This week in regulation


The speed read

  • [speech] Andrew Bailey discusses autonomy and co-operation in financial markets
  • [speech] How accountants can make financial services safer
  • The year in review: The FCA’s Annual Public Meeting 2018

Andrew Bailey discusses autonomy and co-operation in financial markets

FCA Chief Executive Andrew Bailey recently delivered the opening speech at the Eurofi Financial Forum in Vienna, where he discussed the importance of global co-ordination. We bring you the highlights of his speech.

Financial markets which foster competition and innovation, supported by robust regulation, provide better outcomes for users, particularly within wholesale markets. Having open markets is key to this and, in the wake of the financial crisis, it would have been easy to turn our backs on this principle. Mr Bailey believes it is essential to have open markets underpinned by a common commitment to international standards (where they exist) in order to achieve equivalent outcomes and manage cross-border risks. Where international standards don’t exist, the freedom to set domestic standards can certainly co-exist with the need for international co-operation.

Mr Bailey provided two examples of where this is currently happening within global financial services markets:

  • The ongoing benchmark interest rate reform doesn’t limit domestic choices on an alternative and risk-free rate to use for each currency, but there is still a need for cross-border co-ordination of the outcomes these choices result in;
  • There are no restrictions on how domestic regulators operate regulatory sandboxes, or what can be accepted into them. However, the FCA’s Global Financial Innovation Network and the International Organisation of Securities Commission’s (IOSCO) FinTech Network have been created to enable cross-border activity where appropriate.

Following Brexit, the UK will need to work closely with the EU, USA and others whilst also maintaining its autonomy. Feedback from other regulators indicates there is common interest in maintaining effective collaboration. However, what this will look like post-Brexit is still up for debate. One view is that access to the Single Market should be open to third countries such as the UK on the basis of open markets, equivalent standards and the right of establishment. The opposite view is that any financial activity involving EU parties should be carried out within the EU as far as possible, however this goes against the principles of open markets and free trade.

Ultimately, we need consistent regulatory outcomes to ensure the global regulatory framework remains robust. As the UK and EU have identical frameworks, there is a strong case for equivalency on ‘day one’ post-Brexit and plans need to be put in place to achieve this in practice.


How accountants can make financial services safer

Ten years on from the height of the financial crisis and the collapse of Lehman Brothers, Charles Randell, Chair of the FCA and PSR, discusses the importance of effective financial statements and how the accounting profession can help strengthen the financial services industry.

The collapse of Lehman Brothers triggered the failure of numerous other firms, most of which had been reporting relatively robust financial positions up to their collapse, with financial statements signed off by their boards and audit firms. This raised the question of what financial statements are for and whether, 10 years on, we are in a better position to answer.

Mr Randell highlighted four reasons why this is relevant to the FCA’s mission:

  • The FCA is a prudential regulator. The capital requirements of over 18,000 solo-regulated firms are governed by the FCA, including the largest investment platforms and asset managers;
  • Accounting metrics drive the incentives, and therefore behaviour, of senior management and shareholders;
  • Poor accounting practices can lead to consumer harm; and
  • Good quality disclosure, including financial disclosure, is necessary for markets to work well. The FCA has specific obligations relating to the disclosure obligations of listed firms as part of its role as the UK Listing Authority.

A firm’s audited financial statements are the foundations of additional regulatory processes and auditors should be providing adequate challenge during the creation of these statements. Culture is one of the most important conduct drivers for firms, and auditors should have a clear view of the culture of the firms they partner with, as well as ensuring the changes put in place following the financial crisis are implemented within those firms.


The year in review: The FCA’s Annual Public Meeting 2018

The FCA’s 2018 Annual Public Meeting was held on 11th September and was an opportunity for the industry to hear from senior individuals at the regulator as they reflect on the activities of the past 12 months.

We bring you the highlights from both Charles Randell and Andrew Bailey.


Charles Randell

The FCA’s Chair began with a few personal observation from his first five months in office. He highlighted the FCA’s commitment to delivering public value through all of its activities, but also that the sector it regulates is changing year on year, even month to month. This has its challenges, but the regulator operates under a clear framework for prioritising its work and resource, as defined by its Mission.

That said, it is essential the FCA remains adaptable and reacts to developments outside of its control, particularly international affairs and the development of emerging technologies. As outlined in its Business Plan, the FCA has identified the need for an EU withdrawal budget of £30m to achieve operational readiness for the UK’s exit.

On the subject of technology, Mr Randell highlighted that the FCA is technology-neutral and approaches the regulation of individual technologies on their merits. Technology can be a double-edged sword, bringing new benefits but also exposing consumers and firms to new risks. The support provided through the FCA’s Project Innovate and Regulatory Sandbox is beginning to achieve its aim of reducing the time and cost of bringing innovative ideas to market and ensuring appropriate safeguards are built in.

As the financial services industry has become increasingly globalised, so has financial crime. As a result, it is more important than ever to maintain and strengthen the FCA’s partnerships with international regulators. Data sharing is an essential part of this, as is the regulator’s work in strengthening the sector’s resilience to crime through its systematic anti-money laundering programme.


Andrew Bailey

The FCA Chief Executive opened his speech by providing an overview of the breadth of work carried out over the past 12 months, before turning his attention to the regulator’s ongoing work.

The issue of Brexit cuts across all areas and, as previously outlined, requires a significant amount of resource and budget. During this work, the regulator will apply the following principles:

  • Ensuring cross-border market access;
  • Supporting consistent global standards;
  • Co-operating with other regulatory authorities;
  • Building on existing relationships to continue having a role in shaping international standards; and
  • Recruiting and maintaining a skilled workforce.

Operational risks – most notably resilience, technology, financial crime and the impact of data – are a new source of risk to the FCA’s objectives. As we increasingly rely on machines to undertake financial transactions, these risks become more pressing. The FCA believes it has an important role to play in these areas and has increased its resources to reflect this.

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