Finding opportunity in a world of uncertainty

Speaker: Sarah Pritchard, Executive Director, Markets

Event: CityUK Annual Conference at The QEII Centre, Westminster

Delivered: 30 June 2022

Note: This is a drafted speech and may differ from the delivered version

Highlights

• Underpinning every action we take, are our three core aims: reducing and preventing serious harm, setting and testing higher standards and promoting competition and positive change.
• We have shown ourselves able to adapt and change, and are continuing that approach on key areas this year in primary and secondary markets, crypto, ESG and other digital innovation.
• A strong UK market, supporting UK growth, is more likely by ensuring the rules that underpin it are supportive, proportionate and robust.

Back to the future

Tension with Russia, Top Gun as the blockbuster hit of the summer and Kate Bush propelled to the pinnacle of the music charts. Add to that soaring inflation and an energy price crisis.

And one could be forgiven for thinking we’ve been plunged back into the 1980s. Like that volatile, tense period, perhaps the one certainty we have today is uncertainty.

Market Context

Markets and industry leaders, regulators and firms are living through economic conditions many of us have not encountered for years, if at all: high inflation and significant market volatility.  

Most financial services employees under the age of 35 would not have been in the workforce at the time of the last prolonged bear market 15 years ago. And those under 40 were not even born at the time of Volker’s bear.

But this is not the time to go into hibernation. There are some marked differences from the events of 40 or even 15 years ago. We are even more interconnected across the globe than before. And yet we also have more freedom to assert our own rules.

Collaboration on Russian, Crypto and ESG

Every day, we grapple with major issues that transcend national borders, such as crypto and ESG goals and the war in Ukraine. Much of the international community has acted in concert to unleash sanctions and other restrictions on Russia in a bid to cut off the flow of funds to the regime of the aggressor. 

It is that international collaboration that is needed now to preserve market integrity, transparency and resilience to mitigate the risk of firm failures and the uncertainties over crypto and other digital innovations.

Prevent harm, set higher standards and promote positive change

We recently unveiled our three-year strategy. Underpinning every action we take, are our three core aims:

• reducing and preventing serious harm
• setting and testing higher standards
• promoting competition and positive change 

One of the actions we have taken to reduce and prevent serious harm is to prioritise a speedy transition away from LIBOR.

We have worked closely with market participants, the Bank of England, the Prudential Regulation Authority (PRA), the Treasury and our international counterparts to implement this significant market reform over the last five years. 

Separately, to prevent serious harm, we have worked constructively with the government on the Online Safety Bill which will attempt to hold tech firms to consistent standards for what is posted on their platforms.  

In July we will unveil the new Consumer Duty which underscores our commitment to setting and testing higher standards –that second core commitment of ours.

This new Consumer Duty expects firms to not just prevent harm, but to show that they are actively trying to meet their customers’ needs – in product design, in how products are described and sold and in post-sale customer service. 

This is a goal that makes business sense as well as being the right thing to do for consumers. Selling someone the right product with suitable customer service should not, in this century, be controversial.

We can all learn from the past – including how we handled previous recessions and the impact on households. That is why in June we wrote to 3,500 lenders warning them they must do all they can to intervene early and help borrowers struggling with bills. We will be watching the market and have set clear expectations that we expect lenders to support borrowers and those in financial difficulty.

Future regulation

As a result of Brexit, we are now also in a position to tailor our rules to meet the specific needs of our markets. Under the new Future Regulatory Framework, the Government is proposing new secondary competitiveness objectives for the FCA and PRA. 

These proposals strike an appropriate balance between promoting growth while not conflicting with our three primary objectives – consumer protection, market integrity and competition in the consumer interest.

Changes to listing regime

We moved quickly to change rules that were hindering innovative companies listing in our primary markets leading to other significant changes in the primary markets ecosystem. For example our rule change allowing companies to float just 10% of their shares at listing. 

This led to the FTSE making change to its criteria for companies being included in its index and sparked a discussion about what index inclusion really means for investors.  

We put our first consultation forward eight weeks after Lord Hill’s Listing Review. And we finalised rules within nine months. In financial services regulatory terms, this is a sort of inverse of dog years.  

Put it this way, many of our rules for companies who wanted to list here had not substantially changed since the 1980s.   We want investors to be able to share in the growth of new and innovative companies. More of them listing on public markets at an earlier stage in their development is the best way of doing that, in a transparent, and well-regulated space. 

We have a live discussion paper currently seeking views on a significant reform to our primary market effectiveness. We want to test whether wholesale changes are needed to support well-functioning public markets which enable companies to finance their business, creating jobs and growth for the economy. 

We want to hear the views of market participants and investors to help us decide if further changes are needed. As regulators we cannot and should not reach these views alone – input from the broadest section of the sector is important as we consider whether new rules are needed and I welcome the views and also any data from those of you here today on that. 

Regulatory remits

Anyone who joins the FCA for an ‘easy life’ is in for a shock. And I say that as someone who spent most of her career fighting financial crime and working in law enforcement and serious and organised crime.

I have worked under the regulator on the side of the private sector firms, alongside the regulator at the National Crime Agency and even, so to speak, against the regulator in my capacity as a lawyer.

For the last year I have worked inside the regulator and I can see how the scale and scope of our work is broadening as more firms, including the tech giants, enter the financial services space. Alongside these are much smaller and unknown start-ups, some of them with legitimate aims, others who are purely trying to scam consumers.

We are trying to get ahead of those by scanning 100,000 websites every day and identifying newly registered domains that raise our fraud or scam ‘red flags’.

In the 11 months up to March, we identified more than 1800 possible scams to consumers and put them on our warning list. In addition to that, through our multichannel ScamSmart campaign, we actively encourage consumers to check whether a firm they are dealing with is on the warning list.

Our InvestSmart campaign also warns consumers what to look for – and my children are delighted that we also use TikTok to make consumers more aware of the risks and potential scams. 

Crypto

We are looking closely at crypto and the opportunities and challenges associated with it. We want any crypto platforms hoping to register in the UK to comply with the same high standards on anti-money laundering that many of you in this room have had to adhere to. That is only fair.

In fact, it is often far easier for innovative tech-based start-ups to build in these compliance measures from the get-go than it is for long-established firms to retro-fit existing technology to monitor and detect global financial crime money flows. 

We’re working with the UK government and others to explore what regulatory standards could be put in place to manage risks to consumers, while boosting market integrity and competition in supporting the digitalisation of financial services and markets. 

Our sandbox has been replicated in more than 40 jurisdictions. In May we held our first ever policy sprint event, building on our highly successful TechSprint approach. This brought together regulators, industry and other experts to explore how the evolving world of crypto assets could be regulated in the UK. We had more than 600 applicants and ran three sprints which finished earlier this month. 

In an ever more interconnected world, the way in which traditional financial services are delivered is changing too. More firms are outsourcing key elements of their business services to third parties across the globe.

We are examining what potential systemic risks are posed by our financial services sector relying upon the resilience of services provided by a small number of critical third parties. We will soon publish a joint Discussion Paper with the Bank and the PRA setting out potential new measures. 

Investors and ESG claims

Investors are also increasingly paying attention to where the firms and funds they back put their money. This week, we published our feedback statement on ESG Integration in Capital Markets. 

We recognise the potential benefits of a UK ESG bond standard but acknowledge the concerns raised about potential regulatory fragmentation and the unintended consequence of ‘standards shopping’.

We do however see a clear rationale for regulatory oversight of certain ESG data and ratings providers. By working to improve providers transparency, governance and systems and controls we can help address mistrust. We are working closely with the Treasury as they consider extending our remit to cover such providers.

 

In the meantime, we will work with them to support industry to develop and follow a Voluntary Code of Conduct informed by IOSCO’s recommendations.  This will ensure better information for consumers, increased trust and more effective competition and innovation – a core aim of our ESG strategy. 

Diversity and inclusion to combat groupthink

One of the best ways to mitigate risk in any firm is to challenge groupthink. And to have diversity of thought, you have to ensure you have diversity in your organisation and an inclusive culture that allows diverse thinking to flourish.

Last year we published a discussion paper jointly with the PRA on diversity and inclusion. We had a lot of constructive feedback and we will be consulting on rules for regulated firms later this year. 

We introduced new rules for listed companies in April. Companies must declare their diversity metrics against common targets on a comply or explain basis. We have set even higher standards for ourselves and we expect to give an update on how we are doing on this front later this summer.

Striking the right balance to protect and grow

You don’t become a regulator to be liked. My sons are still young and when I remind them, far too late in the evening admittedly, that they haven’t done their homework, their stock response is ‘see you later, regulator.’

Despite their occasional cheekiness, the boys have at least taken on board some lessons from my role. They have sharp antennae when it comes to protecting their privacy – so much so that when my son was six, he refused to give his date of birth to the GP for fear that they held too much data on him.

They also refuse to answer the landline, saying that it is probably a scammer’s call centre phoning. I suspect this may be an excuse.

Parenting children and regulating firms has some parallels. Just when you think you have cracked it, you are plunged into a new, unchartered phase of development.

Just like with raising a family, boundaries, consistency and agility are crucial to ensuring the integrity of markets.

They say it takes a village to raise a child. And we must also look to our counterparts abroad when we are trying to protect investors and promote markets. In ever more global and connected markets, effective regulation can only be achieved through close collaboration with partners, based on relationships of trust and frameworks built on high, internationally agreed standards. 

A secondary objective of competitiveness does not contradict our primary objectives to protect consumers, promote market integrity and promote competition in the interests of consumers. A strong UK market, supporting UK growth, is more likely by ensuring the rules that underpin it are supportive, proportionate and robust.

So long as we strike the right balance, one enhances the other. Together, our primary, statutory objectives and the secondary objective of promoting competitiveness future proof our markets and ensure that Britain is the best place in the world to do business.