This is the last of the series looking at this year's FCA’s Business Plan. The first two focus on the detail of its contents, while the remaining five (including this one) examine the Plan in light of a set of indicators I flagged at the start of the year.
This final blog takes a step back to gain some perspective on how the FCA is currently balancing its three operational objectives, relating to market integrity, consumer protection and competition. Typically, the regulator would argue these are mutually reinforcing but the reality is more complex, with some important trade-offs between them, and differences in regulatory emphasis that are starting to become evident.
Here are four of the debates that will begin to play out during the year:
1. Cyber and resilience are becoming increasingly important for obvious reasons. Problems at Tesco Bank at the end of 2016, and recently at TSB, highlight the scale of the impact when these areas go wrong. Working out how this sits with Open Banking and PSD II, which entail consumers giving firms permission to share their data, will be a major challenge for both FCA and PRA. When the CMA first proposed Open Banking as a solution to the relative lack of competition in the banking market, it may have foreseen the arrival of Facebook, Amazon or Google as a large-scale competition for the incumbents. For various reasons, this now looks less likely, and so the real competition benefits of the reforms may be less clear. All three objectives are in play here, and I suspect barriers to entry around data security are only going to get higher.
2. Product complexity has been an increasingly prevalent aspect of financial services since the mortgage market was deregulated in the 1980s. The results have been profound - much more competition and consumer choice, greater integration between retail and wholesale markets, and products that are much harder for consumers to understand. Given the high profile emphasis the FCA is giving to vulnerable consumers, I expect pressure to build for firms to take greater responsibility for the products they sell – the “duty of care” debate highlighted in the FCA's Mission.
3. Resourcing across its different objectives is a challenge for all regulators. It can also be hard to measure and the FSA, for example, always struggled to both agree on, and measure, the resources devoted to its financial crime and public awareness objectives. The FCA’s problems in this area are more nuanced but it’s worth observing that resources devoted to market integrity are less readily identifiable than they used to be. They are spread across the three frontline divisions – Supervision, Strategy & Competition, Enforcement & Market Oversight – without an obvious mechanism to coordinate, and this may cause problems down the line.
4. Consumer vulnerability comes in many shapes, but it’s hard to argue that wealth is not the most effective insurance policy against it. There is then, a certain inevitability about the increasing regulatory resources being attracted towards consumer credit. However, as I’ve written before, there is no easy way of funding consumer credit through the current fees framework, nor a real acknowledgement from the FCA of its relative prioritization.
Twenty years ago, the FSA started out, as a conduct regulator, primarily focused on sophisticated investments – it didn’t yet regulate mortgages or general insurance intermediaries, let alone consumer credit, and conduct powers around banking would remain switched off until 2010.
The regulator's focus has broadened, and shifted, since then, but there remains a temptation – across all three objectives as well as between them – to concentrate on the more complex and sophisticated end of the market. This is where the weight of the rule book sits and where the media and politicians tend to take most interest. The Business Plan is ostensibly neutral on these questions but they will increasingly drive the FCA’s decision making, as Brexit plays out and interest rates, at some point, start to rise.
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.