Financial regulation in the UK is at a pivotal crossroads

By Bruce Davis on Tuesday 19 July 2022

OpinionAlternative LendingDigital BankingSavings and Investment

A decade on from the formation of the UK’s Financial Conduct Authority, the UK’s financial regulator’s remit has expanded out of all recognition, writes Abundance’s Bruce Davis.

Financial regulation in the UK is at a pivotal crossroads
Image source: Pexels/Olya Kobruseva

Ashley Alder has been announced as the new permanent Chair of the FCA and on the expected eve of the publication of their new consumer duty strategy (promised for the “summer”) it is a good time to ask whether we have a regulator that is fit for purpose.

In 10 years, the scale and remit of the FCA has increased out of all recognition. It was created out of the breakup of the monolithic FSA announced in 2012 when responsibility for conduct and prudential regulation was divided between the new FSA and PRA, both launching on April Fools’ day the following year. 

The FCA now has a stated ambition to extend its reach and become more interventionist in the way our financial markets and businesses work, to achieve better outcomes for customers and the economy as a whole. Gone are the days of the regulator orchestrating markets behind the scenes with the angle of an eyebrow – the new FCA is fighting it out for “likes” with the scammers on TikTok.  

However, the new Chair will be arriving at the top of an organisation still in a state of flux. It is still trying to swallow its hugely increased remit whilst delivering an unprecedented pace of consultations, policy statements and discussion papers which bombard the desks of FS policy chiefs and wonks almost weekly. 

The fundamental challenge for the regulator is how it maintains the balance between the very real need for innovation and its responsibility for avoiding risks and harm brought about by the conduct of the industry it regulates. 

The Future Regulatory Framework points to the tensions in those multiple objectives and the danger is that one - the avoidance of harm - is prioritised over the need for innovation, for the wrong reasons. 

We should be clear - a financial services industry without innovation and disruption (or more dangerous where only the big and powerful are allowed to dictate the innovation agenda) is not one that produces better outcomes for customers and the economy. 

Finance is the gatekeeper of money, and money is the most powerful tool for collective action that humans have ever invented. Limiting the capacity of new forms of finance and new uses of money will allow incumbents to profit in ways that in the long run leave us all worse off. 

Regulation has a role to play to ensure that power is not overly concentrated in single group of companies or that the financial system is not overly reliant on a single model of institution. If 2008 taught us anything, it is that big does not always mean better or safer for the consumer. 

Politics has had a role to play in this shift away from innovation as the solution to the very real issues we face as an economy.  As an example of how far the pendulum has swung, the Treasury Select Committee was recently moved to recommend that companies wishing to bring new products to market should underwrite the potential costs of those products not performing as expected. 

This would be the kiss of death for innovation. It would make innovation only possible for those who already have a powerful position in the market, often at the expense of the interests of the consumer. And it would undermine the efforts of those who seek to offer alternative visions of what finance can do for customers - whether in terms of green investment, social impact or accessibility of credit and capital of less well represented minorities or communities. 

There is also the false dichotomy often drawn between regulation and deregulation as the only way to promote innovation and competition in the market. But regulation does not have to be the enemy of innovation. As many of the early innovators of P2P have regularly pointed out, earlier engagement by the regulator, and a willingness to regulate the sector, would have avoided the need to authorise a large number of established businesses en masse in 2014. 

What is needed is an approach to regulation which allows innovation to take place within its perimeter when there is a clear case to be made for the individual, social, economic or environmental benefits generated by its outcomes. 

The FCA does of course need to be robust and proactive with those who break the rules or seek to evade them, to minimise harm. But they also need the capacity to work with the innovators of finance to ensure we have markets and businesses that are ready for the things we need money to do now and in the future. 

Perhaps the biggest question is whether one organisation can perform both roles or whether the brickbats they rightly received for past failures of enforcement will make them forgetful of the fundamental need for innovation. 

We will look to the new Chair to provide independence of view and thought to communicate a sense of direction which is above the day-to-day pressures and concerns of his executive team. 

A confident, robust and effective regulator is vital if we are going to revitalise the UK’s ability to finance its economic, social, and of course environmental transformation in the next 10 years.

 

The views and opinions expressed are not necessarily those of AltFi.

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