Today, my third and final set of thoughts on our financial services regulators before we begin Committee Stage of the Financial Services and Markets Bill later this afternoon.
I will consider the cost of regulation and how we weigh this against its benefits and in particular the Cost Benefit Analysis Panels proposed by the Bill. I will then conclude with some general thoughts on how some of this is currently landing.
It is potentially highly positive to see the inclusion in the Bill of the creation of a new Cost Benefit Analysis (CBA) Panels (Clause 41). The more transparency there is on the costs of regulation, the better understanding there will be on the need for new regulation and whether it really will deliver benefits.
The Bill seeks to put the CBA Panel and the Insurance Practitioner Panel (Clause 40) on a statutory footing. This is significant in terms of accountability. However, as currently drafted, the regulator is given all the power and control over these groups. Membership, meeting cycles and schedules and outputs are all firmly and fully in the regulator’s hands. This is another example, of several, throughout the Bill where, effectively, the regulator is gifted the power to mark their own homework.
For reasons of good governance, efficiency, and effectiveness it is clear that the CBA Panels must be allowed to undertake the necessary scrutiny of the work of the regulators. This could be achieved through amending Clause 41 to ensure that the CBA Panel has the necessary independence from the regulators. Such changes would need to include:
There is much potential to be gained from the CBA panels. Only optimized, though, if the Bill is effectively amended to achieve this.
As we stand on the brink of Committee Stage getting underway, how does all this look and what is the ultimate prize at stake?
First things first, currently, somewhat incredibly, direct regulatory cost in the UK is up to 14 times as high as the average direct regulatory cost in other key jurisdictions. Every element of the Bill pertaining to the regulators, individually and cumulatively must have this in mind and a relentless focus on alleviating this significant differential for our financial services firms when set against their and indeed through them our international competitors.
It has also been suggested that the regulators’ operational effectiveness is adversely affecting investment. The Commons Public Bill Committee heard evidence the FCA took nine months to authorise a Chief Executive coming from overseas to operate in the UK. Surely, we can improve that.
Another disappointing fact is that no new insurance company has been set up in the UK in over 15 years. No new insurance company in a sector the UK is traditionally so strong in. Past performance is no guarantee of future success, but with the right regulatory approach, the UK could succeed – the businesses are out there, ripe for attraction to these shores.
Back to that all important international competitiveness objective I wrote about on day one. The cross-party Lords Industry and Regulators select committee have stated that “there is a risk that [the competitiveness objective] could be ignored or have no material impact.”
The Governor of the Bank of England, Mr Andrew Bailey, said, on publication of the Government’s intentions to bring in a competitiveness objective, “please don’t be surprised that at the Bank and the PRA we pull the debate back to the anchors of the primary objectives.”
Similarly, his colleague, the Chief Executive of the PRA, Mr Sam Woods, described the proposed competitiveness objective as “a bit of a red herring” and when asked about how he would report on the competitiveness objective said that he “had no convincing answer.”
Clearly, much work needs to be undertaken on this secondary objective during Committee stage and beyond. When considering competitiveness, innovation, and risk, we should feel positive about what has been demonstrated from past performance. We know how to succeed at innovation with no increase in risk, not least to the consumer. Just look to the FCA fintech sandbox, a measure of success you say, well, replicated in over fifty jurisdictions around the world, not bad at all.
We can take this forward. Increased accountability, proportionality, efficiency, effectiveness, responsiveness: our financial services regulators enabled, independent and accountable, ready to further develop their reputation domestically and internationally.
To conclude, at this Committee Stage at least, we have in front of us a Bill with so much potential. Potential for folks and firms alike if we get it right. As is often the case, at this stage of the legislative process, there is much to be done, amended, improved. Not least, as I have covered in this short series on regulation and the regulators there are questions around accountability, cost, and the competitiveness objective.
If we are to gain all of the opportunities and potential benefits of our financial services sector, the new technologies we have in our human hands, all connected through the power and certain positive force of the common law of England and Wales then we have to make this a Bill that delivers on its promise. We can and we must.