Regulation in a Changing World
On 21st October Christopher Woolard, the Executive Director of Strategy and Competition at the FCA, delivered a speech on “Regulation in a Changing World”. You may well have seen it here:-
https://www.fca.org.uk/news/speeches/regulation-changing-world
I will, in a moment, highlight some key issues raised in the speech – but I want to start with a more fundamental proposition.
Each one of us who run, or work in, businesses are well used to the threats and opportunities which this entails. If we produce poor products, get our marketing wrong – or our service to customers is poor, we may end up failing. We have to look at what our competition is doing, what our customers are looking for and, critically, the margin we are receiving to keep us able to invest in the future.
Most of the above are within our own control – if our products are awful, or we are constantly rude to our customers, then there is nobody other than us to blame if it all goes wrong.
The variable which is not under our control, is “what customers are looking for”.
It is not surprising that those businesses which identify this best are the ones which really fly – indeed those which find products which customers didn’t even know they wanted are probably the best businesses of all!
That is the case unless the business operates in the financial services market – and is regulated by the FCA.
Christopher Woolard, whilst looking back at how the regulatory regime has developed within a changing context, pats the FCA on the back saying:-
“The financial system is safer . . and conduct, culture and customer outcomes are increasingly recognised and understood around Boardrooms”.
He is right – ten years ago it was more than common (nearly universal in my experience) for senior management to regard the FSA (in relation to conduct of business) as a matter for compliance departments – and the compliance department was frequently known as the “Business Prevention Department”.
Ten years later I can vouch for the fact that senior management in (nearly) all the firms which I work with, or talk to, are individually and collectively highly educated as to what the regulator is up to and, far more importantly, understand and react to the culture within which they are expected to operate.
In essence, they understand that the financial crisis created a market pressure on them to behave in ways which can be trusted – that there are fundamental principles to be met, and well described fair outcomes which should be consistently delivered to customers. All of that is within their control and, by and large, firms have reacted well to what is fundamentally a change in the marketplace in which they operate.
Christopher Woolard’s speech is principally an introduction to a process which the FCA intends to undertake towards obtaining a better understanding as to how it should, in future, change its regulatory model to react to an even faster “changing context”.
Some of his observations will be very familiar to you – and they, indeed, mirror views which I often communicate myself.
For example, he underlines the fact that:-
“disclosure has been the go-to solution of regulators and politicians in the UK and Europe for the last 20 years, making up the bulk of our requirements. But behavioural economics suggests its impact is limited . . . We also have large numbers of rules outlining what should be disclosed to a customer at each stage of the sales process. But even assuming a firm does comply with all these rules, there’s no guarantee the consumer will properly understand the information they’re being given.”
This is so true – and is why I have argued strongly that the traditional insurance product – based upon a complex legal instrument (the policy) – is simply not sustainable in the changing context where consumer transactions are undertaken faster, and customer attention spans are so much lower, than in the era(s) in which our insurance market slowly developed to what it is now.
I know you are waiting for the “but” – however, so far so good, Christopher. The financial services market is changing rapidly and bonus points to a regulator which wishes to engage with the players in the market to make sure that its regulation (and the conduct of firms) are reflecting this.
Now the “but”.
Thus far he, and I, have been describing a market (a world) which is changing – and how the regulator and firms can better react to this. Nothing wrong with that – the ability to change and react is within the control of the regulator and firms – and the better the “conversation” they may have about their respective reactions – the better the outcome will be.
But – there is a factor which the regulator has brought to the party which means that, whatever the conversation may be, firms will have no control over it – and that brings us back to that variable which is not under any firm’s control – “what customers are looking for”. In FCA speak that can often be expressed as “consumer outcomes”.
This is where the behaviour and attitudes of the FCA depart from the fundamental proposition which I described at the beginning of this letter – that of a market which shifts as part of the natural ebb and flow of “what customers are looking for”.
Here are some quotes on this issue from Christopher’s speech:-
“The demand from the public is clear – they don’t care if a set of rules has been followed, they care about the outcome they receive”.
“despite the warnings and free guidance, 100,000 people every year were drawing down [from pension] without getting advice. . . drawn to the asset they most readily understood and trusted: cash. But in the end, that means lower income in retirement”.
True – and the reason? Consumer behaviour, values, understanding and attitudes are declining at an alarming rate.
Christopher’s reaction is – “the key is building interventions around real consumer behaviour”. Do you know what comment immediately follows this in his speech?
“Our payment protection insurance (PPI) adverts featuring Arnold Schwarzenegger’s animatronic head were loud – some would say weird – but they did the job of grabbing the public’s attention and driving visits to our website to think about their options. So we knew they were working”.
Exactly, Christopher, but how and to what effect were they “working”?
It is your behaviour as a regulator which is driving the decline in customer behaviour, which you are then asking firms to respond to by driving them to ever decreasing margins to meet an ever increasing – regulator driven change in consumer attitudes.
This is what Christopher says next:-
“As a consumer, you don’t care whether the problem lies with legislation, regulation, or industry practices – you simply want them all to work in your interests”.
That is a regulatory attitude which leaves all financial services firms with nowhere to go.
The FCA has the statutory regulatory objective to protect consumers.
There is not a word in the speech suggesting even an inkling in the minds at the FCA that if the FCA is proactive (as it has been and clearly intends to continue to be) in encouraging and delivering unfair and unrealistic expectations in the minds of consumers – then the outcome will be a market under which firms have no control whatsoever over the commercial equation, the balance, under which they are being asked to operate with consumers.
The inevitable outcome will be a decline in the market – the loss of protection for consumers and, most important of all, the FCA will have utterly failed to deliver its most important role in protecting consumers. That is to educate, inform and drive the very highest standards in consumer expectation and behaviour.
In that market the FCA would be proactive in creating trust, knowledge, understanding and participation by consumers in the delicate balance which is required in any market between expectation and viability.
Christopher tells us that:-
“as part of the Principles Review, we will consider things like requiring firms to ensure consumer understanding”.
What an absolute disgrace. The FCA has completely failed in its role to create integrity in the financial services market by consumers. It has done worse than this. It has actively encouraged a lack of integrity by consumers in the financial services market. Each one of us who have received PPI calls endlessly at our homes – or seen the FCA sit back and watch consumers (cheered on by the regulator) happily (fraudulently) claim millions of pounds of “redress” because the deck of cards was so skewered by the regulator that their behaviour was not only unchecked – but was encouraged.
This needs saying – and I can say it. If you choose not to engage in similar terms with the regulator in its review of “re-shaping how financial services regulation works in the UK” then:-
- the regulator will not hear it; and
- you will face a future market where the one uncontrolled variable which you can cope with, becomes completely uncontrollable and you will have no viable future.
