Andrew Bailey has made two interesting speeches in the last few days, this one on trust and ethics, and a second (25/10) on the regulator’s Brexit position. Ostensibly these two speeches are unconnected and I doubt they will have been viewed in tandem internally – regulators tend to compartmentalise, even at CEO level. But, taken together, they illustrate an important duality – as both police force and enabler - in the regulator’s relationship with the industry.
In this context, the Brexit speech is more straightforward and easier to tackle first. It portrays the FCA as the upholder, and sometime author, of standards that enable firms to operate globally, and as simultaneously accepted by its regulatory peers and sympathetic to firms’ business models. From the Practitioner Panel Survey its always been clear that firms have a spectrum of views on how successful the regulator has been in this. But, from my own experience, the portrayal is largely accurate, and, reflecting its objectives, it’s certainly what the regulator strives to achieve.
Even through this lens, however, there are some problem areas, a few of which are referred to, such as the intrusion of politics and the sometimes-uncomfortable results of international negotiation such as PRIIPS. Incidentally, while PRIIPS regulation might be repatriated post-Brexit, much other regulation would remain international in character, and one reading of this speech is as the latest in the line of arguments against any desire to engage in widespread deregulation whenever the UK leaves the EU.
Taken overall, the Brexit speech articulates clearly role of regulation in oiling the wheels of international markets so that they work as well as possible for all participants.
However, the other speech, on building trust in the industry, contains arguments that are more ambiguous in nature. This is not the first time the FCA’ CEO has focused a critical eye on agency theory – the idea that the primary purpose of companies is to maximise shareholder value - which has been prevalent in the US and UK since the mid-1970s. And he has also previously made the link to SMCR. But it is perhaps the clearest articulation so far of the weight the FCA is placing on SMCR to improve the level of public trust in financial services.
This places a huge burden of expectation on what is a small if important part of the overall regulatory regime. The point here, however, is that it puts the FCA much more in the role of police force, and a national police force at that given SMCR’s UK entity focus.
Given its origin in the financial crisis, this is no surprise. However, it is less evident how well it fits with the international standards-based markets promoted in the speech on Brexit. Or to what extent the FCA’s enforcement of SMCR, as it becomes clearer, will strengthen the UK’s position, especially post-Brexit.
At root of course, this is not a new dilemma, and versions of this duality were frequently debated in the Bank of England when it was responsible for banking supervision in the 1990s. The combination of Brexit and the ambition behind SMCR potentially makes this dilemma more acute, and illustrate how difficult are the balances the FCA will need to strike.
So, it is no surprise that in the wake of the financial crisis, the question was asked, to what extent are we regulating firms, and to what extent the individuals in them and particularly senior management? The answer is both, but with a shift of emphasis towards individuals. This is because using the framework of trust, when we seek commitment we have to look more to the promises of individuals, and likewise the embodiment of ethical standards is most obviously seen in individuals, the senior management?