Global regulation in the post-crisis era

Speech by John Griffith-Jones, Chairman, FCA, delivered at the TheCityUK Annual Conference on 30 June 2016.

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Speaker: John Griffith-Jones, Chairman, FCA
Location: Nomura International, London
Delivered on: 30 June 2016

This is the text of the speech as drafted, which may differ from the delivered version.


Thank you for asking me to speak this morning. I was asked many months ago to speak on global regulation in the post-crisis era. It did not occur to me to ask which one. No matter, I have been an enthusiastic supporter of TheCityUK ever since it was set up. It was born of a need for the financial sector in the UK to show some collective leadership at a difficult time following the 2007/8 crisis. It will need to show that leadership again as we come to grips with the consequences of last week's vote. The importance of this is obvious. London is a successful financial hub for not only the UK, but also Europe and throughout the world. These are TheCityUK's own statistics and therefore well known to you.

The UK sector:

  • produces 12% of the total economic output
  • contributes £66bn in taxes
  • generates a trade surplus of £72bn
  • has global wholesale market leading positions, particularly in FX, derivatives, and catastrophe insurance through Lloyd's

In addition, foreign companies have invested around £100bn into UK financial services since 2007.

And from a people perspective, the industry employs over 2.2 million people, many of whom work outside of London, meaning the benefits are spread far and wide.

There is, of course, just now inevitable uncertainty about the future shape of our relationship with the European Union (EU). It is important that we do not lose our focus on ensuring everything continues to work day-to-day.  But it is also right that careful consideration is given to the future and here TheCityUK has a key role to play.

It is not for the Financial Conduct Authority (FCA) to tell TheCityUK, or its membership, how to fulfil its role, but nor is it our job to hide rather than to help.  Our roles are different, and we will not always align, but at this important moment in the UK’s history we should seek to work together wherever we can, bearing in mind our strategic objective to ensure that markets work well. In that spirit, I can perhaps use this opportunity to reflect on some things that we, and other global regulators, have got right in the past that are prerequisites for the UK financial services sector continuing to prosper in the new landscape.

Please do not take my remarks to reflect in any way settled views, never mind FCA consensus ones, they are more in the nature of rhetorical questions, needing thoughtful and thought-through answers over time rather than knee jerk opinions.

And I shall, as requested, focus on global rather than domestic aspects, and therefore on wholesale rather than retail, but note in passing that the two are not unconnected.

Let me pose 3 questions:

  • How does the industry set about thinking through in short order what its strategy is in the post crisis, post Brexit era?
  • What can we regulators learn from the past about successful regulatory policy, and its inter connectedness with other global authorities and initiatives?
  • How important will ‘conduct’ be in the future?

Starting with strategy, I have no doubt that each of your members is already hard at work on their own strategic plan. But over and above that, I suggest there is a need for an industry led 'collective' strategy view to emerge. In the run up to the vote there was much written about various other models: Norway, Switzerland, Canada, World Trade Organisation, and several more besides. As is well known, these include varying degrees of access to the single market combined with varying obligations.

I know that you are already beginning to work through the pros and cons of the alternatives and so to reach an informed position of what scenarios would enable UK markets to work well and continue to serve the real economy to the best of their ability.

I recall the value of the two strategic reports carried out after the crash, Wyn Bischoff for the then Chancellor Alistair Darling, and Bob Wigley for the then London mayor, Boris Johnson. Their value was not so much in revealing some new points of which we had not thought, or indeed merely setting out proposals for legislative or regulatory reform, but in mapping out a coherent basis on which the sector, with the support of the Government, could move forward in the then new and evolving circumstances. Collectively, these reports helped to steady the ship, plot the outline of a future course, giving birth incidentally to TheCityUK on the way.

There must be value in your carrying out a similar exercise again now, over the summer, to identify at least the broad brush strokes, if not all the technical details, of alternative plans. The position is uncertain and it will not be settled for some time. But it is important for firms to resist the temptation to cite chicken and egg - 'we cannot design a strategy without knowing the rules'. It is important for the UK that, at the appropriate moment, you are able to inform the Government where your major opportunities and risks lie, along with other industries, as it forms its plans for the negotiation of our exit. The FCA will, of course, be working closely with the other authorities in this process.

In the meanwhile, we at the FCA will continue to do our day job. For now nothing changes, our objectives remain today what they were last Thursday. I should reiterate what we said on Friday, namely that firms must continue to abide by their obligations under UK law, including those derived from EU legislation. Consumers’ rights and protections will remain unchanged unless and until the Government changes the applicable legislation. This is important; we will not be thanked for taking our eye off the ball, particularly with our responsibilities for day to day regulation of the markets and their orderly operation.

Turning to my second question, neither I nor anyone else can say today exactly what, if anything will change. You can however rest assured that it will be a top priority for my Board and for Andrew Bailey as he starts work as our CEO tomorrow to keep ourselves fully aligned with the ultimately chosen direction of travel. Experience of what has worked well in the past should not be overlooked. In particular:

a). the prudential regulatory changes made to end ‘too big to fail’ have been driven at an international level, and have had to be in order to be effective. The UK has been highly influential, but not dominant, through the quantum and quality of its input, helped, of course, by Mark Carney’s wise chairmanship of the Financial Stability Board. I suggest that many of the really major changes in both markets and conduct regulation in the future will be driven in a similar manner. We increasingly see this happening. Concrete examples include anti-money laundering, benchmark regulation, response to cyber-crime, technological developments in trading platforms, enforcement coordination and the emphasis on increased personal responsibility. And so, although the precise form and detail of laws and rules will vary across the globe, it is clear that the direction of travel, as is appropriate for global business – is for increasing international convergence and to seek to act, where possible in concert with the rest of the world- including the EU. At the FCA, we will continue to work with the European authorities, and our membership of global bodies such as the FSB and IOSCO, and bilateral relationships with fellow regulators in many countries will continue to be of great importance.

b). Many EU directives have had our strong UK support, including for example the UCITs regime. Equally there is no doubt that we have in the past ‘borrowed’ some good ideas from the US. We have learnt that there is no monopoly to wisdom in regulation, something that is unlikely to change in the future. In turn the UK has itself made some considerable contributions that have been picked up by others, through the European Securities and Markets Authority (ESMA) and other bodies.

c). In pursuit of value for money in what we do, we recognise the need for ‘better regulation’ not just ‘bulkier regulation‘.The sheer volume of the reform agenda in response to the crisis, has to be the exception rather than the norm, and it is right to take a step back and consider how it all fits together .

d). And the UK has shown itself capable of acting alone where appropriate – aiming to drive up standards in the UK and encouraging the global community to do the same.

The Senior Managers Regime and output from the Fair and Effective Markets Review come to mind as recent relevant examples of such work.

It is possible, under certain scenarios, that we will need to decide what to do with our existing stock of rules, and we may need to review the current EU pipeline. This is a task not to be underestimated, and we have already started to give some careful thought as to how to set about it.

e). We have learnt, at home with Payment Protection Insurance (PPI) and globally with sub-prime, the importance of concentrating on preventing a future predicament, not just locking the stable door of the last one. Some of the actions taken to reduce the chances of bad things happening again also have consequences of their own. These may be worthwhile but we should not be blind to them and to the new risk they may present. For example, requiring more derivatives to be centrally cleared has deliberately reduced risks in one area but concentrated them in another, which is subject to much closer oversight. There have been concerns that the tightening of capital requirements on banks will lead to an expansion of shadow banking, much of which is regulated by the FCA rather than the Prudential Regulation Authority (PRA), and create the possibility of regulatory arbitrage between the two. The collective success of international regulators going forward should, like our own domestically, be measured in terms of preventing  things from going wrong, not just in the speed of clearing them up when they have.

The FCA is no exception, and if this may make our rulings contentious at times, so be it, it is the job we are expected to do.

Onto my third point – how important will conduct be in the future? The short answer is: very – recent events have not changed this at all.

As you will know the FCA does not have a competitiveness objective. Many in the industry argued for its inclusion in legislation ahead of our creation. I have always been persuaded that the FCA’s greatest contribution to the competitiveness of the market is by ensuring that it regulates in a way which gives both users and participants confidence they are there to serve their interests. That is reflected in the statute in our strategic objective of ensuring that markets work well, and our operational objective of enhancing their integrity.

I continue to believe that the reputation of the London marketplace for fairness, and of its participants for straight dealing, are sine qua nons for its continued success, especially operating outside the EU. As with Wimbledon, the players will only come here because they want to, not because they have to. There is significant competition for London out there. But the UK has some important advantages, not least the depth of liquidity, provided by the critical mass of participants, and the pool of expertise of its people. They are valuable, but they are not immutable.

Much has been written and argued over about the loss of trust that came about as a result of the behaviour surrounding the financial crisis and then the LIBOR and FOREX scandals. I would hope that the lesson has been learnt that conduct of this nature is both unacceptable and incompatible with global excellence. We will continue to regulate on that basis.

From conversations with the current leaders of the industry, I believe they recognise the importance of regaining that trust. But there has perhaps been a temptation to believe that the conduct in the wholesale markets can somehow be kept separate from the conduct in the retail markets. Whilst the detailed skill sets may be different, reputation, it transpires, flows seamlessly between the two. There are still many people not involved in finance, who do not believe that much, or anything has changed, or who have not seen enough to give the City the benefit of the doubt.

In the uncertain times we now face nothing could be more important than changing that perception once and for all. The FCA will do its job, regulating the market to promote integrity and competition and cracking down on poor conduct. But the bigger challenge rests with the firms and their leaders, instilling a culture that supports an ambition to remain the premier capital market in the world, and to conduct themselves accordingly. That must surely involve putting the end customers first.

I am not without hope. I am a great believer in the expression, ‘when the going gets tough the tough get going’. We have had a bit of practice at that at the FCA. Tough, or not, as it may turn out to be, now is the time and now is the need for some exceptional teamwork between Government, the industry and the regulators to create a wholesale marketplace for the future that continues to meet the needs of both domestic and global users.