Series 6 Bonus episode: Driving growth, rebalancing risk, and powering innovation: Inside the FCA’s new strategy

Transcript

Tessa Norman: Hi everyone. Welcome to Risk & Regulation Rundown, the podcast where we share our views on financial services risk and regulatory hot topics. I'm your host, Tessa Norman, and today we're recording a special bonus episode to share our reflections on the FCA's five-year strategy, and review of its rules in light of the Consumer Duty. I'm joined today by two expert guests, Sajedah Karim, who's a Partner in PwC's Financial Services Non-Financial Risk Business, and Conor MacManus, who leads our Financial Services Regulatory Insights team. We're recording this episode the day after the FCA published its new strategy. That strategy sets out four areas of focus, and there's two of those that we'll probably spend a bit more time talking about, because they feel particularly new compared to the FCA's previous strategy. Those are supporting growth and becoming a more efficient and effective regulator, and they've really signalled the intention for a change in approach, in large part in response to the Government's growth agenda. Conor, why don't you kick us off with your immediate reflections on the strategy and particularly on that economic and political environment that the FCA is operating in, because that context is important?

Conor MacManus: Yes, of course. I was at the launch of the strategy yesterday evening. I spoke to a number of organisations that were there, and I think headline reaction was very positive around the message, as you'd expect, that focus on growth and competitiveness being very welcome. But clearly this is a relatively high-level strategy. The real focus will be on the detail and how it's executed. I think that would be the very high-level and initial reaction. On the broader context that the strategy needs to be placed in, clearly the Government has a very big focus on growth and encouraging growth. That is the central mission of the Government. From a financial services perspective, it's one of its priority sectors that will be set out in the industrial strategy, which will be published at some point over the spring/summer, I understand. Clearly, the Government is prioritising financial services as a sector, which is understandable, bearing in mind its importance to the economy. For the regulators, they've had a secondary objective for international growth and competitiveness for a little while, but there's obviously been a lot of focus recently around what more they can do to encourage competitiveness of the financial services sector and the broader economy. I think that's the context and the way in which has shaped the strategy and the focus areas.

Tessa: Thanks Conor. One point that really comes out of the strategy and that I wanted to get your thoughts on is the point around embracing technology, and the FCA uses the phrase 'a tech-positive approach', and I think in that respect it's thinking both about its own operations and also how it can support firms to innovate and to harness the benefits of technology. What are your reflections on that, and what can firms be doing to best position themselves to take advantage of that approach?

Conor: Yes, look, it's obviously an important agenda, and it's very positive that the FCA is prioritising it. You can probably apply three different lenses to this. There's probably more, but let's talk about three, the first of which is the FCA's use of technology itself. It receives an enormous amount of data, oversees a huge number of organisations. From a supervisory, analytical perspective, there has to be scope to deploy technology there, data analytics, AI, which is something that they're already doing, but it's great to see that they are looking to progress that agenda. The other area that is important is the regulation of the use of technology by financial services firms, and the regulators in the UK and the Government have been clear that they are not planning on doing specific regulation, for example on AI, whereas obviously, the EU has taken a slightly different approach through the EU AI Act. So, I think that's welcome. We want a pro-innovation, regulatory framework. But the interesting point is the one that you made around positive towards technology, pro-technology, rather than technology agnostic, which has been the typical approach taken.

I suppose the question is, are they going to be more proactive in the way in which they encourage firms to deploy technology, and what's the best approach from a regulatory perspective to do that? From my perspective, clearly very granular, restrictive rules is not the right approach. But there might be areas where they want to provide some guidance around existing regulatory obligations to encourage firms to have the comfort to be able to deploy technology safely. Then the final point is about use of technology to reduce the cost of compliance from a regulatory perspective. This is something we're seeing a lot of organisations look at and adopt. Again, AI being a great example of something that can be used to reduce cost to do things more efficiently and effectively. Anything that the FCA and other regulators can do to encourage that and allow firms to adopt those kinds of technologies, I think would be very beneficial.

Tessa: Absolutely, and another important element of the growth agenda is this point around rebalancing the UK's attitude to risk, and this is something that we've heard both the Government, and the regulator speak about in quite a lot of detail over the past few months. There's been some debate around the potential tensions that can exist between introducing greater risk into the system in pursuit of growth and competitiveness, and consumer protection on the other hand. Saj, it would be great to get your reflections here in terms of how you see those potential tensions, and do you think this strategy represents a bit of a lessening of a focus on consumer protection?

Sajedah Karim: Yes, great question, Tessa, thank you very much. You talk about there being a debate on the levels of risk, and I think there's been more of a statement that there will be a reduced level of consumer focus. Let me explain what I mean by that. I think that what has been said is that there will need to be higher risk appetite, and that's it. There hasn't really been that debate that you talk about in terms of what does that mean in practice? What are we going to accept as risk, both from a UK perspective, as well as from a regulatory perspective, and then also from an industry perspective, and what actual responsibility will there be for the consumer themselves? I think that debate still has to be had in a lot more detail, and I think it's coming and that's good, because a lot of what the regulator is suggesting it will now do, is positive, but just needs a little bit more detail, and Conor was saying the same thing in terms of the devil will be in that detail. We'll come onto more of that in a second. On the consumer elements, in its last strategy the FCA did talk about Consumer Duty and setting higher standards, and it's done that, and it's done that really well, and the Consumer Duty has drawn out a number of really clear areas where things were not working well, and it's drawn out lots of practices where you can help make things work much better for consumers, so I think that's good.

Trust and the whole consumer agenda and the trust that that brings and the empowering that brings of consumers, I think remains as an element in this strategy, as it was in previous years from the FCA. That feels relatively consistent. Again, what will be interesting is the detail of the debate on rebalancing risk. They talk about rebalancing risk. What does that mean in practice, and how much acceptance will there be by firms and everybody else on the dial of that risk? We've got some specifics we can talk to Tessa, but I think that's coming up slightly later, so I'll pause there.

Tessa: Thank you, I completely agree, and there's a couple of specific areas where the FCA has given strong indications or indeed is working on specific proposals of where it's going to make changes, to help look at that rebalancing of risk. For example, it's looking at targeted support to help address the financial advice gap. It's also looking at reforms to its mortgage affordability and stress testing rules. What are your thoughts on what those types of reforms are likely to mean for firms, both their ability and their willingness to either offer new products and services or to target new customer groups? What are you hearing from your clients about how they would feel about taking on a greater level of risk?

Sajedah: I think it’s early days, and there's a lot more thought that needs to be given to all of this, and Conor were talking about mortgage market reform for example. The FCA may be looking at changing its affordability requirements, and that might create a great opportunity for firms to go, 'Okay, so perhaps we can do something more with the money we have, and perhaps we can take a different type of risk on a different type of segment and a different type of customer, and perhaps this will help with financial inclusion.' But we still need to understand what the PRA are going to do and what the cost of capital implications are going to be for all of that, right? And Conor, I know you had some views on this as well in terms of that entire risk universe that needs to be considered before real steps are taken.

Conor: Yes, I completely agree. There can be a bit of a risk to suggest that risk is set just by regulation. Clearly, financial services organisations are there to manage their own risk. That's their business. It may be that organisations don't have an appetite to risk up or to get exposure to assets that they didn't previously. Some might, and that's a strategic decision that they'll have to take based on the whole regulatory landscape, once it's clear, and absolutely, the FCA may have a position on something, but the PRA is equally important as a prudential regulator, particularly for the banks, and that's something that they'll have to consider, as well as investor appetite and all of the other things that firms will be used to taking into account. I think this is just one part of a multi-faceted consideration that firms will have to take into account.

Tessa: Thanks both, and Saj you mentioned the Consumer Duty earlier, and it'd be great to talk about that in a bit more detail because alongside the strategy, the FCA also published its feedback statement to the call for input that it issued back in July 2024, which was really looking at reviewing its rules and guidance in light of Consumer Duty. That’s an important stepping point in the journey that the regulator's on, away from more prescriptive rules and towards more high-level, more outcomes-focused regulation. The idea being that the regulator can place greater reliance on the higher-level rules of the duty and use that to help reduce the length and complexity of its rulebook. And what the regulator set out is what it calls an ambitious programme of reform, but that's really focused on discreet, specific areas. It did say that from the responses it had to the call for input, there wasn't really appetite for what it termed a wholesale review of the handbook. But what's your take on that feedback statement and the areas that the FCA is looking to reform?

Sajedah: A couple of things. First, thank goodness it's come out, because I think everybody was really positive when the call for input was a thing in July 2024, and lots of people have been looking forward to where the FCA would land on this. It's a very welcome publication and I know that the regulator will have spent a lot of time and energy on getting it right. One of the standouts for me, and if I think about our experience of health assessments on Consumer Duty or helping firms understand what the implementation should look like is that taking a proportionate approach and taking an outcomes-based approach becomes very difficult when you're not necessarily a large-scale organisation. So, an understanding where you should baseline yourselves is a complex and involved decision-making process. The FCA's focus on smaller firms in this space, will make a real difference to some of those organisations who have been a little bit challenged about where exactly to land themselves. I think that's really good. The disclosure elements of change are fascinating. Again, this is something that has been talked about for a long time, and I think now really pushing forward with more tailored disclosure will be interesting and will be very welcome. In practice though, these things are difficult and need to be thought through in a lot more detail than we currently have, and I know that is coming. For example, if I change my disclosures as a bank, what does that mean for what the intermediaries are doing, and do they realise, and how long will that take to put in place, and what does the consumer expect? And if they, for example, bought a car before and they're not getting the same disclosures, is there going to be a lot of angst around that? That all needs to be worked through, and the disclosure across anybody's customer journey needs to be aligned. We can't have different forms, and there again, Conor made this point, it's not just one single regulator that will set disclosure requirements in this case. They all need to be thought through in the round. The detail of all of this and the implementation of it will be involved. The concept of some of the things that the FCA has suggested for its call for input are really good.

Tessa: That disclosure point really helps to bring to life some of the challenges in this more outcomes-based approach, where on the face of it, more flexibility sounds great, but when you delve a bit deeper to some of the realities of that, it will certainly bring challenges as well. Conor, what's your perspective and what are you seeing among firms in terms of how they approach compliance as we move towards a less prescriptive environment more generally? What are some of the advantages and perhaps some of the challenges for firms?

Conor: Yes, it's a very current issue, and one we have been discussing with clients of all different types a lot recently. I think the first thing to say is, there's always going to be a rulebook. And there’s going to be lots of rules in that rulebook. I don't think we're going to move away from that completely, but the FCA and the PRA, clearly there's a trajectory away from very rules-based, granular approaches that the EU uses for understandable reasons, because it's about harmonisation across 27 different countries, to something which, as you say, is a bit more outcomes-based. Consumer Duty is an example, although of course there are rules which underpin it. The operational resilience framework, again, was an example of that. There are pros and cons, as there is under any framework. The benefits, as you say, are that it allows some flexibility in terms of how firms adopt a piece of regulation and ensure it makes sense for their business, which is really what you want to do. You want to align business and regulatory outcomes, rather than it purely being a compliance exercise they have to go through, because otherwise they won't embed it throughout their organisation.

Clearly, not having thousands of pages of rules brings a cost reduction because you don't have to go through rules in the same way. So there's benefits there as well. But the challenge is that inherent in an outcomes, principles-based approach is judgement. Firms need to make a judgement around how do they deliver the outcome that the regulators have set, and frankly, for some organisations, that can be quite a daunting task, particularly for smaller organisations, which have less capability, potentially less dialogue with the regulators. That can be a challenge, and it comes back to this risk appetite point. They will need to potentially assess their regulatory risk appetite. There's also a really important point for the regulators, which is, if you're going down an outcomes, principles-based approach, there will be different interpretations. Firms that look quite similar will do things in a different way, and we've seen that in recent years in a number of different areas, and there can be a tendency for regulators to look at that and say, 'Well, that doesn't feel right.' One's out of kilter from the other, and perhaps the one that's taken a slightly less restrictive approach should move up to the level that the other organisations have taken, which just creates more cost, because they have to do it twice because they take a judgement to say, 'This is the way we were going to do it,' and then the supervisors come and look at it and say, 'Well, maybe you might want to be slightly more in line with your peer group.' I think there just has to be a recognition that there will be, to some extent, a lack of consistency or more of a lack of consistency in an outcomes-based approach.

Tessa: That point around more onus on firms to make more subjective judgements and to justify their decisions is something that firms have already been grappling with under the Consumer Duty. Saj, are there any reflections you'd share from the work that you've done with firms on the Consumer Duty and how they've found that?

Sajedah: I want to answer that in a sense of the cost of implementing the Consumer Duty. When you're trying to figure out through every part of your process what a consumer has understood, and how they've understood, and whether it's the right thing, and whether they've reached the right outcome, and whether you've got the right MI in place, that's quite costly. It makes the customer journey itself more involved from a compliance perspective than it may have been previously, and some firms have grappled with, 'Okay, how far do we go?’ Because now we're challenging ourselves on a product and value perspective, because we're making it so costly in this customer journey. There are multiple layers of where to land dependent on what resource you've got in the first place. I think that equation just needs to be brought in a little bit in terms of, to Conor's point, you might have similar firms interpreting things differently, which makes sense because they're different businesses, but perhaps there's some kind of categorisation around the level of resource, rather than the size of an organisation or the size of customers it's got, but the level of resource and cost you might expect to be passed onto a compliance journey or a customer journey in order to get Consumer Duty right, because it can take a lot of resource, and some firms just simply don't have that level of resource. So, yes, it's been very tough for a lot of firms.

Tessa: Absolutely, and I think that's just one of the reasons why a lot of firms will find it so welcome that the FCA is putting more of a focus on how it can be more efficient, how it can be more effective, how it can hopefully try and reduce the compliance burden on firms. Conor, I wanted to come back to your point around consistency of approach, because that plays into another area of challenge for firms, which is the risk of greater regulatory divergence across different jurisdictions, and that's something that the FCA touched on in the strategy. What are your thoughts on the FCA's perspective on that?

Conor: It would be impossible to ignore the geopolitical situation, and clearly they're not, and regulators around the world are grappling with that in different ways. I think the UK regulators have always been and remain very committed to international cooperation and international standards. I know that the FCA is very active and influential in IOSCO and other forums, and clearly the Bank of England is as well, in various forums. I don't think that's going to stop. But clearly that global consistency is under pressure for various reasons, and being a regulator of one of the largest, most global financial centers in the world, it's understandable that they are thinking that through. One of the points that they did make, which was interesting, was that they might look to cooperate and coordinate with like-minded jurisdictions. Potentially if you can't get international agreement, looking to coordinate and cooperate with other jurisdictions where they have a similar point of view, and that's interesting, and we'll see how that develops. But I think more broadly, clearly as a regulator of firms which operate globally, they'll be looking at these organisations to manage the risks around the global situation, and as you say, from a purely regulatory perspective, the fragmentation, divergence in approaches just complicates even further that regulatory, compliance landscape. That makes it even more important to invest in the technologies that are emerging that can help you navigate what's obviously a very complicated picture.

Tessa: Brilliant, thank you. I think we've covered a lot of very interesting ground there in our discussion, and there's a lot of potential implications, but I think it's fair to say that quite a few of those, as you've both talked about, do feel perhaps a little bit further away, and firms will be waiting for a bit more detail from the regulator before they can fully work through the so what? With that in mind, it'd be great to conclude our discussion with a final thought from you both in terms of how do you think firms should be reflecting on some of the perhaps more medium-term implications, whether it be in terms of impact on competition dynamics in the market, how they reflect on their risk appetite and their broader approaches to compliance? What should they be thinking about now to position themselves for those changes that we think are coming? Conor, I'll come to you first.

Conor: Yes, there's so much going on at the moment, and the publication of the strategy is just one piece of a huge jigsaw of things. We had a number of announcements from the FCA and the PRA before the strategy earlier in the year, and in response to the letter from the Prime Minister. We've got a number of specifics and as I said, the growth and competitiveness strategy for financial services from HMT. I think the first thing to say is, take a step back. It's very easy to get lost in the detail. Obviously, you need to track the detail, but the regulatory landscape is shifting. I think that's clear. Think about that from a strategic perspective, because organisations that didn't do that, post-financial crisis in 2008 found that their business models became quite challenged because the regulatory landscape had moved and their business models hadn't. I think that's a pretty strategic point. The second point is, there's a lot of rhetoric here about deregulation, and let’s not get fixated on that as a point. The regulatory landscape has changed a significant amount. Expectations have been raised. Those expectations remain raised in many areas. Firms will still have a lot of work to do to be able to meet those expectations, and the risk environment in which they're operating remains quite enhanced. For understandable reasons, regulators are pushing firms to be able to manage those risks. So, I wouldn't lose sight of that. But then we do have some detail in certain areas. The focus on technology is important and really good. There are things that the FCA have said that they're going to do, for example introduce a machine-readable rulebook. We've talked about some of the emerging technologies which can be used to help facilitate compliance and reduce the cost of compliance. It's a massive opportunity for firms to embrace that agenda, but it requires investment, and that's what I think they should focus on.

Tessa: Thank you, and Saj, what would you add to that?

Sajedah: I couldn't agree more with everything Conor said there, really. Particularly this step back and think about your business model in the context of everything that's going on. Conor said it really well. The thing that I would also just comment on is, this is all done in the context of innovation and growth, and it's yet to be, of course it is yet to be proven which one of these changes is going to really encourage growth. One of the ones we haven't spoken about is authorisation and making that whole process simpler and hopefully easier for firms, and the UK's presence in, I think they said Asia-Pacific and the US to help firms understand how they can navigate that authorisation process, is a positive step. Some of these changes, such as easing the mortgage affordability rules as an obvious example, and we've spoken a little bit about the complications of that, again, may encourage some growth, but in the context of this growth agenda, there's still a bit to be seen on how these discreet areas, as you called them earlier, Tessa, and they referenced them in their strategy document, when they all come together, what really is the impact on growth and innovation? I think there's still a little bit more to be seen on the impact that all of this will make on that agenda.

Tessa: Brilliant. Thank you both so much for joining us and for sharing your insights. I think there's so much for firms to be reflecting on, as you've both talked about. To our listeners, I hope you've enjoyed this special bonus episode and thank you very much for listening. Please subscribe to future episodes, and please rate and review this series, as it helps other listeners to find it. As always, if you'd like to hear more from us on risk and regulation, please look out for our regular publications on our website, which we'll link to in the show notes, and I look forward to speaking with you again in our next episode.