Now that the UK has left the EU, the future of UK financial regulation is uncertain. It is a key issue for government, financial regulators, civil society organisations and, of course, the financial services industry. The government embarked on a major consultation process called Future Regulatory Framework Review.[1] This resulted in the publication of the Financial Services and Markets Bill on 20th July 2022[2] which is intended to implement the outcomes of that review.
This section of our website brings together the work we are doing on financial regulation including responses to important consultations from government and regulators. Links to these responses can be found at the bottom of the page.
A difficult backdrop
The debate about the future of regulation is taking place against a very difficult backdrop. When considering the future of financial regulation civil society organisations and consumer groups have to factor in the:
- Post-Brexit environment which could lead to a more fragmented, complex regulatory system and risks a reduction in regulatory and consumer protection standards
- Cost of living crisis which is now hurting households just as we had hoped that the economy and household finances were recovering from the effects of Covid
- Low levels of financial resilience amongst millions of households – we have made almost no progress in building financial resilience and financial inclusion since the great financial crisis of 2008
- Failure of the financial system to meet the needs of real economy firms and households fairly and efficiently (what we call economic and social utility)
- Failure of financial markets, despite the hype, to provide significant support to the greening of the economy and promote responsible corporate behaviours
- Continuation of (by historical standards) the relatively low interest rate, low bond yield era, which is distorting the behaviours of financial markets, institutions, and households
- Litany of misselling and other financial scandals which have left a legacy of mistrust in financial services and damaged confidence in regulators
- Impact of digitisation, fintech, and big data on financial exclusion and discrimination, and the increased risk of financial institutions using tech/ data to exploit consumers’ behavioural and psychological biases rather than develop truly socially useful innovations
- Need for regulation to be agile, responsive, and effective in increasingly complex, fast moving financial markets and services
We’ve made real progress on financial regulation in the UK, but there is more to be done and new challenges to overcome
Although it might not seem like it, given the regular criticism of regulators in the press, the current UK regulatory model post the 2008 financial crisis has functioned fairly well in certain areas.
For example, there is no question we have seen considerable improvements in conduct of business standards in the retail financial services industry driven by a more robust approach from the regulators. Of course, financial scandals have not disappeared. Serious concerns have been raised about pension scheme members being wrongly advised to transfer out of their valuable defined benefit pension scheme.[3] But, we have not seen as many multi £billion misselling scandals.
However, the degree of financial ‘innovation’ and growth in fintech and digital/ data services means that new conduct risks and consumer detriments are emerging. We cannot assume that the approach to conduct of business regulation which has worked well post 2008 will be effective in dealing with technology and data related risks and detriments.[4]
Policymakers will have to ensure that regulators have the right powers, resources, and culture to be more responsive and agile to protect consumers in a more complex, fast moving world. The UK financial sector does not have a good track record in using financial innovation to benefit consumers.
Similarly, post 2008 financial crisis, a lot of effort has gone into making the banking and financial system safer through the introduction of tougher prudential[5] regulation of UK banks. But, it is worth noting that concerns have been raised about the prudential regulation of the insurance sector and the risk of deregulation and reduced consumer protection as a result of the reforms of the critical Solvency II regulations.[6]
Moreover, there are concerns that systemic risks may be emerging again particularly outside the mainstream financial system. The low rate environment has encouraged risk taking behaviours as financial institutions and investors ‘search for yield’. For example, the crypto-assets markets, while for now representing a small part of the overall global financial system assets, are fast growing and evolving. Regulators have warned that the growth could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.[7]
While conduct of business standards have undoubtedly improved, financial markets and services are still failing to meet public policy objectives relating to economic and social utility,[8] financial access and inclusion, supporting climate goals, and meaningful standards of corporate social responsibility.[9] [10] The UK legislative and regulatory system is not set up to address these public policy failures.
A new approach to financial regulation is needed if financial markets and services are to work for the economy, society, and the environment
Post Brexit is an ideal time to rethink and reform UK regulation. We think that the strategic objectives for regulatory reform should be to:
- reform the financial sector so it works better for the real economy, the environment, and households;
- ensure regulators can be more agile and responsive to emerging crises and scandals;
- create a regulatory system that deals more effectively and efficiently with the root causes of market failure and consumer detriment in financial services, and pre-empts and prevents rather than reacts to market failure and consumer detriment;
- introduce real accountability and transparency in financial regulation;
- promote access and inclusion and drive out discriminatory practices in financial services; and
- ensure the UK becomes a leading financial centre for sustainable, responsible, and social impact (SRI) finance – in other words socially useful finance.
The effectiveness of regulation depends on:
- the legislative framework;
- the regulatory architecture;
- the objectives and powers given to regulators;
- regulatory governance and acountability; and
- the regulatory culture, philosophy, and approach.
The recent major government consultations focused on the legislative framework and regulatory architecture than the culture, philosophy, and approach to regulation adopted by the main regulators. There are four main structural flaws in the current framework and architecture of UK financial regulation.
- The objectives and powers given to the regulators do not properly reflect the scale of the challenges with regards to climate risk, and financial exclusion and discrimination. If tackling the climate crisis is to be a priority across the economy, then financial regulators should be given a statutory objective to align financial market behaviours and practices with climate goals. Similarly, we argue that if we want regulators to prioritise tackling financial exclusion and discrimination, then this ought to be a statutory objective.
- The legislative framework which determines the relationship between lawmakers and regulators, and the objectives and powers given to regulators, prevents regulators from being agile and responsive to emerging risks and harms. ‘Innovations’ like buy now, pay later credit products require legislation to bring them within the remit of the FCA. This means that sometimes the FCA gets blamed unfairly for failing to prevent harm relating to financial products not actually within its remit.
- Regulatory governance and public interest representation remains weak. Compared to the well-resourced financial services lobbies, civil society remains very under-represented at all levels of the policymaking and decision making processes of regulators. This contributes to group think and undermines the effectiveness of policymaking.
- The current provisions in the legislation relating to transparency and disclosure still provide too much protection to the commercial interests of the financial services industry. Section 348 of FSMA means regulators can’t share confidential information with the public – this protection given to the financial services industry even overrides the Freedom of Information Act (FOIA). Regulators still have to rely too much on the voluntary cooperation of regulated firms if it wants to gather and publish information on how well markets are performing or treating consumers. There is very little information published on levels of financial exclusion and discrimination. There is also a lack of transparency relating to the regulators’ supervision of individual financial firms, so it is difficult to know how often the regulator has chosen not to take action against firms.
Moreover, we do have concerns about the regulatory culture and philosophy adopted by UK financial regulators. Financial regulators have relied too much on promoting competition and choice, and ‘creating the conditions’ for markets to work. An interventionist, precuationary approach is needed to make financial markets and services work for the economy, society, and the environment. Direct interventions such as price caps and product regulation are more effective at ensuring consumers get a good deal and are properly protected.
It is unfortunate that the government seems to have dismissed many of the main concerns raised by civil society organisations in response to the Future Regulatory Framework Review. The measures contained in the Financial Services and Markets Bill previous will do little to address the structural flaws in the current framework and architecture outlined above.
To be fair, there are some positive proposals such as protecting access to cash. But, these do not represent the once-in-a-generation reform and reset of financial regulation needed to face the challenges described above. Indeed, in some ways, the government’s proposals would be a retrograde step from the current position as they threaten to compromise the independence and operational effectiveness of the UK financial regulators. The government intends to give the regulators a new secondary objective to promote the growth and competitiveness of the UK economy including the financial services sector. This is not a good idea as the regulators will come under pressure to deregulate to promote the competitiveness of the financial services industry. And, as mentioned, the government intends to reform Solvency II which we fear would result in deregulation and lower consumer protection in the insurance market.
The FCA has been consulting on a new Consumer Duty for the financial services industry and has recently published a policy statement on how it intends to implement this new consumer duty.[11] The Consumer Duty, if supervised and enforced properly, should make a real difference to raising standards in financial services. But, as we explained in our responses to the FCA consultations, there are very real concerns about how the FCA intends to monitor and supervise compliance with the new Consumer Duty and the reluctance of the FCA to mandate how firms measure and report compliance with the new measures. It will be very difficult for civil society and Parliament to know whether or not the Consumer Duty is working. Moreover, the FCA is, yet again, reluctant to actively use interventions such as price caps and product regulation. These direct interventions would be a much more effective method of making firms and markets comply with the Consumer Duty than relying on firms to compete in the market on the basis of treating consumers fairly.
Major consultation responses
There have been a number of major consultations and inquries into the future of UK financial regulation post Brexit, greening the financial system, and protecting consumers. The link to our responses can be found below.
Future of regulation
HMT Financial Services Future Regulatory Framework Review
Phase II Consultation: FIC Submission HMT Future of Financial Regulation consultation final 190221
HMT Financial Services Future Regulatory Framework Review:
Proposals for reform CP 548: FIC Submission HMT Future of Financial Regulation Proposals for Reform Feb 2022 final
Treasury Committee: Future of Financial Services Inquiry: Financial Inclusion Centre Submission TSC Future of Financial Services Inquiry
Greening the financial system
HM Government: Update to the Green Finance Strategy – Call for Evidence: Financial Inclusion Centre Submission Government Green Strategy Update FINAL VERSION 0622
HM Treasury Review of Solvency II consultation Bank of England/ Prudential Regulation Authority DP2/22 – Potential Reforms to Risk Margin and Matching Adjustment within Solvency II: FIC HMT BoE PRA Solvency II consultation response final 210722
FCA Discussion Paper DP21-4 Sustainability Disclosure Requirements (SDR) and Investment Labels: Financial Inclusion Centre submission to FCA dp21-4 final
Protecting consumers
FCA Consultation GC20/3 Guidance for firms on the fair treatment of
vulnerable customers: Financial Inclusion Centre Submission FCA condoc GC20 3 guidance to firms on fair treatment of vulnerable consumers
Financial Conduct Authority (FCA) Consultation Paper CP21/13 A new Consumer Duty: Financial Inclusion Centre Submission FCA Consultation CP21-13 A New Consumer Duty FINAL
Financial Conduct Authority (FCA) Consultation Paper CP21/36 A new Consumer Duty: Financial Inclusion Centre Submission FCA Consultation CP21-36 A New Consumer Duty FINAL VERSION
[1] Future Regulatory Framework (FRF) Review: Proposals for Reform – GOV.UK (www.gov.uk)
[2] Financial Services and Markets Bill – GOV.UK (www.gov.uk)
[3] FCA pressed for details of pension transfers probe | Financial Times (ft.com)
[4] See FIC discussion paper: Fintech – beware of ‘geeks’ bearing gifts? | The Financial Inclusion Centre
[5] ‘Prudential’ regulation relates to regulation designed to keep banks and insurers from failing and is the responsibility of the Prudential Regulation Authority within the Bank of England. The other main types are ‘conduct of business’ and competition regulation. Conduct of business focuses on how financial firms treat consumers, and preventing rip-offs. This is the responsibility of the Financial Conduct Authority (FCA). The FCA also has an objective to make sure competition works in the interest of financial consumers. The Competition and Markets Authority (CMA) also has a role to play in competition across all economic sectors.
[6] See FIC: Submission to HM Treasury Review of Solvency II consultation | The Financial Inclusion Centre
[7] Assessment of Risks to Financial Stability from Crypto-assets (fsb.org)
[8] For example, how well financial markets and services: support real economy activities; produce good value products that meet consumers’ needs such as saving for retirement; and help build financial resilience.
[9] For an assessment of the economic and social utility of financial markets and services see our report An Economic and Social Audit of the City, An Economic and Social Audit of the City | The Financial Inclusion Centre
[10] For an assessment of how well financial sector activities are actually aligned with climate goals see our report Time for Action – Greening the Financial System | The Financial Inclusion Centre