The FCA’s vision to become a more ‘effective regulator’

The Financial Conduct Authority’s (FCA) purpose is to ensure a functional, protected, and competitive market, as proved by its operational objectives: “protect consumers from bad conduct, protect the integrity of the UK financial system, and promote effective competition in the interest of consumers.”

However, recent feedback from external forces has prompted the regulator to self-reflect on its methods to better meet these objectives.

In a recent speech from Chief Executive Nikhil Rathi, the regulator has addressed several points of suggestion, including regulatory efficiency, international collaboration, an increased risk appetite, secured data infrastructure, and continued focus on talent.

Regulatory peaks and troughs

Throughout his speech, Rathi underscored the areas where the FCA has already optimized effectiveness, while also noting the issues that would benefit from change.

Some of the highs include quicker authorization processes and proactive intervention action. The regulator stated that 97% of authorization cases are addressed within deadlines. Furthermore, the FCA is now able to accelerate enforcement action due to closer scrutiny of authorization. Currently, only 1 in 4 firms make it through as opposed to 1 in 14 two years prior, meaning the regulator can closely apply supervision resources to a reduced number of cases.  

One of the regulator’s main objectives in revising its practices is to focus on serious risks, supported by the secondary objective of protecting consumers. The reference to the Consumer Duty reform fuses both goals and signifies the veer toward an outcomes-based regulatory approach, indicating “fewer new rules and lower barriers to entry.”

As a result of these improvements, the FCA has reportedly seen better quality products, enhanced consumer and client relationships, and safeguarded communications.

In contrast, Rathi used the listing regime – the rule companies must follow to list their shares in the UK – as an example of an improvement area, given it has been the subject of scrutiny for being “too complicated and onerous,” as stated in a press release in May. Consequently, the FCA has worked to remodel the regime by merging premium and single listings into one category, intending to ease accessibility and encourage diverse business strategies.

In another effort to dial back on regimented procedures and enable businesses to operate at maximum capacity in international markets, the regulator proposed to reshape Class Transactions so that it is no longer required for businesses to obtain FCA-approved circulars and shareholder approval for significant transactions.

Reflect and reposition

The FCA’s foremost aspiration in reforming approaches is to establish itself as an authority that financial players can confidently trust to uphold industry standards and promote growth:

“First, an effective regulator. Firms want speed, clarity, and certainty.”

To meet this goal, the regulator is making changes to simplify processes, propel industry standards, position itself as a competitive industry leader, and adopt an outcomes-based approach that accommodates flexibility in reflection of the everchanging financial environment.

Developing an increased appetite for risk is another theme on the FCA’s roster. This suggests the regulator’s awareness of modernized developments within the industry as firms adapt to technological advancements and adopt new tools:

“We need acceptance that with more risk in the system, we will not, nor should we try to, stop every failure.”

Overall, this concentration on outcomes and organizations’ disclosures rather than regiments and regulations shows an apparent willingness to flip the switch and accept the industry’s evolution. A disclosure-based approach gives organizations the flexibility to inform clients and investors of pertinent information and how any risk affects the business based on their profile and specific operations.

A speech from William Hinman, Director of the Division of Corporate Finance at the Securities and Exchange Commission exhibited the US regulator’s view on how taking a principle-based approach when handling disclosure on intricate and evolving topics promotes market stability:

“The flexibility of our principles-based disclosure requirements should result in disclosure that keeps pace with emerging issues, like Brexit or sustainability matters, without the need to for the Commission to continuously add to or update the underlying disclosure rules as new issues arise.”

Rathi briefly commented on international collaboration, specifically highlighting artificial intelligence (AI) in relation to the matter, which has been a hot topic in the industry. While the FCA has taken part in setting standards around a range of other subjects, such as crypto and sustainability, it highlighted AI as a focus area moving forward and aims to make use of its possibilities:

“Market cleanliness and effective functioning are critical to the global economy. We know our strengths… But if we want to keep these markets, these risks and opportunities need attention and, critically, our investment. This is an FCA priority and needs to be for all market participants too.”

Rathi also pointed out that the FCA can “help solve problems” related to data infrastructure. The regulator tested synthetic data to better understand how to manage large amounts of info while respecting privacy, implying its attempt to support the market by balancing safeguarded data with mindful regulations that don’t hinder growth or complicate compliance.

As a final point, the speech stressed the importance of diversity and inclusion. Previous statements have brought up this topic, as a healthy business culture contains various perspectives and upholds talent to fortify competitiveness and maintain a sound market.

Try, try, try again

It will not go unnoticed that the FCA’s latest speech follows a string of damning incidents for the UK regulator – from staffing issues, to large backlogs, and suggestions that it may lack “teeth.” As well as this, the UK will soon face a general election, which could reshape the future of the FCA altogether.

All in all, the FCA has acknowledged the responses it has been receiving and highlighted that experimentation is “a part of innovation” that allows for learned lessons:

“Trial and error are part of innovation. So is failure. Can we agree that some trial and error, even by regulators, is inevitable and desirable? Or do we stop before we start due to the potential risks or political fallout?”

Firms are urged to use their best judgement to fully embrace the move towards an outcomes-based approach. Instead of waiting for action from regulators, organizations need to understand risks and proceed accordingly. One way firms can do this is by capturing data and monitoring communications even when utilizing new channels and technologies in their practices.

Onward with an outcomes approach

As a final note, Rathi’s message stressed that the FCA has made “far-reaching changes” that signify it is reflecting on the shifting industry climate and transforming to match the new environment:

“Let us keep having an honest conversation about risk and priorities. Let us not be so afraid of failure that we stifle innovation. Let us build competitiveness not with short-term tactics but with long-term vision.”

As regulatory measures continue to evolve in reflection of the dynamic financial environment, it is vital that organizations remain compliant to mitigate risk and promote market soundness. Global Relay offers a range of recordkeeping and monitoring tools to retain, capture, and analyze your communications data.