We've reached a pivotal moment for UK financial regulation. The FCA should either exist to protect the consumer or be a cheerleader for the City of London. It can't do both.
The Financial Conduct Authority is having a crisis of identity. What is the FCA actually for? You may think it’s there, first and foremost, to protect consumers like you and me. But it’s never been that simple, and now politicians from both major parties have complicated the issue still further.
Let me explain. It was the last Conservative Government that initiated the current confusion by introducing what it called the FCA’s secondary international competitiveness and growth objective, which came into force in August 2023. In other words, as well as protecting consumers, the FCA also has another duty now to help promote the UK’s financial sector and the wider UK economy.
Surely most of us want to see the UK economy grow, and, at least in theory, it’s possible for those two objectives to co-exist and even complement each other.
That’s certainly the message the FCA is keen to promote. But it doesn’t take a genius to work out that this new dual role does create a conflict of interest. After all, what’s good for the financial industry is often bad for financial consumers, and vice versa.
Tension between competing objectives
Someone who’s expressed concern about the FCA’s responsibility to boost competitiveness and growth is Andy Agathangelou, chairman of the consumer pressure group, Transparency Task Force (TTF). “In and of itself it is a very laudable objective,” he told me in a recent interview for The Investing Show. “There is a tension though between whether the priorities ought to be about protecting consumer interests, or becoming, if you like, a cheerleader for the City.” As Agathangelou points out, even the regulator’s former chief executive Andrew Bailey once cautioned against a secondary objective for the same reason.
Of course, it’s no secret that the new Labour administration is also keen to promote economic growth. But the TTF’s concern is that the financial industry lobby is also exerting pressure on the FCA in the hope that lighter-touch regulation will boost its profits.
“There's quite a bit of research suggesting that a country's primary sector has huge power over its government,” says Agathangelou. “For example, in Australia, the mining industry is massively important, and, as an unsurprising consequence of that, anything to do with mining and exploring for new metals and so on is very subservient to the lobbying powers of the mining industry.
“In the UK, financial services is about 8.2 percent of GDP. Historically, financial services has been a flagship industry for our country. So it's not surprising that we do have phenomenally powerful lobbying capabilities in the City of London.
“My hunch is that the pressure to create the kind of conditions to stimulate growth and competitiveness probably came from the City, not MPs representing their constituents.”
Has the Consumer Duty succeeded?
An example of successful lobbying, the TTF argues, is the Consumer Duty, which has been in place since July last year. Although it has undoubtedly had some positive effects from a consumer protection perspective, the Consumer Duty is nowhere near as robust as the duty of care which the Financial Services Act of 2021 required the FCA to explore.
“Personally,” says Agathangelou, “I think what the industry's now got is several hundred pages of pretty technical regulation to work through that does have the general intent of looking after consumers’ interests. (But) it would have been far cleaner and far simpler had (the FCA) gone down the other fork in the road, the duty of care, which is what Parliament wanted them to do.”
The Transparency Task Force is now encouraging both consumers and financial advisers to respond to a call for input from the FCA on how the Consumer Duty has gone so far and which direction financial regulation in this country should take from now on.
Again, for those concerned about a possible erosion of consumer protection, the wording of the FCA’s document is rather ominous. It talks, for instance, about the case for simplifying retail conduct rules and perhaps removing some altogether.
It’s time to have your say
For some, this might smack of a fait accompli. Some no doubt suspect the FCA is just be going through the motions of a formal consultation when the course of action has already been decided on.
But I’m rather less cynical about the FCA than many commentators are. Yes, it has made some serious mistakes. Its handling of the Neil Woodford fiasco has seriously dented its reputation. But it has made some progress on consumer protection for which it deserves credit.
Remember, too, that the power and influence of the financial industry has always put the regulator in a difficult decision. Now, with both Labour and the Conservatives pressing for a shift in its priorities, I fear the FCA is genuinely struggling to retain its independence.
It’s very important, therefore, that all of us who care about consumer outcomes task every opportunity to air our views. We can be sure, after all, that big asset managers and other financial institutions will be airing theirs. You have until 31st October to have your say: just complete the form on the FCA website.
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