The FCA and the Future of Retail Banking

Published: 26/11/2013     Last Modified: 27/11/2013 / Author: Clive Adamson
Speech by Clive Adamson, FCA Director of Supervision, at the Marketforce and the IEA’s 16th Annual Conference, London. This is the text of the speech as drafted, which may differ from the delivered version.

As a forward-looking regulator we are extremely engaged with the banking industry on advances in technology and how this can benefit firms and consumers.

Last year, I spoke about forthcoming regulatory changes in the UK, and about the importance of professionalism in financial services. Today, from a perspective of being almost eight months on since the creation of the FCA, I will talk about how far we have come but also about our vision of the retail banking market, a market that is evolving at a rapid pace.

Last week saw the 30th anniversary of the start of online banking in the UK, and this conference looks at a wide range of topics relating to the technological changes taking place in the market today and the impact that these are having on banks’ business models. As a forward-looking regulator we are extremely engaged with the banking industry on advances in technology and how this can benefit firms and consumers, but ultimately our focus must remain on ensuring that customers are treated fairly and markets are working well.

So, how are we going about achieving this? The creation of the FCA was the first step in this journey and I hope you have started to see how different financial services regulation will be going forward.  

The FSA has now formally split into the Prudential Regulation Authority and the Financial Conduct Authority, and while we are separate regulators with separate objectives, we do have areas of alignment in the way we are supervising and approaching the markets we regulate.

As a conduct regulator, we aim to be more judgement-based, forward-looking, and outcome-focused than we have previously been. What this means in practice is that we are continuing to develop and deepen our understanding of the sectors we regulate and what consumers, both wholesale and retail, are really experiencing. We are looking closely at how firms make their money, and using more data and intelligence to join the dots so we can head off risks before they crystallise to cause consumer harm or damage market integrity.

New supervisory model

Firms should think about distributing products in an age of new technology, but also how consumer tastes are changing.

In order to be a truly successful conduct regulator, we have developed a new and more focused supervisory model. For those of you who may be unfamiliar, the key operational elements of our supervisory model entail:

  • moving from a reactive approach to a pre-emptive and judgement-based approach
  • moving from dealing just with symptoms of problems to addressing underlying causes, and
  • moving from an approach that is focused only on ensuring compliance with rules to an approach that encourages firms to do the right thing in respect of their customers and the markets they operate in

This philosophical change is important because, in our experience, when things go significantly wrong in a firm within our remit, it is not because it hasn’t complied with a set of narrow regulatory rules, but because there is a fundamental flaw in the business model, in the culture or its business practices. So we need firms to ask themselves the question: ‘should we’ carry out a certain activity as well as ‘could we’ do it. To put it another way, ensuring your firm operates to the highest standards is a cultural question, not a control or process challenge.

In our view, this requires much more than a good control environment – what’s really needed is an approach that puts the interests of the customer at the heart of how the business is run. This is therefore a business model and cultural question, as much as it is a controls question.

To touch on the cultural point, it is clear to us that meeting our requirements is heavily dependent on a firm having a culture that sees the interest of the customer as paramount. This needs to be led from the top of the firm, and needs to be grounded in clear business practices or standards that can be easily understood and operate as a guide to all levels of management when judgements need to be made about what is acceptable and what is not.

Our approach to looking at culture is to draw conclusions on what we observe about a firm – in other words, joining the dots rather than assessing culture directly. This can be through a range of different indicators such as:

  • how a firm responds to, and deals with, regulatory issues
  • what customers are actually experiencing when they buy a product or service from front-line staff
  • how a firm designs products and the considerations around this
  • the manner in which decisions are made or escalated
  • the way in which claims or complaints are handled
  • the behaviour of that firm in certain markets, and
  • the remuneration structures

Ultimately, however, what we are interested in is whether a firms’ focus on the interest of its customers does in fact result in good outcomes for consumers – in other words, we are an outcomes-focused regulator.

Turning specifically now to retail banking, I would like to say a few words about our vision for this market, some of the challenges we see in realising this vision and some of the work we are currently involved in.

So, what is our vision for retail banking? It is in fact quite simple. We want a market where consumers have access to and are able to buy products and services from firms they trust, that are readily available, good value, and perform as expected, and, when things go wrong, they are readily put right. We want a competitive market where firms are able to make a sustainable return, where innovation takes place for the benefit of the consumer and where the IT infrastructure is sufficiently robust to provide ongoing customer access.

How far are we away from this today? I think, in reality, some way away. We know that trust in banks by consumers is low, for a whole variety of reasons, we know that some products have been sold that are not good value and have not performed as expected, we know that complaints have been at a high level, and we know that many banks IT infrastructure is not sufficiently robust.

So, what are the challenges ahead for retail banking in the UK? I will focus on three things.

Firstly, re-building trust through everyday providing products and services that meet consumer needs and are good value. It may be stating the obvious, but it is essential that banks move away from a sales-driven product approach, to a consumer-driven needs approach. This means delivering products and services that are understandable, meet needs and are good value over their life time. We are pleased that many banks have heeded our call to reform sales incentives for staff and that is to be welcomed. We believe though that some progress needs to be made in product design and product governance to truly achieve good value products.

Secondly, there is the challenge of emerging and potentially disruptive technologies. We are seeing emerging technology across the Cloud, next generation data processing, big data, social media and mobile. These technologies, properly harnessed, could give real benefit to consumers but represent challenges to banks, not least because new entrants could emerge from non-traditional financial services firms.

Thirdly, and linked with the first two challenges, is how firms should think about distributing products in an age of new technology, but also how consumer tastes are changing. It is striking that, in the UK, half of all adults and more than three quarters of 25 to 34-year-olds, now manage their money online. This market has increased significantly over the recent past.

Firms need to, and clearly are, thinking through the implications of all of these challenges for their business models.

What is the role of the regulator in this evolving landscape?

We will clearly continue to highlight bad behaviour that we see in firms and ensure that appropriate redress is paid when things have gone wrong – sadly there has been a lot of this in recent years, and in recent days, such as endowment mis-selling, PPI, IRS for SMEs etc. This, in part, is the fourth challenge for banks – how to deal with these legacy issues while building a more robust model.

However, it would be incorrect to assume that we are only focused on things that have gone wrong. We are equally interested in encouraging a competitive market, as it is one of our statutory objectives, and in looking at how firms are evolving, to ensure they are doing so in a way that focuses on customers’ interests.

With regards to competition, we have announced that we will undertake a market study of the cash savings market. The purpose of the study is to assess whether the market is working in the best interests of consumers, and whether there are aspects of how it works that could be improved. We will look at our results and, over the year ahead, at whether there are competitive factors that are driving poor outcomes for consumers.

On emerging risks, we are looking at the risks of mobile banking and what that means for consumers.

Some of you may have seen that earlier this year we published a report exploring some early findings of our review into mobile banking services, setting out the possible risks to consumers and areas that firms should consider when developing their services.


The full review will be published in 2014, and will be looking to providers of mobile banking services to ensure their products and services are secure, reliable and straightforward to use. Our interim report was published to help firms achieve this. The key areas of potential risk that we think should be at the forefront of firm’s considerations include:

  • Fraud – the potential risk that fraudulent access to mobile banking accounts could result in customers being unable to access their money or make payments, resulting in financial loss, inconvenience and stress.
  • Security – the potential risk of consumers receiving malware or a virus when downloading a mobile banking application.
  • Technology risk/ interruption to service – the potential risk of a systems failure or an IT problem preventing consumers from accessing their accounts.
  • Consumer awareness and understanding – the potential risk that while services are new and consumers are less familiar with using them, it is more likely that payments will be made in error, such as paying the wrong person or paying an incorrect amount.
  • Anti-money laundering systems and controls – the potential risk that mobile banking is used for the facilitation of money laundering activities, particularly where a mobile payment service is not linked to the customer’s current account and there aren’t additional checks to verify the identity of the payee and recipient.

In addition to the guidance we issued to firms we also encourage consumers to consider the following common sense areas when using a mobile banking service:

  • Whether they are taking steps to reduce the risk of fraud, such as making sure that should they lose their phone, others can’t easily gain access to their account.
  • Being careful not to enter incorrect account details when making payments. This is made more likely as a result of smaller keypads and because consumers may be making payments at unusual times.
  • That their phone is sufficiently protected against the possibility of downloading malware (malicious software) or viruses when loading a mobile banking product.

Turning to the resilience of IT infrastructure - we are pursuing two threads here. Since the extended outage of major banks’ payment systems last year, we have been working closely with our colleagues in the PRA looking at the resilience of banks’ core payment systems. I am pleased about the focus the banks have applied to this risk, but there is always more to do. The second thread is the risk of cyber-attacks. We know that this is on the increase and we know that financial services firms are frequently targeted. This subject is firmly on the agenda of the regulators and we are working closely with firms, and with other authorities, to improve resilience in this area. This includes conducting exercises such as the ‘Waking Shark 2’ exercise that took place this month.

To summarise, I hope you have found this talk helpful. I have set out our vision of the retail banking market – in short, a market that works for the benefit of consumers. We all recognise the challenges involved in getting there and we, in the FCA, are ready and waiting to play our part in working with the industry to achieve a better market.

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