The financial services industry has become stuck in a “regulatory spin cycle” and must focus on the broader lessons learned from crises rather than measures to protect the system, a think tank has warned.
New City Agenda, which was founded by David Davis MP among others, has argued in a report that while crises often prompted regulatory responses, these were often “watered down” over the course of time.
The authors of the report, Cultural change in the FCA, PRA and Bank of England, noted: “Financial regulation in the UK operates in cycles. Following a crisis, politicians respond to public outrage by introducing new legislation and more detailed regulation. However this new regulation is progressively watered down, not sufficiently enforced or repealed. This lays the foundations for the next crisis.”
According to the report this “cycle” had accelerated over time. The authors provided an example that while the 1720 Bubble Act had survived some 105 years before its repeal in 1825, the 2013 Banking Reform Act had been watered down before even coming into force this year.
“Today it seems to be only a few years before lessons from the past are forgotten,” the report added. “History teaches us the most crucial thing is not what regulators do directly after the crisis, but how they hold onto the lessons they learned, integrate them into their culture and ensure that this continues to guide their action.”
In an assessment of cultural change programmes among the UK’s financial services authorities, the report claimed the FCA had a “more fragmented approach” than some other bodies.
“Its senior leaders introduced new values and made a number of speeches emphasising the need to adopt a new culture and approach – which was characterised by those outside the regulator as ‘shoot first, ask questions later’”, the report said, noting former FCA chief executive Martin Wheatley's public stance on misconduct.
“It made changes to hiring, training and remuneration systems but was not clear on what it was trying to achieve or how progress should be measured.”
However the authors also urged the financial services industry to take a more appreciative view of the FCA and its peers.
“Industry stakeholders need to update their perceptions of regulatory agencies and recognise they are not always the ‘B team’ or inferior to those who work in the industry,” the report said.
“They need to move away from often unhelpful generic criticism of the regulators. Instead, they should engage with more focused and specific ways of improving regulations and regulators. There is also a need to recognise that complaining about excessive tick-box regulation and then demanding more boxes to tick (in the name of certainty) can be counter-productive.”
