This includes years of supervisory work with industry—led by my colleague Megan Butler—to bolster operational stability.
And firms should expect us to be even more rigorous on upholding high standards—especially on governance, conflicts of interest and conduct, including considering diversity and inclusion as regulatory issues, as we set out last week with our colleagues at the Bank of England. While oversight continues through the regulatory lifecycle, it starts at the gateway. If you let a bad firm or individual into the system, it takes up the time of supervisors and enforcers, and it risks the savings, livelihoods and health of consumers. Just one decision at the start—not letting them in—could prevent all that.
It is to manage this risk that I appointed a new Executive Director, Authorisations, Emily Shepperd, who has significant operational leadership experience, and why we are recruiting around 100 additional authorisations colleagues. The UK is open for business, but not to firms who do not meet, or wish to meet, regulatory expectations. There will be a greater focus on scrutinising applicants’ financials and business models. This will apply especially in complex markets, or where the firm is operating in a high-risk business, such as crypto firms applying for anti-money laundering registration.
Our independent Regulatory Decisions Committee is the final decision maker on contested enforcement, supervisory and authorisation interventions. Later this month, we will consult on changes to the way it functions to place greater responsibility in the hands of managers within the FCA. The effectiveness of this evolving approach became clear last month when we acted quickly to ban a Lithuanian e-money firm from operating in the UK in light of concerns about its financial crime controls. A tougher approach will involve some contentious outcomes.
There are 1,435 EEA firms currently accessing UK markets via the Temporary Permissions Regime. As we move to a more permanent arrangement, there will be a demanding review of all firms seeking to enter the UK authorisation gateway. And not all of those under the TPR will automatically make it through. The same is true for the funeral plans industry, which falls under our remit next year. Even so, I am convinced that proactivity is a better approach. We are not just a gatekeeper, however. We want to support, as well as scrutinise, new businesses in the market as part of our supervisory role.
With this in mind, we will set up a Regulatory Nursery—a form of early-warning system where we monitor firms doing entirely new types of business and operating as fully regulated entities for the first time. We will work with companies as they expand to ensure their growth continues to deliver value for consumers, supports innovation and competition, and does not compromise market integrity. We propose to do this with a new Regulatory Scalebox, as recommended in the Kalifa Review. People will inevitably ask: Isn’t all this regulatory overreach too hands-on?
No, it is a constructive, pragmatic approach that will help maintain the UK as a great place to do business. And I’m sure those firms who treat regulation with respect, who want to maintain high standards, who want to operate in a fair marketplace will embrace that. After all, it’s what they are paying for and, as they see results, I’m sure will support further investments. Indeed, our relationship with the firms we regulate is paramount not only to our success but theirs too. It’s incumbent on us to be straightforward about what is possible with the resources we have—and what additional resources we might need. Because there is always more that we can do to make sure the firms of the future can thrive in the UK and to prevent consumer harm.
Almost four million more people are financially vulnerable following the pandemic, while many others have accrued high levels of cash savings. With both groups now more exposed to fraud, scams, and high-risk investments, we’ll need to step up our vigilance and support in the coming months. There is, of course, a tension hard-wired into our economic system. Consumers have more freedom than ever before—and more choice than ever before—on where to invest the wealth they accumulate throughout their working lives. Yet there remains the expectation of a safety net to catch them if they fall.
That raises a fundamental question of where responsibility lies. Sheldon Mills, our new Executive Director of Consumers and Competition, with a breadth of professional and personal experience, will be taking the lead in helping us to get this right. We are consulting on how a new duty of care for consumers can be reflected in our rules and guidance, particularly as it relates to vulnerable consumers in a digital world. On the one hand, there is-rightly-an expectation on consumers to carry out due diligence. This is reflected in the law passed by Parliament, which created the FCA. But the reality is that they are often up against shrewd operators, offering enticing returns, cloaked in financial and legal semantics.
Indeed, the circumstances in which people receive payouts will be part of a wider review into the Financial Services Compensation Scheme that we are planning. Is the balance of responsibility in the right place, however? In the context of rising compensation liabilities that are being met by well-run firms, and indirectly by their customers, it is also right for us to test public expectations of where the boundaries should be in terms of regulatory safety. For example, we may wish to consider whether high-net-worth sophisticated investors should attract the same protection as other consumers less used to investing and less able to bear losses.
We may also want to examine whether definitions for sophisticated investors are sufficiently robust. We have a very liberal regime in the UK when it comes to defining an investor as “sophisticated”. The threshold to self-certify as a high-net-worth individual here is £250,000 net assets, or £100,000 annual income – and a few clicks of a mouse. In other comparable markets, such as Australia, Canada or New Zealand, it can be as high as £2.5 million, with a much more rigorous process for certification. There will, of course, always be some risk for investors since that’s the choice they make for the returns they want. It is not our job to prevent every loss and such an approach would be highly damaging for the economy. It is our job, however, to learn from what we see, from emerging trends, and from the experiences of others. And that requires us to become more adaptive—the third area where we need to make progress.
More adaptive
As the past few years have shown, we have to be prepared for a world in which we are constantly being disrupted. So our transformation will be an ongoing process. One of continual learning. One of constant adjustment. And it will be strengthened by a stable operating platform so we can act with confidence, knowing that we are equipped to deal with whatever is thrown at us. As we have in the past 12 months in different ways. Fresh ideas to improve the effectiveness of UK primary markets, while safeguarding standards. New pricing policies to end the loyalty penalty when you buy home or motor insurance. Putting a cap on certain fees charged by claims management companies and addressing what’s known as phoenixing to prevent bad actors returning to the system.
We’ll need to continue adapting and working at pace. Because constant change is today’s reality. We know that on issues such as fintech or sustainability what we say one day might become quickly outdated. And that new technology will present new opportunities for criminals that will require us to re-tool in response. Mark Steward, our Executive Director for Enforcement, leads our ScamSmart initiatives and is making significant headway in our dialogue with technology firms. As he said recently, scammers are some of the most entrepreneurial people in the country.
We know that many issues will cross over with one another. That’s why we will shift our entire operating posture to one that brings more focus to the problem in front of us rather than simply being split up by different types of firms or sectors. We want our response to be led by the right tools to solve the right problems. We saw how successful that approach can be during the pandemic. We need to bottle that culture of strong collaboration, sharing information and breaking down silos into a more sustainable, business-as-usual way of working.
At the same time, we recognise that the challenges we face are too multifaceted, too multidimensional to address on our own. This is where our proactive stance meets our need to collaborate with others to create a strong, resilient financial services sector. We’ll have to build new partnerships and intensify old ones—working with consumer organisations, trade bodies and other regulators at home and abroad. And, of course, continuing to draw on the expertise of independent statutory panels, who advise and challenge us. We are going to get better.
But only by working closely with others can the FCA become the organisation we want, and that consumers and companies need. For example, there are more than 50 organisations with a stake in the national counter-fraud effort—from the police and government to charities and trade bodies. Equally, the cross-border nature of our markets means international cooperation is paramount—especially after Brexit. Leaving the EU has given us the freedom to tailor our rules to better suit UK markets. However we use that freedom, we will continue to work with our foreign counterparts to shape global standards, benchmark ourselves to them, and work vigorously towards convergence and cooperation.
The way we, under Andrew Bailey’s leadership, joined the US, EU, Japan and Switzerland on transition away from LIBOR stands as an excellent example of proactive partnership to deliver global financial stability. We will continue to lead the Global Financial Innovation Network supporting sound technological innovation across borders. There are solid and successful relationships to build on at home too. Whether that’s with the National Economic Crime Centre on serious organised crime—and I am delighted that our new Executive Director Markets, Sarah Pritchard joined us last month from the NECC.
Or through Project Bloom to tackle pension scams, with the SFO on fraud, or through IOSCO on global securities regulation and sustainability standards. Already, we plan to reinvigorate cooperation between the FCA, Financial Ombudsman Service and the FSCS through a consumer investments coordination group—and we hear the calls for even more consistency in approach and greater clarity for consumers. We will also help deliver a sustainable financial system which supports and enables the government’s commitment to a Net Zero economy.
We were one of the first countries to introduce climate-related financial disclosure requirements for listed companies—a regime we proposed extending last month to asset managers, life insurers and FCA-regulated pension providers. We are also co-leading international efforts to encourage a global baseline of disclosure standards so that investors can understand the sustainability performance of the companies they invest in. We are building on these activities with further work to embed sustainability across the FCA, including through the appointment of a director of Environment, Social and Governance—Sacha Sadan, who joins us next month.
Sacha will add to the growing diversity in appearance, thought, capabilities and experience fundamental to the future of the FCA. We are getting the right people with the right skills and the right experience at the top, joining long-standing executive colleagues. I am pleased that David Scott, former senior Freshfields partner, has joined us as interim General Counsel and Raj Parker as Senior Legal Adviser, helping us to learn. We have already benefited from Raj’s hard-hitting recommendations in his review into the FCA’s oversight of the Connaught funds published in December.
Our implementation of those recommendations is underway and being assured by our Chief Risk Officer, Sheree Howard, who is bringing a strong enterprise risk approach to our organisation. We will continue to build diversity throughout the FCA and support a more diverse financial services sector. As of today, 43% of our Senior Leadership Team is female and we’re on track to meet the Women in Finance Charter 50% target by 2025. Indeed, nine out of 18 executive committee and board members are women. Thirteen percent of our SLT identify as being from an ethnic minority and we are working towards a target of 20% by 2025, of which at least 4% will be Black.
I would also say that as a national institution, the FCA should not only reach out to but also reflect the whole of the United Kingdom. Building on our successful experience in Scotland, including working with the devolved government, we will double the number of staff in Edinburgh to more than 200 over the next two years and establish a presence for the first time in Cardiff and Belfast. I am also pleased to announce today that the FCA is exploring opening a new office in Leeds, initially with 100 staff. We are engaging with the Bank of England and other partners on this project and hope to make significant progress by the end of next year.
These measures will allow us to better reflect the people we serve and greatly expand our talent pool. We need an operational platform that can scale, excellence and integrity across our systems, and the people, culture and capabilities alongside that. Stephanie Cohen, our new Chief Operating Officer, joining most recently from BlackRock, is charged with the task of turning the FCA into a stable operational machine.
Measuring success
Transformation on the scale we’ve set out will not happen overnight. Our Board will provide rigorous oversight of our change and it is vital that we are held accountable along the way. As such, we will be clearer on what outcomes matter and what metrics we use to measure them. We will report publicly on progress, beginning in April. This will help to demonstrate value for money, to understand the impact of our interventions, and to drive improvements in operational effectiveness.
Right now, there are too few ways that our performance is accurately captured, which raises questions about our effectiveness from Parliament, government, consumers and companies. Greater transparency and accountability require a significant change in behaviour for the FCA. As a starting point we are this year setting seven key strategic overarching outcomes and testing a number of metrics. These are aligned with our transformation programme and set out in our Business Plan.
Specific metrics include:
- bringing down the FSCS levy over a multiyear timeframe as well as the value and volume of FSCS claims
- refusal, withdrawal and rejection rates at the gateway
- complaints about newly authorised firms
- increasing the number of firms whose permissions we remove either permanently or temporarily
- reducing the number and proportion of calls to the FCA that we need to redirect
- increasing effectiveness of our ScamSmart campaigns
- market cleanliness measures
Conclusion
With our role more critical than ever, our remit bigger than ever, and scrutiny of our performance closer than ever, the FCA needs to get on the front foot. To become more proactive, we must become even more innovative to fully capitalise on data and technology; even more assertive to ensure consumer protection and market integrity; and even more adaptive to meet the challenges we know about and prepare for those that will come. There is a solid foundation to build on and notable successes that we must consistently replicate across our work.
From the way we are using data, to the forceful action we’ve taken on fraud and money laundering, to our suite of new executive directors, we are already striding forward. Over the next 18 months you will hear more from the new leadership team and continue to see an FCA that looks and feels even more different. One that operates differently, partners differently, and communicates differently. One that delivers market integrity and delivers for the consumers that we serve. One that is not only purposeful but that is fit for purpose. There is a lot of work to do. And I am confident that we now have the right strategy, the right people and the right ambition to do it.
Source: FCA
