FCA: ‘Regulation can hinder financial services if costs are disproportionate’

Speaking at The CityUK on FCA’s Growth and Competitiveness Objective, Sheldon Mills, executive director of consumers and competition at the City watchdog, said innovation could come from surprising places 

He stated there was often a fine line between having enough rules or regulation to ensure markets work smoothly and not having so many that innovation, gets stifled.

Mills also pledged the FCA would "continue striking that balance" to promote the UK's competitiveness. 

Regulation can hinder financial services if the costs are disproportionate to the benefits and if it stifles innovation.Sheldon Mills, FCA

“The Financial Services and Markets Bill will require us to continue striking that balance by giving us a secondary objective to facilitate the UK’s international competitiveness and promote sustainable growth over the medium to long term.

"This is while we continue to deliver on our primary objectives to protect consumers, enhance market integrity, and promote competition in the interests of consumers,” he said.

Innovation

Part of the regulator's work to boost UK financial services has been the development of the digital sandbox, which the FCA has confirmed will become permanent.

Mills explained: "We continue to innovate and can confirm our Digital Sandbox will be made permanent, opening up the platform to an even broader range of innovative businesses and start-ups."

The financial services sector directly contributes to economic activity by making up around 8 per cent of GDP, accounting for 2.3mn jobs in the sector and related professional services, and contributing around £100bn in tax.  

Financial services also facilitates economic growth by channelling capital to start-ups, small businesses and the largest infrastructure projects – including the vital work of supporting the UK’s net zero ambitions.   

“We recognise that achieving sustainable economic growth is a key economic policy challenge, which benefits consumers and businesses of all sizes,” he said. 

“We welcome the proposed secondary competitiveness and growth objective, and stand ready to do our part in contributing to this challenge.”

Less prescriptive regulation

In the speech, Mills gave examples of when the FCA has intervened to crack down on consumer credit or insurance. 

“These are just some examples of how our primary objectives of consumer protection, market integrity, and competition, drive growth, trust, and good outcomes,” he said.

“Of course, regulation can hinder financial services if the costs are disproportionate to the benefits and if it stifles innovation. 

“That is why we have become less prescriptive, and more outcomes driven - for example with the consumer duty which as you should know by now, comes into force in one month.”  

Our own operational efficiency is - rightly - always under scrutiny.Mills

However, he explained that being less prescriptive does not mean more lax. 

“It took five years for UK GDP to return to its 2008 level following the financial crisis, a crash many attributed to lax regulation and undoubtedly hindered growth,” he said.   

“Regulation can aid growth by cementing the hard-won reputation of our financial markets as a safe and rewarding place to invest. 

“Resilient, transparent, and efficient UK capital markets fosters trust amongst investors both from the UK and overseas.”

To do this, the UK needs trusted capital markets, operated by trusted financial professionals, Mills explained.

“We will continue to play our role in ensuring that we have safe, stable, and fair markets which are efficient and support the flow of capital and investment the UK needs.”

Operational efficiency 

To effectively regulate and to drive competitiveness and growth, Mills said the FCA must be efficient as a regulator.  

“Our own operational efficiency is - rightly - always under scrutiny,” he said.  “We will continue to increase the use of data, technological and human resources.”   

He explained that the FCA speaks with many FinTechs and finance businesses seeking to do business in the UK, and they say two things: first, they want to be authorised here because of the stable system of regulation, and second, they raise concerns about cost and time to get authorised.  

“We’ve listened to this feedback, and we are tackling our authorisations backlog, reducing it by 60 per cent recently,” he said.

“We are trialling automated forms which should speed up the process and our future of data collections programme aims to make it more cost effective for firms to supply us with the data we need.”

Mills said the FCA’s focus on efficiency and effectiveness extends to its rule-making.  

The FCA is responsible for transferring into UK law nearly 90 per cent of the EU files relating to financial services. 

“We can decide to repeal or replace them with rules better tailored to our needs,” he said.

“At all times during this mammoth task, we will remain focused on delivering against all of our statutory objectives, including how any changes can further growth and competitiveness.  

“We want consumers and markets to capture the benefits these changes will bring, while managing the costs regulatory change puts on industry.” 

Ultimately, Mills said the FCA wants its handbook and rules to be as clear and as they can be for new entrants and existing players alike. 

He said this was a significant opportunity for the UK’s financial services sector.

“As we take on this challenge, we want the industry to be involved in shaping the future,” he added.

Wider eco-system

Elsewhere, Mills said there are many factors the FCA does not control when it comes to growth and competitiveness of the economy. 

Factors such as the geo-political environment, taxation, investment in infrastructure, immigration, demographics, and many more besides, are vital, he explained.

“Firms tell us it is expensive and cumbersome to attract talent from around the world, or to move talented employees from one jurisdiction to another. 

“Fintechs often tell us that they are not eligible for the EIS tax schemes – a system which encourages investment in a tax-efficient way. 

“There are many reasons why more UK investors’ money is held in overseas equity funds (£272bn) than those specialised in homegrown equities (£269bn).  

“And we have very different powers and remits to some of our international counterparts.”

He explained that these are just a small number of many factors which have an enormous impact on economic competitiveness and growth, which fall outside our remit.  

“And as our chief executive Nikhil Rathi has said, we are at the start of a long-awaited debate about the wider markets eco-system and the role we all play in supporting it,” he added. 

“We will continue to play our role in ensuring that we have safe, stable, and effective markets, which are innovative and support the flow of capital and investment as the UK seeks to drive economic growth for future generations.”

sonia.rach@ft.com

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