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FCA’s role increasingly political

10 Apr, 2018 | Jonathan Horsman

The Financial Conduct Authority’s (FCA) scope is becoming increasingly moral and socially conscious alongside its standard-setting remit.

FCA’s role increasingly political

Three Financial Conduct Authority (FCA) speeches within a week in March amply demonstrated a trend that has been gathering momentum for the best part of a decade: the gradual politicisation of the FCA.

Once upon a time in the not-too-distant past, businesses could reasonably assume they were being policed by a cold-blooded, rules-based regulator that oversaw conduct and competition without concern for emotive public policy questions that were rightly the preserve of elected politicians. Not anymore.

Slowly but surely and by its own admission, the FCA has been moving centre-stage in the debate about what is socially permissible in retail financial services and, more pointedly, what is not. The question is no longer simply ‘is it compliant?’ It is ‘is it socially just and do we like it?’

This trend reached something of an apogee last month, but before looking at the evidence it is worth reflecting on what brought about such a momentous change in the regulation of financial services in the first place.

How we got here

As with so many things in contemporary politics, the origins lie in the global financial crisis of 2007/8. Some readers may not remember, but politics at the time was a battle between the big clunking fist of Gordon Brown and a rooky team of modernising Conservatives led by David Cameron. A lot can change in 10 years.

The global financial crisis was unquestionably the defining event in Gordon Brown’s career, but it also marked a turning point for Cameron and his right-hand man, George Osborne. They faced a choice of whether to persist with the modernisation that had hitherto defined them, or to play it safe and revert to the traditional Tory territory of fiscal rectitude.

The remodelling of the financial regulatory system after 2010 achieved two goals that paid rich political dividends.

First, he established an indelible causal link in the public mind between the financial crisis and Labour incompetence on the economy. The narrative ran that Brown and co had spent too much and been asleep at the wheel when the banking system showed signs of crumbling. This gave the Conservatives the political cover they needed for ‘austerity’. So compelling was the narrative that they even recruited the Lib Dems as coalition partners.

Second, and of greater relevance to this article, by creating a conduct super-regulator in the form of the FCA, Osborne effectively shunted the politics of retail financial services three miles down the river from Westminster to Canary Wharf.

This second act still benefits Treasury ministers to this day. Instead of them taking the rap for all the consumer problems arising from financial services, it is Andrew Bailey and colleagues who must face the music on bad banking, mis-sold products, rip off credit, etc. Osborne’s reforms may have seeded the longer-term problem of a lack of accountability in an over-powerful regulator, but they were undoubtedly a political masterstroke.

The Speeches

First up was FCA Director of Supervision, Jonathan Davidson, at the Credit Summit on 15 March. He gave the audience a gloomy litany of ‘what if’s’ arising from changes in the economic environment. Whereas one might expect responsibility for such changes to be primarily a societal issue or matter for government, he said, it isn’t -- the buck stops with the regulator.

Next came Andrew Bailey at the FCA’s ‘Transforming Culture’ conference on 19 March. His speech posited a definition of the FCA as a “public interest authority”. In so doing, he revisited a previous theme – that the FCA is comfortable moving beyond simple conduct supervision and into the realm of intervention on pricing and even product design.

Thirdly and most tellingly came Christopher Woolard at the Responsible Finance annual conference on 20 March. He talked about going “beyond regulation” to address failure in the market and influence demand. He said “we have to accept there is a limit to what can be achieved through […] authorising, supervising, enforcing and writing new policy […] We have to look at business models and the supply of capital”.

So, what can we conclude from all of this? Firstly, that the regulator’s role is changing and it is demonstrably comfortable with the fact. Concerns raised in Parliament are habitually deflected by ministers to officials in the FCA who accept that it’s up to them to find solutions.

Secondly, there’s more intervention on the way, and particularly in the high-cost credit space if recent speeches are a reliable guide. And given there isn’t a more politicised area of financial services, perhaps we shouldn’t be surprised.

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