Compound Growth

Here to help with Regulation & Compliance

© Compound Growth Limited 2012-2017

Financial Regulation: the Changing Environment

23rd October 2015

Yesterday , Lord Mayor Alan Yarrow hosted this year’s City Banquet, which provided the perfect platform for acting Chief Executive of the FCA, Tracey McDermott to deliver a speech on the “Rapidity of Change” in UK Financial Regulation.

But what exactly is the FCA’s intention for future regulation within the UK and will the current speed and rapidity of changes within the regulatory environment slow to allow firms the chance to breathe and catch-up so to speak?

We take a look at Ms McDermott’s speech and summarise what the FCA believes to be ‘good regulation’ in 2015 and beyond:

Compliance in an ever evolving environment

Since the financial crisis and following the changeover of the City Watchdog from the FSA to the FCA, the regulator has repeatedly emphasized the need to address conduct failures that have since emerged and which are believed to have had wide-scale impacts upon the financial markets.

The response to date by those in charge has been a surge of legislative, regulatory and structural changes, on a scale never quite seen before. In addition there has been a concentrated analysis of the behaviours, incentives and cultures present in both regulated firms and at the regulator which let the conditions for crisis develop. Together these measures aim to address what are considered the root causes of previous industry failures.

In speaking yesterday, Ms McDermott acknowledged the fact that there have been “fundamental errors made by both firms and regulators” and that as a result they have “identified deficiencies in the regulatory framework...[that] called into question some of the most fundamental aspects of fair dealing and integrity which London’s financial markets are known”.

Whilst the FCA believes that there is still a way to go, they have made some marked achievements, most notably ensuring “that conduct is firmly on the agenda of boardrooms of financial services companies”.

However, whilst regulatory change is still in firmly on the cards, with many firms preparing for the first stage implementation of the Senior Managers and Certification Regimes next year, Ms McDermott recognised that the speed with which new and additional regulations are being proposed and implemented could not reasonably continue.

With this in mind, Ms McDermott put forward, in a rugby-inspired analogy, the three key roles that she believe regulators need to perform to ensure a sustainable regulatory approach for the future.

Referee

'Groundsman’ or Policy Maker

Post-match Commentator















Roles of the Regulator

Undertaking the role of ‘Referee’ will requires regulators to have a number of key requirements to ensure they measure up. They must:

Make sure those who are regulated play by the rules.

Be constantly aware of what is going on

Be respected, fair and consistent and tough where and when required

Be at the centre of the action but without being the centre of attention

Whilst this role will require them to set the rules and ensure they are enforced, the FCA acknowledges that without competition in the market, the rules will be of little value or interest to the customers of financial services firms.

Therefore, whilst they will look to deal with misconduct fairly and decisively they will also look to steer the industry into promoting the right incentives and conditions for healthy, innovative and competitive markets, able to provide good outcomes for both consumers and markets.

As an effective ‘Policy maker’, the FCA wants to:

Create the best environment possible to allow for competition

Create a level playing field without the advantage of one participant over another

To set clear, consistent and predictable boundaries that also allow firms to be innovative in developing new approaches and new services.

To recognise and act to address emerging risks or developing practices that are undesirable. 

In carrying out this function, the regulator admits that they also need to be prepared to review their work and to revise and implement changes to those rules that are not working.

And in this regard, we have today seen the regulator issue a Consultation Paper (CP15/32: Smarter Consumer Communications) that proposes to remove certain ineffective disclosure requirements from the FCA Rulebook.

Finally, as ‘post-match commentator’ the regulator wishes to:

Facilitate debate that reflects and analyses upon past performance

To innovate and find new solutions to old problems by working and supporting the industry

To continually challenge the industry to do better

Ms McDermott, advised that it is the regulator’s firm understanding that through professional excellence, creativity and integrity, the City will continue to attract global clients into the future. So, whilst it seems that more regulation is certainly on the cards, (although possibly at less of a pace than in recent years), the regulator seems dedicated to ensuring that the right environment is created to allow both competition and innovation to flourish.

With many of their new regulations, such as the SMR still to be implemented, it still remains to be seen if their attempts to create such an environment  - one that not only facilitates wealth-creation but also protects the public from the failure of large companies and that catches and penalises wrongdoers - will be successful.

It is certainly an interesting time for those in Financial Regulation and it is clear from Ms McDermott’s speech that the regulator knows it has its hands full.

Regulatory Change: Additional Support & Assistance

The volume and nature of regulatory change over the last few years, and the regulatory risk arising from this has, and will continue to be, significant.

Firms and their management need to consider the impact of regulatory change upon their business, and identify the functions, such as Compliance, that are likely to require additional support and assistance to ensure their efforts continue to remain effective.

If you are considering the effectiveness of your current approach to your regulatory requirements or have a practical compliance challenge that you would like support or advice upon, we would be delighted to hear from you. Just drop an email to our regulatory support team.

Relevant Reading:

UK Financial Regulation: The Changing Environment

Comment from the FCA:

“the intensity and volume of regulatory activity over recent years is not sustainable – for regulators or for the industry.

We are often told that boards are now spending the majority of their time on regulatory matters. If that continues indefinitely we will crowd out the creativity, innovation and competition which should present the opportunities for growth in the future.”

Tracey McDermott, FCA, ‘Rapidity of Change’ Speech, 22 October 2015