Charles Randell, Chair to the Finance and Leasing Association, recently delivered a speech at the Finance and Leasing Association Industry Gathering on 22 April 2021. It’s now more than a year since we all started our extraordinary new ways of living and working with coronavirus. Last summer, three months into the first lockdown, I made a speech about the consequences of coronavirus and the financial system we would need for the recovery. I said that the recovery would be determined more by decisions about public health and fiscal and monetary policy than by financial conduct regulation, but I noted that the pandemic had exposed some stark truths: that we have too much debt; that we don’t save enough; and that when people do save, they are too often persuaded to buy unsuitable investments. I said that the financial conduct regulator we need for the recovery is one that fundamentally changes this picture.
That is the challenge and opportunity that faces our new Chief Executive Nikhil Rathi and his senior team as they work with the FCA Board to finalise the details of our business plan and our strategy for the further transformation of the FCA, which we will announce this summer.
Today, many of us are embracing optimism about the future path of the pandemic. Approaching 34 million people in the UK, including the great majority of those who are most vulnerable to the virus, have now received their first vaccine dose and as summer comes closer it is easier to meet and socialise with our loved ones safely outdoors. But it’s cautious optimism, because we know how easily the virus can exploit careless behaviour.
I feel optimism about the challenge and opportunity to reshape the FCA for the future; but it’s also cautious optimism, because of the scale of the change that is required to transform the organisation for a world that coronavirus has – whether we like it or not – changed fundamentally.
This new world is one in which the digitisation of many activities, including many financial services, has accelerated. A new world which calls into question the role of towns and cities in our economy, as more people work and shop without leaving their homes. A new world in which some consumers have become financially more secure, adding to their savings as they have been unable to spend their money, but others have exhausted their savings or fallen further into debt. A new world in which largely unregulated online activity has become a bigger part of our lives, exposing the vulnerable to more and more scams, whether they are high interest rate scams, cryptocurrency scams or bank transfer scams; and where, even with regulated activities, consumers are sometimes only one click away from a bad decision.
In order to transform the FCA to be as effective as it can be in this new world, we need to do many things differently, and I will highlight five of them.
Focus on the gateway
First, we need to make sure that the firms which have FCA authorised status are good enough. Over the last seven years, the number of firms given to the FCA to regulate has more than doubled, and it continues to grow as we are given more responsibilities. The review into London Capital & Finance highlighted the risks from firms which exploit the “halo effect” of FCA authorisation.
This means that we not only need to be rigorous with firms at the point when they apply; if we do authorise them, we need to know whether they are using their authorisation and what for; and we need to quickly remove the authorisations of firms which are not using them or which are misusing them.
Being tougher and more effective in these gateway activities will reduce what has been called the “60,000 firm problem”.
We know what we have to do – and we are already acting, so that a firm with FCA authorisation will have to “use it or lose it”.
Focus on basics
Secondly, doing our job well in this new world with 60,000 authorised firms requires us to focus on the basics. In 2019 we decided to underline four priorities for basic consumer protection: safe and accessible payments; sustainable credit; clear and safe investment choices; and fair product terms, including price. We will continue to focus on them because, frankly, none of these aspects of consumer financial services is yet in a satisfactory place.
For this audience I would particularly highlight the review we published in August 2020 into relending by firms that offer high-cost credit. It speaks for itself, but one paragraph stands out:
“The review raises several concerns about firms’ conduct, including poor practice in the use of online accounts and apps to encourage consumers to borrow more, and marketing messages which emphasised the ease, convenience and benefits of taking more credit. Some firms suggested that consumers could use additional borrowing, for example to take a holiday, and reinforced the message by including imagery of exotic locations. Some firms also appeared to use ‘nudge’ techniques such as appealing to social norms by conveying a message that relending is common practice and normal behaviour.”
What this review found, in summary, was that a number of firms had business models which were indifferent to whether the consumer could pay back the loan as long as they could make a return through interest payments and other charges, the proceeds of a further loan or a combination of the two. They promoted this harmful business model with obviously unsuitable consumer advertising and communications.
Focus on outcomes
That brings me to the third big change we need to make as we transform the FCA: focusing on outcomes. I said last year that not only do we at the FCA need to focus on outcomes – we also need to make sure that firms do the same.
Firms must identify if consumers are trapped in a cycle of unaffordable debt and take action to break that cycle, such as forbearance, support and referral to appropriate debt advice, rather than extracting further rents from the most vulnerable. If they do not, we must be ready to take strong enforcement action against both the firm and the senior managers who are accountable for product design and consumer outcomes.
In order to play our part in producing these outcomes, we need to collect and use the right data from firms, joining those data up with a cross-organisational strategy to intervene more promptly. It’s easy to talk about outcomes-based regulation but experience shows it’s hard to deliver. I’ll be saying more about this next month.
In order to pivot to a greater focus on outcomes in a rapidly changing world, the approach of regulators and legislators needs to change. Both financial services legislation and financial regulation are full of complex detail, with statutes, statutory instruments and rulebooks that fill countless shelves. But complexity produces loopholes and opportunities for regulatory arbitrage.
In consumer lending, we have seen this with Buy Now Pay Later products which are functionally equivalent to many regulated products but largely unregulated. We’ve called this out and the Government is acting to change the law. We also see it with online promotions, by unregulated lead generators or scammers. We’ve said that the Government needs to look again at the legislative framework that allows online financial harm to proliferate.
These examples demonstrate the difficulty of using detailed laws and rulebooks, which take a long time to change, to tackle a world of digital activities which are changing faster and faster.
In order to regulate in this world, we need to be more agile and confident in using our Principles for Businesses to take action against those firms which are not doing the right thing. Transforming the FCA will require us to reset our approach to the Principles, including in particular our Principle that firms should treat their customers fairly. We have been giving consideration to a New Consumer Duty (or Duty of Care) and we will make further announcements about this shortly.
We also need to use the additional speed and scope to adjust our rules which we have, now that the UK has left the European Union. Not to undermine the standards of consumer protection which European rules require, but to deliver equivalent or better outcomes more effectively.
To do these things – enforce the gateway to authorisation, focus on the basics, focus on outcomes, and use our rulebook better and faster – we need to reshape the FCA.
Nikhil Rathi has already made some big changes. To give the right executive focus to our gateway to authorisation, he has appointed Emily Sheppard as Executive Director for Authorisations. To strengthen our focus on outcomes, our work on consumer and market sectors must be joined up from end to end, from policy to supervision; so he has appointed two Executive Directors who between them will cover that full scope – Sheldon Mills for consumers and Sarah Pritchard for markets.
Delivering a more effective FCA requires us to make better and faster use of the information and intelligence we already have across the organisation and to exploit new sources of information and intelligence, so he has appointed Jessica Rusu as our first Chief Data, Information and Intelligence Officer. And we need to become as effective in operational delivery as we have been in some of our policy interventions, so he has appointed Stephanie Cohen as our new Chief Operating Officer.
Just as I am cautiously optimistic about progress in tackling the coronavirus, I’m cautiously optimistic that these changes to the FCA will deliver what we want them to. But after last summer we were all disappointed to discover the pandemic wasn’t over. And on numerous occasions going back over decades, financial regulators have spoken confidently about a new paradigm but haven’t then been able to deliver; so my cautious optimism about the FCA needs to be matched with clear commitments to stating the outcomes we want, measuring these outcomes and being transparent about whether we have achieved these outcomes.
As Chair of the FCA I have sought to play my part in creating the financial conduct regulator we need for the recovery and the new world we face. As key players in the financial lives of millions of UK consumers and businesses, I hope you too will reflect on the part you need to play.