The Future of Financial Conduct Regulation

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On 23 April, Andrew Bailey, Chief Executive of the FCA, gave a speech on the future of financial conduct regulation. Mr Bailey considered in particular the impact of Brexit on financial conduct regulation, and the changing purpose of regulation. Highlights from the speech include that:

  • There should be a debate about the future of regulation, but this needs to be in a public interest framework
  • The FCA will undertake further work to examine the role of its principles
  • The FCA will consider the most efficient and proportionate options for achieving the substance of a duty of care

 The FCA confirmed its support to economic growth, to a strong and successful financial services industry, and open financial markets, with free trade that points away from tying markets to locations, and markets that are global not narrowly regional. This is consistent with the competition statutory objective. But, this needs to be done on a basis that is fair to all groups in society, reflects the existing different capacities and vulnerabilities, and is sustainable. The public interest demands that a balanced combination of success with fairness and sustainability. 

 Key points within the speech are that:

  • Public interest objectives, which are specific to the conduct of financial services, sit within the broad landscape of all public policy and public interests
  • The FCA takes no position on the substance of Brexit itself, and it continues to prepare for a full range of scenarios
  • During a transitional period, the FCA would continue to be an active member of ESMA and work closely with its EU27 counterparts on legislation that is in development.  Close cooperation with EU counterparts to meet regulatory objectives will continue even after exit
  • The UK and the EU has generally not differed in their agreement on the objectives sought by financial services regulation, which will not change with Brexit
  • If the UK is left to its own devices –  with its common-law system and large, global financial markets – would construct financial conduct regulation in a different way. It would take on-board practical experience more rapidly and be based more on principles that emerge from experience in public policy, and somewhat less on detailed rules that can become overly set in stone

 Two key questions to answer in the context of a post-Brexit future are whether EU and UK approaches to regulation are notably different (and the related implications of this), and what equivalence arrangements does the UK want and expect? In answering to these points, it should be kept in mind that the UK’s legal approach is rooted in common law and developed more through case law, while the EU system has deeper roots in the legal tradition of codification and greater use of statute rather than regulatory rules. Mr Bailey said that “there are things we would have done differently with EU rules if we had developed them unilaterally”. For example, he admitted he fails to understand why the trading obligation rule in EU law is needed when there is a well-established principle that firms must obtain best execution for their clients. Mr Bailey maintains that the point on the differences of the common-law approach strengthens the need for outcomes-based equivalence rather than a rules-based approach – in other words, focussing on common outputs of regulation, rather than harmonised inputs. Wherever possible, those outcomes should flow from global standards, and always be the best test of equivalence. “Same outcome, lower burden”. However, Mr Bailey dismissed a return to the light-touch approach adopted before the financial crisis, which he described as a “‘rising tide lifts all boats’ view of the world”, that had been discredited.

Mr Bailey ensured that the post-Brexit system would still look for a financial system that earns sustainable and acceptable returns and does so transparently, and still encourage fair and sustainable risk taking. A financial system where there are strongly held views on consumer harm, and its incidence, and where doing the right thing mentality is deeply embedded in the culture of firms.

Whilst this speech sends an important message to the industry, about the future, and a possibly lighter, approach to regulation, it does not clarify the possible scenarios for accessing EU markets after Brexit, and what firms can reasonable expect in the next months. Although Mr Bailey tried to emphasise that the FCA takes no position on Brexit, this speech could be read as a somehow clear position on what the UK would have done differently, even if it is not detailed how. With current variety of scenarios and landscapes, how can we be sure that principles only will suffice to regulate financial markets, which are supposed to be global rather than regional, going forward? The FCA is committed to managing changes in the market, however it could be wondered whether a change in the market paves the way also for a change in the approach to regulation?