A sustainable approach to regulation which breaks the “regulate, de-regulate, repeat” cycle is critical, according to the Financial Conduct Authority’s acting chief executive Tracey McDermott.
Speaking at the City Banquet at Mansion House yesterday evening (22 October), she said this will require regulators, firms and individuals alike to help change the way financial services operates.
“If we look at the history of regulation we see an unloved model,” she told the Lord Mayor and his guests, describing it as often coming in “bursts of activity after crisis or scandal, followed by periods where regulation is less visible and less intense”.
While this has produced some important and enduring reforms, Ms McDermott warned that regulators must learn lessons from past mistakes, with two main risks apparent.
“The first is that regulatory phases become locked into feedback loops with economic ones. The appetite for reform reduces as the economy recovers, we start to believe that we have conquered the challenges and to become complacent, this creates the potential for new risks to build up in the system and for new strains of financial shock in the future.”
The second was described by Bank of England governor Mark Carney, who described forgetfulness and beginning to believe the “three lies of finance”: this time is different; markets always clear; and markets are moral.
Ms McDermott admitted that the financial crisis and the conduct failures which subsequently came to light had far reaching effects.
“They highlighted fundamental errors made by both firms and regulators, they identified deficiencies in the regulatory framework and structure, and they called into question some of the most fundamental aspects of fair dealing and integrity for which London’s financial markets are known.”
She also conceded that implementation of post crisis reforms has been and continues to be, a challenging task, but added that the FCA was starting to see some light at the end of the tunnel.
“I do not think I will get much argument in this room when I say that 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; this cannot be in anyone’s interests. If that continues indefinitely we will crowd out the creativity, innovation and competition which should present the opportunities for growth in the future.”
Stretching a rugby analogy close to breaking point, Ms McDermott described the regulator’s role as that of referee, groundsman and post-match commentator.
In the first instance, she said the FCA must be constantly on the pitch, keeping up with what is going on, respected, fair and consistent. “Tough where required, at the centre of the action without being the centre of attention.”
In its second role, she said the regulator wants to ensure a level playing field which does not advantage one participant over another, setting boundaries that are clear, consistent and predictable but that also enable firms to innovate and develop new approaches and provide new services.
Finally, Ms McDermott said the FCA must facilitate debate which reflects on and analyses, past performance.
“Supporting and working with industry and other interested parties to try to find new solutions to old problems, constantly challenging the industry to do better and pushing them to go further and faster in the quest for change, and we should be in no doubt that these methods – the push for higher than required voluntary standards - can be a very effective tool.”
peter.walker@ft.com
