Nikhil Rathi, Chief Executive of the Financial Conduct Authority (FCA) recently gave a speech addressed to the City Regulators, Mansion House. Lord Mayor, thank you for the invitation to speak today. I’m pleased to join Sam Woods this evening. His measured, confident leadership at the PRA has ensured the close partnership of the two financial regulators. I look forward to our continued work together. I am just one month in to my term as CEO of the Financial Conduct Authority. And you may be aware that the Government has recently proposed legislation enabling the CEO of the FCA to serve a maximum two terms. And having researched your background, Lord Mayor, I have much to learn from you. As due to the current unusual circumstances, you are the first Lord Mayor to serve two terms since Sir Robert Fowler in 1885.
Sir Robert was an interesting figure, and a significant landowner. With plural voting, he could vote in 13 different constituencies. In one election, he managed to exercise his democratic right in all 13 in a single day. For those Parliamentarians in the audience, that may provoke flashbacks of the passing of the Withdrawal Agreement. Today, I want to set out how we at the FCA see the issues and challenges that we face now, those over the next year and some of the longer-term issues on our radar. And how we, as a regulator, must transform to be ready for the work ahead.
The immediate environment – Coronavirus and Brexit
It’s a cliché to describe the challenges we have all faced this year as ‘unprecedented’. Meeting them has been possible because of those working throughout the industry. Branches and call centres could only remain open if people were willing to keep serving customers. Our IT systems kept running because of the engineers who work night and day. Those on the financial services frontline kept vital services available in rapidly changing circumstances. My FCA colleagues worked at remarkable speed to introduce measures to protect consumers and to keep markets functioning.
The number of mortgage and credit card payment holidays granted demonstrate the far-reaching impact of the pandemic – more than 4.4 million deferrals granted across mortgages, credit cards and personal loans. And, in light of the latest lockdown restrictions across the United Kingdom, we have proposed updated guidance that would allow those in financial difficulty to receive payment deferrals for up to six months, whilst providing tailored measures for those facing medium-term challenges.
In the corporate world, our markets and those who work in them stepped up to meet the need for recapitalisation. £14.7 billion in equity was raised on UK markets between April and June this year, and the issuance of corporate debt by UK companies in June increased by 247% compared to January.
The financial impact of the pandemic is being felt by the firms we regulate, too. Ultimately, we can’t intervene to stop firms from failing in the face of economic distress and sadly we do expect a significant number of regulated firms, particularly smaller firms, to fail in the months ahead, but it is our job to ensure that where this happens, the resulting harm and loss to their customers and the wider financial system is kept to a minimum.
As we responded to the Covid crisis, we have also kept our focus on readiness for the end of the transition period after the UK’s departure from the European Union. First, we’ve continued to work to minimise disruption. We now have temporary regimes that will allow approximately 1500 non-UK firms to continue operating in the UK. We are also ready to take on a new set of responsibilities onshored into the UK regulatory framework.
Secondly, we continue to operate in an open, co-operative way, providing technical support to the Government in negotiations and deepening our relationships with international regulators, and adapting to our new relationship with EU counterparts. Finally, we remain committed to upholding high international standards and to maintaining open markets. Fragmentation will affect liquidity, reduce the ability to net transactions, make risk management more difficult and feed through into a higher cost of capital. These additional costs and lower returns will ultimately hit savers and pensioners, whether they are in the UK or in the EU. We are doing what we can to avoid this.
Last week, we set out that, in the absence of mutual equivalence, our approach to the Share Trading Obligation (STO) will ensure UK-based investors and asset managers continue to have the freedom to find the best possible trading terms, and to get the optimal outcome for themselves and their customers. We do not wish to restrict how and where companies can raise capital or restrict trading of their securities in any currency.
2021 and beyond
As we look to next year, we are also turning our attention to the future regulatory framework. Following the Government’s recent consultation, one important question will be how we balance the need for regulators to have enough flexibility to act quickly – as we have in recent months – while maintaining proper democratic oversight of our work. We will play our full part in ensuring any updated accountability arrangements work smoothly and transparently. There also remain significant logistical challenges to resolve together. For example, being prepared for the transition from LIBOR to be completed by the end of next year.
Good progress has been made in the past three years on the transition from LIBOR to stronger and better interest rate benchmarks. This has been made possible by industry working closely and collaboratively with the FCA and the Bank of England. In Sterling markets, the risk-free overnight rate, SONIA, is now the norm in new issuance of floating rate bonds and securitisations. SONIA is overtaking Sterling LIBOR in the swaps market, accounting for around two-thirds, equating to around £10 trillion in SONIA swaps traded a month. Other important transition steps in the past months including the publication of ISDA’s protocol for derivatives. In less than three weeks, since the protocol window opened, almost 600 entities have signed up.
The next four to six months are arguably the most critical period in the transition and the time to act is now. Market participants from all sectors – lenders, asset managers and non-financial firms need to ensure they are ready for the end of LIBOR. With these immediate challenges gathered around us, there is a risk we lose sight of long running issues reshaping financial services.
To pick out a few:
- Gaps between generations in terms of wealth and opportunity;
- Increasing pressure on the financially vulnerable, stretched or distressed;
- The growth of big data, machine learning and artificial intelligence posing new ethical and regulatory questions along with great potential for innovation;
- And, in a sustained period of low interest rates, shifting consumer incentives towards high risk investment opportunities at a time when consumers are bearing more of the responsibility for their own investment decisions.
Each of these drives consumer behaviour, and therefore the behaviour of firms and competitive dynamics in the market. Regulators have to respond. And even these issues are potentially dwarfed in terms of impact by climate change.
On Monday, I announced FCA’s plans to require companies to make better disclosures about the effects of climate change on their business, in line with the recommendations of the Taskforce on Climate-related Financial Disclosures. The new rule – which is only one step in our work to promote good disclosure throughout the investment chain, and won’t be the last – will cover two-thirds of the market, or nearly £2 trillion, of the capitalisation of equities on the UK Official List.
Transformation
Addressing these issues requires that we transform the FCA. And that need will only be reinforced by any lessons from the three forthcoming reviews into the FCA’s historic work. The ambitious transformation programme we are working on at the FCA encompasses everything that we do – our culture, our people and our technology. Let me share thoughts on one aspect, improving our use of data.
With around 60,000 regulated entities to supervise, we need to make further investments in a more digital and data-enabled approach. This should allow us to intervene sooner to reduce harm to consumers and markets. And smarter collection and use of data, backing faster intervention, should result in a lower total cost of regulation for well run financial services firms. Improving our capabilities will also aid our evaluation and engagement with industry on topics like big data, model risk management and artificial intelligence.
The data strategy published earlier this year outlined our ambitious vision to harness the power of data and advanced analytics to support our Mission, and to ultimately transform how we carry out financial regulation in the UK. We have seen the benefits of this during the crisis and will accelerate this work in the coming months. We are also working closely with peer regulators around the world, many of whom are embarking on their own digital transformations. It’s fair to say that for all of us, there is a significant journey ahead.
We also have much work to do on diversity and inclusion at the FCA, delivering on the Women in Finance Charter and recognising the immense importance of an organisation like ours reflecting the communities we serve in all parts of the UK with genuine diversity of thought brought to bear on the complex problems we are trying to solve. And with Sam and his colleagues at the PRA, we will also be looking to the industry to work hard with us on these issues to tackle some deep-rooted issues and ensure the cultural change we all would like to see.
Conclusion
Transformation of the FCA and the way that we work will underpin all of our efforts – maximising our use of data and technology, making the FCA more diverse so that we can bring a full range of perspectives and ideas to our work, and using the lessons of this extraordinary year to build on the best elements of our organisational culture. This will allow us to deliver more for consumers, firms and markets by making us as effective and efficient as we possibly can be.
Lord Mayor, the City of London was famous for its street traders, known as barrow boys and I, hailing from the Cumbrian town of Barrow, look forward to making rapid progress on the changes we must make during your second term. Thank you.
Source: the FCA
