Thursday, March 15, 2018 06.17AM / FCA
Speech By John Griffith-Jones, Chairman, FCA, Delivered yesterday at an event hosted vy TheCityUK at Linklaters LLP, London. Note: This is the speech as drafted and may differ from the delivered version
At TheCityUK conference in June 2013, I was not quite 100 days into the formal job. But I made the point that I had gained ‘a healthy respect for how difficult a job it is to be a good regulator’.
In retrospect, perhaps I hadn’t realised quite how difficult a job it was going to be.
I must say that my 5 years have certainly had their ups and downs. Certainly like any new organisation we had our teething problems. Indeed I grew familiar with the former Chair of the Treasury Select Committee describing the organisation as being ‘in special measures’. Absent the benefits of papal infallibility, I learned that regulators frequently find themselves in the role of arbiters of issues without easy answers.
Periodically, and often with little notice, our decisions put us in the firing line of public opinion. Take the most recent topical issue of the publication of the section 166 report into the Royal Bank of Scotland’s Global Restructuring Group. Before that the payment protection insurance (PPI) time limit decision. And before that the interest rate hedging products redress process. All 3 difficult decisions taken in good faith, all 3 subject to noisy disagreement to a greater or lesser extent.
Despite these challenges though I do think that the FCA, as The CityUK’s Chief Executive, Miles Celic suggested earlier this month, has established itself as a world-leading regulator. It is also an organisation with a very strong public ethos. A point emphatically demonstrated by the volume and importance of work it has pursued over the last 5 years.
To remind you with a very quick highlights reel. Since 2013, the FCA has engaged on: pension exit charges; general insurance renewals; interest-only mortgage work; foreign exchange and London Inter-bank Offered Rate (LIBOR) issues and subsequent reform; Markets in Financial Instruments Directive (MiFID) II implementation; the Innovation Hub; our market abuse enforcement work; fixing PPI once and for all; the asset management market study; and of course the Senior Managers Regime.
We have been given new things to regulate, the liability side of the customers’ balance sheet, consumer credit; a new competition objective. We have created the Payments Systems Regulator as a separate subsidiary; and prospectively will pick up credit rating agencies, claims management companies and the work of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS).
Looking back on this work today, I remain struck by its ambition and scale.
However, I also appreciate that activity is not a measure of success; we are no more immune from Parkinson’s Law than anyone else. The value of our work – ultimately – is in outcomes, the difference it makes to society.
Frustratingly, 5 years is too short a period to make a bullet proof evaluation, but in my estimation the FCA is succeeding in 2 ways.
First, it is having a direct and positive impact in protecting the many millions of UK households. We have worked on the basis that prevention is far better than cure. This translates into rule making or competition remedies to prevent systemic harm where foreseeable, redress and enforcement in individual firm cases or where damage has already been done.
Second – and this is as important a point – the FCA has been highly influential in transforming attitudes in financial services firms.
I am not naïve enough to imagine that misconduct has disappeared. Nor that Western European capitalism has undergone a spiritual epiphany. But I have witnessed financial services firms promote, and in some cases transform, their attention to customer outcomes from where it was in 2013.
I like to think that, with a few experiments along the way, we have used constructive deterrence to prevent bad things from happening in the first place. Frustratingly, this is the great unmeasurable in drawing up our report card. But in summary, and without unduly tempting fate as to what we don’t yet know, the FCA has put conduct firmly on the map.
As you might imagine, I think it is essential for our vigilance to continue. But I am also conscious that the changes are not without their price.
The FCA itself has grown as it has taken on responsibility for more firms. In 2013/14, we employed around 2,600 staff and regulated some 25,000 firms. Now, the numbers are around 3,400 and 56,000 respectively. Our cost is only one part of the equation.
Add in the Financial Ombudsman Service (FOS), the Financial Services Compensation Scheme (FSCS), the fines, the redress, the costs of the internal compliance departments and the processes needed to comply with our rules, and you have an impressive total. A total that is borne ultimately by the customers.
So how we demonstrate public value in this context is very important. Where it is possible to measure value for money quantitatively, we can and we should. Where not, we must advance the qualitative case. We have recently enshrined achieving public value as a core tenet of the FCA, and should be held to account for our performance.
So where does all this leave us today?
To the outside world, I think we are a more trusted and respected organisation than we were at birth. A point underpinned by the latest FCA, Britain Thinks survey, which has shown a steady upward trajectory in public confidence in the organisation. Rising from 6.4 in 2013 to 7.1 this year. The Practitioners Panel annual survey of firms has followed a similar pattern, with satisfaction with the regulator increasing from 5.9 in 2013 to 7.5 in 2017. Without doubt, the FCA is more sure of its direction.
The Mission essentially provides a framework to underpin our decision-making, including decisions on prioritisation. An organising philosophy, if you like. I see this as an extremely important step. Traditionally, regulators have tended to concentrate on ‘risks’ to their objectives. An inward focus. The Mission sets out a fundamental switch by concentrating on ‘harm’ to customers and markets. An external focus.
It also establishes how we prioritise and respond to specific issues within markets or firms, as well as decisions on how we operate our individual business units, be that policy, competition, authorisation, supervision or enforcement.
The Mission greatly helps – but it is no cure all.
As I alluded to earlier, arbitrating on difficult decisions requires courage, independence, fairness and wisdom. So even if you disagree with a decision it takes – and sooner or later you will – I trust that you will continue to respect it for the way it goes about its business.
And so to the future. To me, this is all about the FCA maintaining a stable and respected position as a tectonic plate amongst many others. In no particular order of precedence these include the consuming public, government, parliament, the Prudential Regulation Authority (PRA) and the Bank of England, the law courts, international regulators, the investigative media and of course the firms themselves.
With my crystal ball in hand, I see 4 major challenges ahead in this space that will need to be navigated by the steady helmsmanship of my successor, Charles Randell.
The first is of course Brexit.
In 2013, I believed, along with many others, that London had, since the end of the Second World War, successfully made the transition from a financial centre of necessity to a financial centre of choice.
This has been no mean feat, and as only the British can, over the years we have given ourselves scant credit for a remarkable achievement. Little did we know then how this was about to be tested again by Brexit.
As a technocrat in the conduct space I know that there are ways of ensuring that London can remain a wholesale banking, asset management and insurance market place for all nationalities, safeguarded by a system of sound regulation and established law at least equivalent to the best of the rest.
Furthermore, I know that the FCA will play its full part in making the very best of the hand that gets dealt.
But, as we all know, we are not the only tectonic plate in town, and the all too adjacent grinding noise of politics bumping up against economics makes the long term outcome uncertain. Very recently both the Prime Minister and the Chancellor have set out their views of what the country wants from the negotiations for the financial sector, I am sure we all wish them well in what will be a tough few months.
Prior to these speeches, many people had been urging the FCA to take a more public opinionated stance on Brexit. I wholly endorse Andrew Bailey’s measured comments in public coupled with his intense and influential activity in private. The FCA will, after all, need to be there regulating, whatever the outcome. One thing is clear in my mind, I have no time for any sort of regulatory race to lower standards. On the contrary, I believe that the FCA’s excellence as a regulator is crucial in facilitating The City’s successful future in a Brexit world.
Another perpetual fault line will remain the perimeter between policy, regulation and unregulated activity. Based on my personal interaction with many consumer and small and medium-sized enterprise (SME) campaigners for change over the past 5 years, I have developed the greatest respect for their energy, drive and commitment – without them the world would be a poorer place.
But respect is not the same thing as agreement, and some of the issues on which campaigns run most strongly require a change in the social contract, and therefore logically the law, rather than in the FCA’s rule book or the opinion of its leadership.
I believe that these should be for an elected government to direct and/or for Parliament to enact, in order to ensure the long-term independence of the regulator. High profile examples from my tenure have included enhanced regulatory protection for SMEs, the treatment of high-cost credit, the need, or otherwise, for a duty of care, the emerging consequences of pensions freedom.
Technological advances provide an additional rich source of new issues, use and abuse of data, personalised differential pricing, and the power of network effects in promoting dominant players. The hot topic of the day is what to do about cryptocurrencies, to which on the one hand the official sector does not wish to afford the status of a currency, but which are being advertised to the consumer as alluring investments on billboards in Canary Wharf. Therefore have all the potential of causing consumer harm unless brought within the regulatory perimeter.
Less high profile, but arguably as important is the relationship between the legal and regulatory process. There is a significant mismatch between the external view of the powers that we have and should therefore use, and the legal constraints that we, internally, feel we constantly need to have regard to. These include European law, exposure to judicial review, appeal to the Upper Tribunal and beyond, the infamous but wholly necessary privacy requirements of section 348, and more basic concepts of natural justice such as innocent until proven guilty.
In the grand scheme of things the checks and balances have worked reasonably well in my tenure but I am struck by the inaccessibility to the law by the consumer, on the triple grounds of speed, complexity and cost. ‘Justice delayed is justice denied' has more than an element of truth to it in money matters. A 4-year legal process and a dense thicket of jurisprudential argument provide a far less attractive route to redress than the use of 24/7 media and the associated parliamentary support to pressurise the regulator to short circuit due process in contentious cases. I am further struck by the ready availability of civil justice in the UK to the globally wealthy, whilst out of financial reach to most British citizens.
Last but not least on my to-do list is the relationship between the regulator and the regulated. Tracey McDermott used to speak about pendulum regulation, and the desirability of avoiding it whatever the short-term expedient. I could not agree more. It is not possible in as short a period as 5 years to be sure that the FCA has established itself sufficiently robustly to resist pressure to move position should it arise, as it certainly will one day.
Our best defensive bulwark is of course our own excellence, but it will be greatly helped by a financial services sector that has regained the trust and support of the country at large.
Whilst considerable progress has been made since the dark days of 2008, there is, by general consensus, still a long way to go. We, the FCA, will continue to put the conduct agenda high on your list of priorities, but the real agent of change, culture, remains largely under the control of the firms themselves. Or put more succinctly, in the short-term you get the regulator you have, in the long-term you will get the regulator you deserve.
I cannot end without paying a tribute to the people who work at the FCA. As I rapidly discovered, being a regulator is not an easy job. At one level it is a three and a half thousand people business, like many others in the sector, at another it has a very special ethos, seeking to do the right things to meet the incredibly important objectives it has been set and doing so often under the glare of intense public scrutiny.
I greatly admire all of the people who pass through the FCA, from the 3 Chief Executives I have worked with: Martin, Tracey and Andrew, through fellow Board members to the most junior new joiners. I cannot speak for any of them but I remember how, when the announcement of my appointment was made, my friends fell into 2 broad categories, those who wondered whether I knew what I was letting myself in for and those who knew I clearly didn’t.
I leave that judgement to you. From my perspective it has been both a great privilege and an unmissable experience to have played a modest part in moulding the FCA into a fundamental building block of the country’s single most important industry. I wish everyone involved all the very best, especially Charles as my successor.