How regulation can prepare the ground for economic growth

Speaker: Sarah Pritchard, Executive Director, Markets
Event: City and Financial Global: The Future of UK Financial Services Regulation Summit
Date: 27 September 2022
Note: This is a drafted speech and may differ from the delivered version

Key points

• Protecting consumers from harm and maintaining market integrity are key elements of boosting economic growth and international competitiveness.
• The FCA continues to work on ways to reduce regulatory burden where possible whilst maintaining high standards so the UK is the best place in the world to do business
• The pending authorisations backlog has been slashed by 40% in the last year and the FCA is trialling automated forms to further speed the process
• The FCA is looking at reforming investment advice rules so that specialist knowledge is available to mass market consumers for lower risk products

What are the magic ingredients to ensuring sustainable growth? And how can regulators ensure that the rules and action they take help growth to take root and flourish perennially?

When I first got my allotment, it was wildly overgrown.

My husband and I spent days clearing all the weeds. With sore backs, raw hands and ruddy cheeks, we thought that our hard work was done and we could plough on with the more rewarding task of planting.

We were wrong. The weeds took just days to spring back, initially in discrete areas. But as days turned to weeks, the allotment became an overgrown jungle once more.

Likewise in our day job as regulators, when we take our eyes off the terrain, new harm can  quickly spring up. Dealing with this can sap your resources and divert focus away from the more rewarding work of helping new and existing firms to thrive and grow.

Growth

At the FCA, we are clear that we want to support long term competitiveness and growth of the UK economy, and know we can do so by being an effective regulator.

We can support growth by showing speed and agility, by providing regulatory certainty and by responding quickly to changes in markets.

We know we need to do more to speed up some of our decision making. Last year, we made changes to enable us to be quicker and more efficient in stopping harm to consumers and markets.

We are focused on speeding up our approach to authorisations[3], while ensuring it remains robust. 

A strong gateway, making sure that the firms that operate here meet the right standards, is critical in making sure the weeds do not take over.

Our backlog for pending authorisations has reduced by 40 per cent in the last year.

We are trialling automated application forms for companies which are easier to understand and quicker for us to assess.

We know we can encourage people to do business here by providing regulatory certainty. You will have already seen us become a more outcomes focused regulator[4] and this deliberate approach is outlined in our new strategy[4].

By being focused on outcomes - rather than writing rules for every scenario - we can support new businesses and entrants to the market, as well as existing firms who are adapting their business models. Firms want to know what we want from them and what is needed.

We aim to give that certainty and clarity.

Just last week, we published draft guidance on the regulatory perimeter for trading venues.[5]

Technological and market structure changes mean that this perimeter has become more ambiguous, with some firms uncertain on the regulatory permissions they need.

While we cannot yet change the definition of a trading venue – as that is set by retained EU legislation – we can give guidance on our view of when permissions are needed.

We hope that this draft guidance, which we are seeking industry views on, will give as much certainty as possible under the current legal framework.

Innovation

We spend a lot of time at the FCA cross-pollinating fresh ideas with industry.

Our Regulatory Sandbox[6], which creates a safe space to test regulation around innovative new products – has been widely emulated.

It has helped more than 160 growing businesses to test their offering, with over 90 per cent becoming authorised with our help.

Earlier this year we announced our new and innovative Early and High Growth Oversight[7] approach after pilots showed it helped new businesses grow.

We aim to support 300 newly authorised businesses by next spring and are running webinars to support firms on key issues – such as one on financial promotions in the next few weeks.  

Through this approach we hope to support growth. We will tend seedlings that will thrive, while removing those that won’t – taking early intervention to remove problem firms in this early oversight period.

As well as supporting new firms, we seek to use our testing approach to identify innovative solutions to reducing harm too.

As we speak, over 120 attendees are also taking part in an FCA and Payment Systems Regulatory[8] TechSprint focusing on solutions to Authorised Push Payment Fraud[9].

This type of fraud exceeded card fraud for the first time last year and is increasing year on year. It poses a significant threat to consumers, businesses, and the integrity of the UK financial system.

Making payments safe and accessible is a priority for us and we hope that by partnering between regulators, industry partners and fraud experts, we will be able to identify more innovative ways of reducing this pervasive threat.

We aim to encourage a balanced approach of fostering innovation while offering consumers protection – helping the UK to remain the most attractive destination for fintech in Europe. Globally, we are second only to the United States. 

Being agile as markets change

Markets change and will continue to do so.

We are building a regulatory approach that is agile and will respond to future changes.

In recent years, the reliance on a small number of third-party service providers has grown significantly.

No one firm can manage the potential systemic risks from their disruption. A single point of failure could impact multiple firms, threatening the stability of the financial system.

This was illustrated in June 2021, when the server of the US cloud computing firm Fastly went down[10], wiping out access to sites such as Reddit, Amazon and even the UK government websites.

It could have just as easily been financial services hosted on the cloud that were inaccessible to users.

Luckily the problem was resolved but the glitch shows how dependent we are on third parties and how essential it is that they remain resilient and reliable. 

The government, in the current Financial Services and Markets Bill[11], intends to give the FCA, the Bank of England and PRA new powers to oversee the resilience of services third parties provide that many financial firms rely on. In July we published a joint Discussion Paper[12] to seek views on this. We are engaging firms and third parties as we develop these measures.

Although this will give us new powers to oversee others, this does not mean that our attention will only be on those new third parties. All firms should consider and understand their exposures to third parties, be able to identify when there are issues and have tested recovery and resilience of their important business services. These are the basics of good oversight of outsourcing.  

Market integrity

Part of our remit is to enhance market integrity, making sure that markets are effective, efficient and reliable.

This year, markets have been particularly reflective of the impact of geopolitics, which makes trust in those markets and strong international partnerships all the more important.

As a leading centre of global liquidity, the UK has a central role to play in advancing market integrity alongside international partners; a role that has never been more important than during the current period of heightened volatility. We are monitoring activity in these markets closely.

That is particularly the case in commodities markets, where the UK maintains a globally leading role.

We continue to work closely with partners within FSB and IOSCO to advance internationally aligned approaches to commodities regulation that recognise the globally inter-connected nature of these markets.

In the wake of Russia’s invasion of Ukraine, we witnessed major volatility across commodity markets, particularly in energy and metals. We have maintained a close dialogue with other regulators and market participants to evaluate areas of potential stress or strain. In March, unprecedented volatility in nickel markets, led the London Metal Exchange (LME) to suspend trading and cancel an early morning’s trading.

We continue our assessment of the circumstances surrounding that decision to make sure that all lessons are learned.

We agreed with LME the immediate strengthening of its governance through the appointment of additional independent directors, and immediate measures to enhance oversight of Over The Counter positions, and we continue to monitor reforms by the exchange to its market structure and market oversight arrangements.

Promoting effective competition

Efficient, effective and reliable markets are also those where there is competition. We have a competition mandate, and will act where we suspect competition is not working well or where we see anti-competitive practices.

This year we announced that we are undertaking work on accessing and using wholesale data[13]. We heard concerns that competition in the markets for benchmarks and indices, credit ratings and trading data, may not be working well and this could be increasing costs for investors and affecting investment choices.

This could lead to investors being thwarted from switching to cheaper, higher quality or more innovative alternative providers or by adding costs to investors and limiting new market entrants.

We have started with our trade data review and issued a request for data from trade data suppliers and users. We will be expanding to broader ranges of wholesale data shortly and plan to launch a market study covering competition for benchmarks, credit ratings data and market data vendors in November.

This work is intended to ensure that competition is working well, that good quality information is available to market participants that want it, and that innovation is keeping up with market developments.

Regulatory change

As we move further into the post-Brexit world, we support the Government’s ambition under the Future Regulatory Framework[14] to ensure that we can tailor our rules to suit our markets. 

The FCA is already flexing its agility and changing where we can – and where doing so will deliver positive outcomes for markets and consumers - but we will be able to do more once the Future Regulatory Framework becomes law.

We share the government’s commitment to maintaining a coherent, agile and internationally respected approach to financial services regulation.   We will make sure that we do what is best for the UK, retaining market integrity and protecting consumers.

Our experience of operating MiFID II over the past four years has given us a good insight into what works in a UK market context and what doesn’t.  

Some of the rules we have in place currently were formed on the basis of the collective compromises of 28 countries.

We did not agree with all of the rules that were adopted, and indeed we have seen evidence of many ineffective requirements.

Policies such as the double volume cap or share trading obligation do not deliver benefit in UK markets, and are ripe for change.

But where rules are critical and support the integrity of markets, we will maintain and adjust these over time.

One area we are looking at transforming is the advice and guidance rules.

MiFID was introduced 15 years ago and had a clear distinction between advice and guidance.

Offering advice on what to invest in carries with it a heavy regulatory burden.  A full suitability assessment – in effect an in-depth MoT of a customer’s personal financial situation - is needed from a qualified financial advisor.

Because of the costs involved, only the relatively well-off can access advice on what to invest in.  Mass market consumers are often left to navigate a bewilderingly large choice with little support.

As part of the FCA’s Consumer Investments Strategy[15] we have said that we want to establish a simplified advice regime for mainstream stocks and shares ISAs where the risks to consumers are relatively low.

This will remove some of the burden of regulation which currently applies across the board to all advisors. It will also enable firms to reduce their charges and make advice on mainstream investments more accessible to mass-market consumers.

Once the FCA has greater rule making powers under the future regulatory framework legislation next year, we will be able to do more.

To get ready for that, we want to carry out a holistic review of the boundary between advice and guidance so we can understand how to reduce the regulatory burden while continuing to provide the right level of consumer protection.

The weight of regulation should be commensurate with the level of risk but moving away from the one-size-fits-all approach mandated by MiFID will be complex and it will need assistance and input from industry.

We are getting ready now for the greater opportunities that will exist in future to set rules that are appropriate for the UK.

Equity markets review

We’re also consulting on changes to the equity secondary markets rules[16].

We’re aiming to remove some rules that create material operational or compliance costs on firms, but which do not deliver material benefits to end users or support market functioning. 

Our proposed changes are designed to improve the experience for investors and the resilience of trading. While the current regime works well, there is room to make it better, not least in purging operational complexity and having a more global focus.

The proposals for change would allow trading venues to reference prices from reliable overseas markets - improving choice and competition.  They would simplify some of the reporting requirements for Over The Counter transactions and improve the content of post-trade transparency.

And again, so we can get ready when we are able to make further changes once the Financial Services and Markets Bill becomes legislation, we have asked for views on how to improve the way that retail orders for shares are executed in the UK.

The reason for asking for these views now, and early, is to find out what changes market participants think are needed and are manageable.

This will allow firms to absorb changes in a manageable way.

Primary and secondary markets

Over the summer, we published a discussion paper on ways we might reform the listing regime[17] to make it more effective for both issuers and investors.

This follows changes that we made last year to allow dual class shares structures in the premium listing segment, reducing the level of shares in public hands required to list, and increasing the minimum market capitalisation threshold.

These changes delivered recommendations made by Lord Hill’s UK Listing Review, reducing barriers to listing while maintaining high standards of market integrity.

More recently, Mark Austin’s Secondary Capital Raising Review[18] has been published. We welcome the review which aligns with our strategic priority to ensure UK wholesale markets are regarded as one of the leading global markets of choice for issuers, investors and intermediaries. This can be achieved by identifying ways to streamline further capital raising by publicly traded companies and promote access for investors.

We are working closely with government and industry stakeholders in taking forward the relevant recommendations for the FCA as part of the UK listing review agenda.

Accountability and scrutiny

Given the scale of the changes, especially those relating to the retained EU law, we fully appreciate that the relationship between the FCA and Government as well as Parliament is important and should evolve.

We recognise the need to exercise our functions in a transparent and accountable way and are committed to do so. 

We believe you can strengthen accountability without undermining agility and the important role of regulators in delivering against their statutory objectives.

Our current statutory objectives -  to protect consumers, promote market integrity and promote competition in the interests of consumers - will broaden through legislation to include a secondary objective to promote international competitiveness and growth of the UK economy.

An effective regulator should and must be promoting the long-term competitiveness and growth of the UK in any case.

These objectives do not run counter to each other, despite what certain commentators may say.

Without market integrity and appropriate protection from harm, there is a risk any growth is more likely to be short-lived.  The key is to balance these different outcomes.

Conclusion

Best-in-class and proportionate regulatory standards will protect consumers, ensure market stability and promote competition.

That protection is all the more important in a climate where household budgets are stretched in the face of high prices.

Increasing international competitiveness and growth is about creating the right conditions for firms to innovate and to invest. This means building markets that attract international businesses and allow UK-based firms to compete abroad effectively – whilst also ensuring that those benefits are passed on to consumers and firms.

We need a proper debate about how we evolve to make the most of our new freedoms and responsibilities.

Ultimately, though, we all want the same thing: to nurture our financial services  environment and prepare the ground to make the UK the best place in the world for firms and consumers to do business.