Speaker: Nikhil Rathi, Chief Executive
Location: Mansion House
Delivered: 27 October 2022
Note: this is the speech as drafted and may differ from the delivered version
Lessons can be learned for better regulatory and risk reporting both internationally and domestically following the disruptive market events in the last year.
Upfront effort from firms in implementing the Consumer Duty should mean fewer new rules down the line.
We will continue to embed competitiveness throughout our regulatory approach but it is vital that there is no compromise on consumer protection or market integrity. Those globally high standards are why the UK can be open to innovation.
Change starts at the top
They say that regulators age in dog years. My family concurs with this, and knowing my insistence on an evidence-based approach, simply point me to a mirror.
Yet when I took this role, some commentators drew attention to my relative youth. But as of this week, that is no longer remarkable.
For the first time I live in a country where the Prime Minister is younger than me.
But, without venturing into politics, I am also proud to be speaking in a city which has a directly elected mayor from a British Asian background and in a country now led by its first British Asian Prime Minister.
Sam Woods of the Prudential Regulation Authority and I have both spoken about the importance of diversity and inclusion and we are leading joint work on this with industry. We know this work matters for good conduct and risk management. As those of us who have run businesses or large organisations know, allowing the best talent to rise to the top also matters crucially for our competitiveness.
A tide of unprecedented challenges
I am two years into my tenure at the FCA and will summarise what we have done so far to shift our regulatory direction and approach, some reflections on market and consumer challenges and a perspective on regulatory independence and reform.
The last 2 years have been punctuated by multiple once in a hundred-year events. I am proud of how my colleagues have consistently risen to the challenge.
When I became CEO during Covid, FCA colleagues made sure millions of consumers received enhanced forbearance from lenders and secured over £1.5 billion in business interruption insurance payments for businesses.
All the while the markets we oversaw proved resilient, paving the way for record capital raising to support recovery.
We managed the end of the Brexit transition period at the close of 2020 and our next task was to replace emergency pandemic measures with longer-term, tailored support.
Then, within days of the Russian invasion of Ukraine, we were working intensively with the Government, international partners and firms to implement sanctions at extremely short notice whilst keeping core markets functioning. I would like to thank everybody involved for the dedication, speed and assertiveness with which they responded.
Testing our standards to the limit
Through this period, we have also fundamentally reoriented the FCA. Our three-year strategy published earlier this year holds us to account for the first time against specific outcomes and metrics.
We have bolstered our senior leadership, promoting our top internal talent and bringing in commercial, operational and international experience.
We have made difficult reforms to our pay and rewards to focus more on collective and individual performance, support career mobility within the FCA and lay the ground for substantial expansion in Leeds and Edinburgh.
We are attracting over 1000 new colleagues this year.
And we need that extra support to our existing talent base because our workload has increased, and our remit continues to broaden. We have greater willingness to take more legal risk, to intervene earlier and to test our powers to the limits.
This has included the first criminal case against a bank for money laundering failings, securing tens of millions under our consumer redress powers, and imposing the first account forfeiture order.
Our gateway is more robust as we have learned the lessons from independent reviews. Now 1 in 5 firms are initially rejected for authorisation compared to one in 14 in the previous year.
Despite this extra scrutiny and workload, we have made huge progress on our backlog and plan to improve this further with our investment in automation.
Lessons to learn for regulatory reporting
We are investing in and deploying technological solutions to make us even more efficient.
We now test firms’ sanctions controls with big data techniques, scan around 100,000 websites a day to identify scams and have developed a single view analytics tool to be able to spot where to intervene and when, faster.
In the last year, we have seen disruptive market events, such as the default of Archegos, the temporary suspension of the nickel market on the London Metal Exchange and the extreme turbulence in commodity and fixed income markets, including gilts which particularly affected defined benefit pension funds.
In each case, there was a significant use of leverage, sometimes hidden leverage, concentrated counterparty risk and margin modelling based on periods which did not address the stresses that actually crystallised. Some firms faced operational challenges too.
While the events we have seen have been unprecedented, there are lessons to be learnt. In each case I can see the need for better regulatory and risk reporting and oversight both domestically and internationally and this is something we will be focusing on with our partners.
Hyper-vigilance during cost of living challenges
Both the pandemic and the war precipitated our next challenge: the rising cost of living.
We had already started focused engagement with lenders to make sure they were treating customers properly and taking action when they weren’t.
Our survey last week of 19,000 people shows that more expect to struggle in the months ahead. Nearly 8 million people are finding paying for the basics a heavy burden – that is 2 and a half million more than last year.
We remain ever more vigilant to actors preying on consumers’ vulnerabilities and are intervening at our fastest pace ever against problematic financial promotions, 8 times more interventions year to date compared to last year.
Through our new strategy we also have finalised our Consumer Duty – which puts the onus on firms to put good outcomes at the heart of their products and services.
Upfront effort from firms should mean fewer rules down the line. We know the timetables are demanding and we will aim to be pragmatic in our oversight of implementation.
That commitment to high standards – is why the UK can maintain our openness to innovation.
Embedding growth in our post-Brexit rules
And that is why we embrace a secondary objective of promoting growth and competitiveness, aligned to international standards.
Indeed, we have long been embedding growth in our work, through regulatory sandbox or our pioneering early and high growth oversight with new firms or through our leadership of the Global Financial Innovation Network with 80 partners.
Immediately post-Brexit, we introduced the most far-reaching capital markets reforms for two decades and are ready to go further. We also introduced the Long-Term Asset fund framework to support investment in infrastructure.
But we can and will do more.
We know that you want a regulatory system that is joined up avoiding duplication. During periods of market turbulence, Sam and I and our teams are in constant daily contact.
We will work with the government and industry to prioritise and sequence the 40 or so EU files due to return to the UK statute book.
We have heard strong, consistent views that this should be done at a steady, manageable pace, minimising transition costs.
Throughout we will be committed to transparent impact assessments and cost benefit analysis. Our new strategy is predicated on tackling emerging harms.
Big solutions for Big Tech
Our work with the Bank on the use of Artificial Intelligence in the regulatory framework examines the benefits and risks and suggests solutions. Please do engage with this and help us craft the right framework for the future.
Our paper on Big Tech released this week examines the innovation the tech giants could bring to financial services but also explores the risk of their potential dominance which can harm consumer outcomes. Our work focuses initially on payments, deposits, insurance and consumer credit as well as their role in third party service provision such as cloud infrastructures.
Building on our leadership in the area of green finance, we are seeking feedback on our proposals released this week on marketing ESG funds.
Calling out vested interests
As we embed competitiveness further in our approach, it is vital that we do not compromise on consumer protection, market integrity and competition.
Indeed often arguments are put to us on the grounds of competitiveness that are anything but.
It is not our role to create or maintain barriers to entry that support short term revenues of incumbent players at the expense of new entrants.
During our Supreme Court case on business interruption, one insurer argued that we were undermining competitiveness of the UK insurance industry by litigating to secure clarity for policyholders.
Our response was simple: A market in which insurers do not meet their legal obligations to customers will not be a sustainably competitive one.
We are always open to simplifying regulation whilst delivering the same outcomes and streamlining our processes without undermining rigour.
As an independent regulator, we have shown we can act quickly, whether it was in our reaction to Covid, Russia, the rising cost of living and unprecedented market turbulence.
It is vital that this independence and agility at speed is not undermined by any proposed call-in power.
And while we embrace and embed a secondary mandate for growth, making it a primary mandate would clearly undermine our international standing.
This last year has been a sobering experience, has left all of us a bit older and hopefully most of us a bit wiser.