RegulationNov 25 2016

The culture of secrecy

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The City Regulator needs a cultural shift to prevent itself ‘sleepwalking’ into another financial crisis, according to a report from the eminent Cass Business School for New City Agenda.

The report – Cultural Change in the FCA, PRA & Bank of England, with the subtitle “Practising what they preach?” – outlines some interesting aspects of the way the regulators work and interact, and does not pull any punches.

For example, one of the key points in the preface is that the administrative cost of regulators is now £1.2bn a year, six times as much as in the year 2000.

The report adds: “There are now over 13,000 pages of detailed rules and guidance from the PRA and the FCA. The FCA handbook costs £3,641, the same to buy as a second hand Mini Cooper. Complexity and box-ticking benefit lawyers and gives a veneer of reassurance, but it increases costs and makes regulations more difficult to understand and enforce and easier to manipulate or avoid. It also distorts competition.

"Big firms have armies of officials and a close relationship with the regulators to help navigate this complexity. Smaller firms and new entrants often find themselves reeling from the complexity, with only a call centre at the regulator to help them out.”  

I am sure most people would prefer the Mini Cooper…but I digress. The fact that the cost of regulation has ballooned in this way is a real concern to companies who are doing their utmost to work with the regulator to help clients, while simultaneously fearing the wrath of the regulator when something goes wrong. It should be a concern to everyone, because ultimately the cost of regulation is passed on to the consumer, so we are all paying for it.

However, concerns about the cost of regulation should be outweighed in all camps by an analysis of whether the regulatory system as it stands is working to help consumers in the long run – that is, after all, its raison d’etre.

The fact that the cost of regulation has ballooned in this way is a real concern to companies who are doing their utmost to work with the regulator

The report clearly outlines that in the run up to the financial crisis of 2008, the regulator’s ‘light touch’ approach did little to prevent the crisis that subsequently unfolded.

This is just one of the criticisms levelled in the report, that “instead of concentrating on the big issues, regulators spent valuable time adding ever more detailed rules and procedures and giving consumers ever more complicated information” which was “likely to increase confusion and cost rather than establish clarity”. Increasing confusion for consumers is a bad idea, because if they do not understand a product or the sales process around it, they are less likely to buy it and protect themselves.

Now, there is no doubt that regulating the UK financial services industry is not easy because on the one hand you work to protect consumers from bad practice, but on the other you cannot stifle competition or the industry’s ability to generate profits which help to boost the UK economy.

These, clearly, are not mutually exclusive and it could be argued that an industry that is more trusted because of the right regulation will boost consumer confidence and result in better protection through the purchase of financial products and higher profits for the industry. This nirvana is something to aim for.

But we are certainly not there yet. The financial crisis proved that regulators, while intending to do the right thing with a ‘light touch’ approach, were simply focusing their collective energy in the wrong area. The report criticises the regulators’ “deep seated culture of box-ticking” which creates a bureaucratic system that does little to address the real issues in the industry, while complicating the lives of those trying to do a good job.

The report also calls on politicians and regulators to “tackle the culture of secrecy” in regulation, where it is possible for the big banks to negotiate secret agreements with the regulator that are then not disclosed, which calls into question the regulator’s accountability.

This culture is supported by politicians through “the framework they set, the statements they make and the people they appoint”, the report found.

Can you as advisers do anything about changing the culture of regulation? The instinctive answer is to say “no” to that question, but the FCA has released a consultation on its Mission that will “inform the FCA’s strategy and day-to-day work over the coming years”.

It adds that: “Consultation with [its breadth of stakeholders] will have a fundamental impact on the shape of the final strategy.”

Responding to this consultation will, at the very least, mean you have tried to have some influence on the future of regulation. It is consulting not only on protecting consumers but, importantly, on “when the FCA intervenes” - making it clearer about what it is doing and why - and defining harm within the financial services sector.

You have until January 26, 2017 to respond and you can make your feelings known via the form at www.fca.org.uk/mission or by emailing FCAMission@fca.org.uk.

Alison Steed is a freelance journalist