Tracey McDermott, acting chief executive at the Financial Conduct Authority (FCA), has acknowledged that the recent intensity and volume of regulatory activity is not sustainable in a speech delivered at the City Banquet, Mansion House.
McDermott said the recent trends had been a response to the financial crisis and the conduct failures that subsequently come to the public attention, which highlighted ‘fundamental errors’ made by both firms and regulators.
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"But it is also true to say that we are starting to see some light at the end of the tunnel," she added.
While this seemed to suggest that regulation may become less intense in the near future, she warned it was vital that the pendulum did not swing
too far in the opposite direction.
She said: "The danger is that a sensible and intelligent desire to reduce unnecessary regulation leads the pendulum to swing too far in the other direction. We become caught in a loop where we regulate, de-regulate, repeat on an infinite cycle. And if we do that, if we take too big a step back when things are going well then history suggests we will fail to anticipate and prevent the problems of the future."
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By GlobalDataIn order to achieve an industry which serves its clients in a way that is "innovative, vibrant, competitive and clean", McDermott said the regulator needed to take several roles, using the analogy of a rugby match.
Dermott said the FCA needed to act as a good rugby referee; "….constantly on the pitch, keeping up with what is going on, respected, fair and consistent. Tough where required. At the centre of the action without being the centre of attention.
"This requires rules to be set and to be enforced. Foul play to be dealt with fairy and decisively. But ultimately the rules will be of little interest or value to the customers of financial services firms if there is no competition between the players in the first place."
Where it can, said McDermott, the FCA should look to use regulation to drive the right incentives and conditions for healthy, competitive and innovative markets, for which it is attempting to apply behavioural economics in a regulatory context.
This led to the second role McDermott suggested was that of a policy marker, or that of a rugby groundsman – owing to the fact that the FCA has both competition and more traditional regulatory powers.
For this reason, she said: "Each of our regulatory interventions needs to be judged against how it will contribute to these aims. Our interventions need to be carefully considered and rigorously evidence based."
One particular example this is the danger that regulation could protect incumbents from competition. To combat this, McDermott pointed to the Call for Inputs on the Financial Advice Markets Review, which was designed to find examples of regulations which might be impeding innovation.
The FCA to take the role of facilitating debate which reflects on and analyses past performance, and supports the industry in finding solutions to old problems.
She added the FCA should be constantly challenging the industry to do better, and pushing it to go further and faster in the quest for change.
In concluding her speech, McDermott said: "We need to make sure that we have a landscape that ensures clean markets and protects consumers through fostering competition and innovation.
"A sustainable approach to regulation, which breaks the regulate, de-regulate, repeat cycle is critical to that.
"This requires all of us – regulators, firms, and individuals alike – to play our part in changing the way financial services operates, not just for now but for the long term."
