Speech by Andrew Bailey, Chief Executive at the FCA, delivered at our Financial Crime Conference.
Speaker: Andrew Bailey, Chief Executive
Event: FCA Financial Crime Conference, London
Delivered: 10 November 2016
Note: this is the speech as drafted and may differ from delivered version
It is sobering to remember that we are approaching the tenth anniversary of the start of the global financial crisis. Why is that of relevance to financial crime? Well, the last ten years have seen a number of crises, and in my view recent years have been associated with a crisis in financial conduct. Sadly, this has taken several forms – involving retail and wholesale consumer and users of financial markets. One, but only one, element of what we should describe as a misconduct crisis has involved financial crime in its various forms.
This begs the important question, how effective has the financial system been in providing effective prevention of financial crime?
Let’s unpick that question for a moment because this is not a simple world. To do so, let’s look backwards and then forwards. Over the last thirty years, there has been a progressive expansion of the scope of regulation to address the risks of financial crime. This has not just happened out of nowhere, it has not just come out of the proverbial ether. It reflects the development of strong norms in society about what is and is not acceptable in areas such as money laundering. Likewise, norms in an area like the use of financial sanctions have developed over a similar period of time.
Alongside these developments has been the progressive growth of global trade in goods and services and the movement of capital and funds across borders to support that trade and much broader economic development. Likewise, technological change – for instance in the area of payments – has fundamentally changed the landscape. All of these advances have been undoubtedly to the benefit of the world economy in an overall welfare sense. But they do have side-effects, and among those is the increased scope, both domestically and internationally, for financial crime to take place. These developments, along with the emergence of very sensible societal norms in terms of hostility to financial crime, have created a very challenging landscape for the work of preventing financial crime.
So much for how we got here, now let’s look forward for a moment. From time to time I get asked if I can assure someone that a problem will not, or better still will never, re-occur. For some risks it is possible to attach probabilities and set confidence levels or risk tolerance measures – albeit recognising always that we live in an uncertain world.
Financial crime is constantly evolving so we cannot promise to beat it entirely – but can promise to continue to focus on tackling the risks it poses – to consumers, firms and the integrity of the financial system.
If you’ll indulge me for a moment, I’d like to say a few words about our Mission consultation, which we published a few weeks ago. Our role is adapting to meet the changing face of financial services in the UK. Consumers’ needs are becoming more diverse and complex, yet they are increasingly required to take more personal responsibility for their financial decisions. Technology is creating new opportunities, both for the types of services firms can provide and how they provide them.
And the number of firms and individuals which now come within our regulatory remit continues to grow. All of these issues are important when considering our response to financial crime.
We have an overriding strategic objective set by Parliament to ensure that relevant markets function well. In addition we have three operational objectives with which to deliver our strategic objective; to protect consumers, protect the integrity of UK markets and enhance competition. We need to ensure we are a proportionate and effective regulator as financial services adapt to meet new needs in new ways. Our future Mission clarifies our thinking about the way we regulate and how we decide our priorities against a number of critical areas. I would say that we are very keen to hear your views on our approach.
We have written our future Mission as an account of what we do and how we think about the challenges we face. It is deliberately not exhaustive but we hope it will contribute to and foster debate on our role.
The challenges we face
In the context of meeting our objectives, fighting financial crime has been and continues to be a high priority for the FCA. Whatever the progress we do not intend to reduce our focus on financial crime – particularly given the evolving risks that exist and the level of public interest in ensuring the cleanliness of financial services. I want therefore to spend a few minutes identifying some of the challenges we face in this area, some of which I have already mentioned in the context of the Mission.
First, we should recognise that the effect of technological innovation in financial services has entries on both the positive and negative sides of the scorecard. Easier access to financial systems, markets and institutions benefits society without doubt, but also provides opportunities for criminals. But it can also provide more capability to identify and prevent financial crime risks. The issue then is whether we have or can have the systems in place to fight against such crime. Can we keep up?
Second, a reliance on rule-making by regulators, and therefore the prescription of what cannot be done, can be ill-suited in a world where criminals are able to move very rapidly supported by new technology. I often characterise financial regulation as the use of judgement framed in terms of a set of rules.
The challenge here is to establish rules and principles which can be applied via judgement in order to achieve sensible outcomes.
Third, there is what I call the ‘boots on the ground’ challenge. Firms, particularly those with a widespread global presence, have the difficult challenge of achieving consistent adherence to global policies. This is not easy, and is another aspect of the ‘too big to’ problem. But nor is it impossible to achieve, as we can observe when we supervise firms.
Approach to the future
Let me now move on to identify a couple of what I regard as very big points that should guide our approach to the future.
The first is all about rules and expectations. I mentioned earlier evolving societal norms. This is important, not least to encourage innovation. But, I think we do need to strike the right balance here between enabling change and having a predictable and clear framework of rules. It is vital that everyone knows the rules of the game, and then everyone sticks to them. They are the way to codify society’s expectations and then seek and ensure compliance. And, of course, as far as possible this needs to be internationally agreed and implemented. As a regulator in the financial crime area, I want to be able to set out very clear expectations and then hold firms to them.
The second key point concerns our use of technology. If ever there was an area that strikes me as ripe for applying technology to harness the power of Big Data alongside distributed ledger technologies to produce better outcomes, while rationalising the process and cutting costs, it is financial crime. This is an area that generates vast amounts of reporting. For as long as I can remember there have been comments about needles in haystacks, and the issue of how to extract all the information from the vast quantity of reporting. And, for not much less time, there has been talk of automation. But I suspect it is still more or less just that, talk. Yet the pace of innovation in, for instance, automated text analysis, surely puts us on the cusp of real progress. We can’t stay on the cusp for too long, and here as authorities we should play a role to enable change to happen, because doing so will help us advance our objectives.
To conclude, if we know one thing, it is that financial crime will mutate and morph and it would be unwise to make statements to the effect that we have it beaten. But, there is a lot we are doing well and will continue to develop to tackle financial crime.