Regulatory organisations often function better in adversity. This was true of the Bank of England during the secondary banking crisis of the early 1990s, and (before my time) was almost certainly just as true during its predecessor in 1973/74. It was also true of the FSA in the days that followed 9/11, and (after the failure of Northern Rock) through the years of the financial crisis.
The FCA’s Business Plan presents an organization increasingly in control of its own choices, clear in its Mission, and having articulated its new approach across a range of areas. This is always a dangerous place for a regulator, a time when events can change perceptions so quickly. So it’s worth looking briefly at five of the main threats to the FCA’s equanimity over the next year and what impact firms are likely to see as a result.
1. Brexit: I’ve written about Brexit in the past, but it’s worth reiterating that its pre-eminent importance is likely to lead to an internal churn of staff as key individuals are pulled away from the day job and have to be back-filled.
2. Stratford: The FCA’s move to its new location has already begun. Not so long ago there were dire predictions that it would haemorrhage staff as a result. These warnings have got much quieter recently and, while key staff may still leave, it is more likely to be for a combination of reasons (see below). When the FSA set up in Canary Wharf in 1998, the new location was much less attractive than Stratford now, and getting there much harder for most. We lost some good people but survived. So will the FCA but the move will increase pressure on recruitment and resourcing models.
3. 2nd honeymoon ending: The FCA’s 1st honeymoon came to an abrupt end on its first birthday, when it inadvertently released some market-sensitive information ahead of publishing the 2014/15 Business Plan. Andrew Bailey’s appointment as CEO has since done much to stabilize the organization, but issues around British Steel pensioners and GRG have recently threatened its equilibrium, and it would now not take much to change the mood music. The main effect of this for firms would be much slower decision making from the FCA, as risk averse senior management increasingly pull decisions closer, clogging up the system.
4. Next Bank of England Governor: The media noise around who will succeed mark Carney has already begun and will only continue to swell. The decision is likely to be announced well before Christmas, to keep the markets happy, and Andrew Bailey is clearly one of the favourites. To state the obvious, whatever the decision, it is likely to have a de-stabiising effect on the FCA’s senior management, as individuals take stock. In many ways, this is probably more of a risk to the FCA than the Stratford move.
5. Credit cycle: The two secondary banking crises I referred to at the start of this blog both came at the end of a credit cycle, and both were triggered by external events. In 1973, it was the oil crisis following the Yom Kippur War. In 1992, it was interest rates jumping as sterling crashed out of the EU Exchange Rate Mechanism. Any similar event would put enormous immediate pressure on the FCA’s supervision model, which is not designed or resourced for such situations.
All organisations need to be resilient and, as a regulator, the FCA has deep reserves to call on if needed. However it is still only five years old and the next 12-18 months is likely to be its most testing period so far.
Firms are being challenged by rapidly evolving user needs, as well as heightened uncertainty in the economic and political outlook. Our Business Plan shows how we will use our resources to tackle these challenges.