A Tale of Three Speeches – Understanding the FCA’s Post-Brexit Strategy

August 18th, 2016

Clues to the FCA’s regulatory approach post-Brexit

Since the Brexit vote there has been much debate over the future direction of financial services regulation in the UK.  Will the UK strike out on its own, shaping an independent, perhaps more bank-friendly, regulatory environment, or will it stay in harmony with other jurisdictions?  Will the fears over the economic consequences of Brexit cause regulators to pull back from post-financial crisis regulation?  Has the FCA’s approach to conduct and culture changed?

Some answers can be gleaned from three speeches made since the referendum result by senior FCA staff – Andrew Bailey (CEO), John Griffith-Jones (Chairman), and Jonathan Davidson (Director of Supervision).  Here we summarise the key takeaway points.

Anyone hoping to see UK financial services regulation ‘go it alone’ is likely to be disappointed

There are those who see Brexit as an opportunity for the UK to shape its own, perhaps more bank-friendly, regulatory environment.  However, it’s important to note that international co-operation and synchronisation has been a feature of all the major post-crisis regulatory initiatives.  Many of these initiatives are of global, rather than EU origin, and the UK’s commitment to (for example) the margining of uncleared derivatives transcends its membership of the EU.

This was emphasised by John Griffith-Jones in his speech, who said that “the direction of travel … is for increasing international convergence and to seek to act, where possible in concert with the rest of the world – including the EU”.  He went on to stress the FCA’s ongoing commitment to working with European and global regulatory bodies.

Meanwhile, post Brexit, most observers agree that a decision by political leaders to withdraw from the Single Market would likely to have an adverse impact on the UK financial services industry, at least for a period.   As such it is probable that political leaders will seek continued access to the Single Market, at least in financial services, as part of any Brexit deal.  The price to pay for such access would, amongst other things, be ongoing regulatory harmonisation with Europe.  In his speech, Andrew Bailey expressed his support for the UK’s continuing access of the Single Market.  He made an interesting point that cross-border trade assists the FCA’s objective of ensuring healthy competition in financial services.

It may be that the regulatory tide is finally about to turn

But it isn’t necessarily because of Brexit.  There have been a number of indicators of recent that, eight years on, the momentum behind post-financial crisis regulation is starting to fade across the globe.

In his speech, the FCA Chairman said that the FCA recognises the need for ‘better regulation’ not just ‘bulkier regulation’”.  He suggests that the volume of regulation since the crisis must be considered an exception, and that a time of reflection is appropriate.

Andrew Bailey said that he considers it vital to review and articulate the FCA’s mission.  He specifically highlights that the FCA must not only balance the duty of care towards customers but also the duty of responsibility of consumers for their decisions.  The emphasis seems slightly different from that of a former CEO, Martin Wheatley, who in some speeches expressed concern that consumers could not always be relied upon to make rational decisions, and that regulators should therefore look for ways to ‘nudge’ them into better outcomes.

Changing culture in firms remains a priority – for firms as well as the FCA

The FCA has said a few times that the primary responsibility for changing culture at banks lies with the banks themselves.  This was reiterated by John Griffiths-Jones, who said that the role of firms in changing culture is a bigger challenge than that faced by the FCA in achieving its regulatory objectives.

Meanwhile John Davidson echoed previous comments from the FCA that it will not seek to prescribe culture on the basis that there is no ‘one size fits all culture’ that can be imposed.  He does however helpfully provide four ways in which firms can shape culture, which from the FCA’s point of view will be indicators of how culture is progressing at a firm:

  1. Tone from the top
  2. Recruitment and reward structures
  3. The tone and content of “narratives” circulated in a firm, such as business plans and mission statements
  4. The learning of new “capabilities” – for example sales staff needing to learn how to relate to a customer rather than just how to persuade them to buy something.

 

Charles Hastie

Charles Hastie

Charles Hastie is Regulatory Head at Clutch Group, working out of the company’s London office. Charles harnesses his long-standing regulatory investigation experience to develop strategic solutions for Clutch’s financial services clients. He establishes ongoing liaisons with key opinion leaders, government officials, and regulatory bodies to ensure that significant developments in the field are monitored and relayed to clients. For more information, contact Charles at charles.hastie@clutchgroup.com.