Hardly a year goes by without the role of regulation in the economy being reconsidered. Even now, in the midst of a national crisis, the debate continues. The Chair of the FCA, Charles Randell, has recently called for a rethink. He proposes that the regulator concerns itself more with promoting the right outcomes for consumers rather than with prescribing how firms should behave. At the same time, the Treasury is embarking on the second phase of its own review into regulation. This now includes consideration of the relationship between regulators, Government, Parliament and stakeholders. This self-examination by the regulatory family has to be applauded because there is certainly scope for improvement in how we think about the purpose and the delivery of regulation.
The starting point for any review of regulation should be whether it is nurturing or destroying competition. Competition is the best protection for consumers. Without it, they are at the mercy of exploitation and incompetence.
Government made a big mistake at the turn of this century when it created the FSA without giving it an objective of promoting competition. This was corrected when the FSA was replaced by the PRA and FCA. In the years before the financial crisis, new entrants to the major financial markets were rare. The major incumbents consolidated and grew, spending more energy on growth than the consumer interest. Since the crisis, challengers have emerged, fostered by the regulators seeking to reduce barriers to entry. However, this turnaround is vulnerable.
This has been seen in the trials faced by non-bank lenders in the current crisis. Regulation created space for them to emerge after 2010 by not imposing on them the same level of control over lending that had been placed on the deposit-taking banks. They responded by plugging an emerging gap in lending to smaller business. Regulators came to the rescue of a competitive deficit. At least until earlier this year. Then came COVID19, and with it a much-needed injection of finance into the banks by the Bank of England. But not into non-bank lenders. They are out in the cold, dependent on their own accumulated reserves and those of a nervous funding market, rather than the strength of the central bank. And to make their lives even more difficult, they are expected by the FCA and Government to provide as much support to their customers in difficulty as the banks are doing without the benefit of Bank of England backing. This anti-competitive situation must be corrected, and the FLA has made extensive recommendations to Government on how this should be done.
There are lessons to be learnt from this for the regulatory reviews. Competition is a delicate plant. Regulators must give it full weight. This applies particularly in stressed times, when regulators can too quickly look to the big players for help and forget that the economy depends on others too, particularly for its long-term health. In addition, whatever the merits of separating conduct and prudential regulation, the FCA and the Bank must work together to create a sustainable and competitive market. Borrowers must be helped in difficult times. However, the cost of that help and how it falls on those without state backing must be brought to the regulatory decision making table alongside conduct issues so that a fair playing field is created for all lenders responding to the crisis, and hoping to help with the recovery.
The third player in UK regulation is the Ombudsman, the FOS. The Treasury’s review must include the relationship between the FOS and the FCA. The Ombudsman is rightly separate from the regulator and should not be dictated to in relation to individual cases. However, both must work hard to establish a common, indivisible view of how the rules should be interpreted. Without this, the rules are beset by uncertainty and uncertainty undermines fairness for customers and firms. Finding this common ground is particularly vital if the Treasury agrees with the FCA Chair that regulation should be more outcome-focused. Outcomes are hard to define. Our expectations of what constitutes a fair outcome change over time. It will be harder for the FOS to decide what the regulation means and increases the risk that it will struggle to view contracts through the lens of expectations prevailing at the time they were signed.
Last but far from least is the relationship between the regulators and politicians. Maintaining regulatory independence is extremely challenging and is under increasing pressure, but must be preserved. Public confidence in regulation depends on people being satisfied that the regulator is wholly driven by what is fair, not by undue influence. I say that as the director of a representative body. The FLA wants its views and the views of others to be taken into account on their merits. This does not mean that regulators should be cocooned from the political world. The views of our democratic representatives must be heard and their right to challenge regulation must be respected. At the same time, the expertise of the regulator and their impartiality must also be respected by Ministers. The Treasury’s review must find the point of balance.
So, what does this add up to as a prescription for the future of regulation? In short: cherish competition; promote effective regulatory collaboration; and nurture independence.
Published 01 Jul 2020