This week in regulation


The Speed Read

  • FCA responds to the Independent Review of the Funding of Debt Advice
  • Speech: What does achieving 'open financial markets' really mean?
  • Insight: Improving diversity through behavioural science
  • Speech: Considering the risks of blockchain

FCA responds to Independent Review of the Funding of Debt Advice

In 2017, the Debt Advice Steering Group launched an independent review into the funding of debt advice across the UK, led by Peter Wyman, CBE.

Mr Wyman’s report outlines a package of measures to improve efficiency in the debt advice sector and to ensure a sufficient supply of advice is available to all who seek it. The recommendations do not require primary or secondary legislation and so can be acted upon immediately.

Six of the recommendations are directly applicable to the FCA and the regulator is working with the Money Advice Service (MAS) and other stakeholders to identify the most appropriate course of action:

  • MAS should continue to be solely funded by the FCA levy as outlined in CP17/38;
  • Increase the financial services levy for debt advice by £10 million per year for 2018/19 and 2019/20 to improve the quality of debt advice, encourage innovation and increase the supply of debt advice by 50% by the end of 2020;
  • All debt advice providers should have quality assurance processes authorised by the FCA and report the headline figures annually to the regulator;
  • Debt advisers should hold a relevant debt advice qualification and meet continuing professional development (CPD) requirements as set out by the FCA;
  • All organisations which offer exempt debt advice should adhere to a code of conduct which commits them to an authorised quality management process and accrediting advisers using one of the authorised schemes; and
  • MAS should continue to focus its activities and expenditure on increasing the capacity and quality of debt advice by providing coordination, infrastructure and training.


What does achieving ‘open financial markets’ really mean?

 European Commission Vice President Valdis Dombrovskis recently said “the most important common objective in relation to Brexit must be to preserve financial stability.” Andrew Bailey, FCA Chief Executive, echoed this sentiment in a recent speech at the International Financial Services Forum in London. We bring you the key points of his speech.

The Brexit transition period is essential, not only because it gives regulators time to mitigate the ‘cliff edge’ risks that come with leaving the EU, but also to allow firms adequate time to implement their plans once they have a clear idea of what the post-Brexit landscape will look like.

Financial markets in the UK are open markets and have been for generations. Closing access to them as a result of Brexit would not only undermine financial stability, but also limit the UK’s ability to support trade and growth, and manage risk. Mutual recognition is one option for maintaining a steady-state relationship between the EU and UK in the future. This would be through the recognition of equivalence of the respective regulatory frameworks from day one. While each regulator would retain autonomy in rule making, coordination structures should be in place to ensure these are consistent.

Mr Bailey believes that domestic regulation should be based on prevailing international standards, with levels of cooperation reflective of the level of market integration. There may be occasions where the FCA wishes to go beyond these standards and these should be assessed based on the outcomes they are designed to achieve.


Improving diversity though behavioural science

Firms across the financial services spectrum are undertaking extensive programmes to improve diversity and inclusion, but it can be difficult to know which initiatives are having the desired impact. Laura Smart, Behavioural Scientist and lead of the FCA’s Behavioural Insights in Practice programme examines how behavioural science can provide insights to assist in designing effective diversity and inclusion programmes.

It’s human nature to align ourselves with those who are similar to ourselves and distrust those we perceive to be ‘outsiders’. Psychologist Jonathan Haidt recommends removing the focus on differences and instead encourage a greater celebration of a group’s similarities, for example in pursuing and achieving a common goal.

Analysis by researchers Frank Dobbin and Alexandra Kalev in 2016 highlighted that initiatives such as mandatory diversity training and specialised grievance systems tend to have the opposite effect to that envisaged. This adds to a growing body of research suggesting such approaches run the risk of alienating people who don’t believe their behaviour needs to change, or who view such training as a criticism of who they are.

One important finding from behavioural science is that it is often more effective to influence processes rather than people and can often have a more significant effect on behaviour. For example, it may be very difficult for an individual to prevent themselves making certain assumptions based on a candidate’s name when reviewing job applications, but introducing ‘blind’ CVs can be an effective way of changing outcomes and behaviour and requires minimal effort to implement.

The behavioural trials cited in this Insight article can tell us what has worked in the past, but Ms Smart argues that to make a difference in the future, efforts to improve diversity and inclusion must be tested and measured to ensure they are having the desired effect.


Considering the risks of blockchain

Blockchain has a number of useful applications, but there are potential risks to consumers and competition, which the FCA needs to be mindful of. That was the message from Mary Starks, FCA Director of Competition in her latest speech on the subject.

Many people now view cryptocurrencies as an asset class, rather than a means of payment as it was first designed to be. This potentially has regulatory implications and the government’s cryptocurrency taskforce (which the FCA is part of) is currently assessing whether further action in the market is required.

Ms Starks highlighted how distributed ledger technology (DLT) can be used to solve current problems and inefficiencies in existing systems by improving operational resilience and transparency. A second type of innovation – the introduction of something entirely new into the market, with offerings such as decentralised peer-to-peer exchanges – challenges the way markets function and how the FCA regulates them. Some of the competition issues these technology-led developments raise include questions around early mover dominance and of access, particularly for permissioned networks.

The FCA needs to understand the technology, its benefits and the risks it presents to ensure that any intervention strikes the right balance between not inhibiting the benefits, nor overlooking the risks.

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