Speech by Charles Randell, Chair of the FCA and PSR, to the Building Societies Association
Speaker: Charles Randell, Chair
Event: Building Societies Association
Delivered: 6 May 2021
Note: this is the speech as drafted and may differ from the delivered version
- Focussing on the best consumer outcomes is the right thing to do – but it’s not yet fully embedded in everything that we and financial services firms do.
- By defining the right outcomes, measuring them even more and acting on the results even faster with an enhanced data capacity, we will be able to target our interventions more effectively.
- Being transparent about outcomes drives us to act and increases our accountability.
'Groundhog Day' is my favourite movie. I could happily watch it over and over again - in fact, I could watch it every day. Its message is uplifting: by changing your everyday actions to achieve your goals, sometimes in small ways, you can produce better outcomes - not only in your own life, but in the lives of everyone around you.
Of course, if you want different outcomes but don’t change what you are doing, your actions become the very definition of insanity: doing the same thing over and over again and expecting different results.
We’re determined to transform the FCA to produce better outcomes for the post-coronavirus world. A world with an increased number of vulnerable consumers. A world dominated by the opportunities and risks of digital business models. A world with climate and biodiversity emergencies. And a world with new frontiers for UK financial services.
This is a long and difficult task. Much of what we want to do has been tried before but hasn’t produced the outcomes needed. So as we go about this transformation, it’s worth taking time for a thorough sanity check: can we say that this time, it really will be different?
A history lesson
The history of financial conduct goes back through millennia of manias, panics and crashes, so there are lessons a-plenty. We often hear that 'this time is different' although we know that it rarely is.
As we see consumer interest in so-called crypto-assets growing, there is a now even a website marketing non-fungible tokens for tulips - showing that history at least rhymes, even if it doesn’t exactly repeat, and that irony is truly alive and well.
The ebb and flow of different models of regulation, including principles-based regulation, risk-based regulation and outcomes-focussed regulation in the UK has been very well covered by Professor Julia Black in a number of books and articles. Reading the Chapter on 'Regulatory Styles and Strategies' which she contributed to the The Oxford Handbook of Financial Regulation pours a large and icy bucket of water on any ideas you might have that success in financial regulation is easy.
You may be pleased to know that today I don’t plan to go back further than the founding of the Financial Services Authority.
The FSA vision
In the year 2000, the FSA issued a document entitled 'A New Regulator for the New Millennium' which set out its vision for the future of regulation. Reading it may make the current generation of FCA leaders think they have woken up in Punxsutawney.
The FCA’s remit is now narrower in some ways than the FSA’s was, but wider in others. It’s still a huge remit and it’s still growing. And as we seek to discharge this remit, we still fall some way short of achieving the vision set out by the FSA over two decades ago - of being driven by outcomes in everything we do.
This New Regulator for the New Millennium was supposed to:
'assess the outcome of an action rather than the input. Although outcome measures are more difficult to develop, they are more informative and will help users understand the impact of the FSA’s actions. We expect that most performance measures will in due course have some form of target attached.'
This was part of an approach to set success criteria for individual projects and evaluate performance, in order to learn lessons for the future.
An example - treating customers fairly
The requirement to treat customers fairly provides a good case study of how hard outcomes-focussed conduct regulation is.
The Principles for Business – of which treating customers fairly (or TCF) is one – celebrate their 20th anniversary later this year. Although called 'Principles', these are rules, but rules framed in more general terms than many of the other rules in the Handbook.
The TCF Principle requires that 'a firm must pay due regard to the interests of its customers and treat them fairly.'
Five years after TCF came into force in 2001, the FSA assessed progress in implementing the Principle. It described the picture as 'mixed'. It also set out how the Principle should incorporate six consumer outcomes.
They are quite general: such as 'where consumers receive advice, the advice is suitable and takes account of their circumstances'.
The FSA explained how it would assess whether the desired outcomes were being achieved. In relation to suitable advice, it summarised findings of supervisory work which suggested that an alarmingly high proportion of advice firms did not have adequate processes to assess their customers’ needs or to provide advisers with adequate training.
In other words, it fell back to measuring and assessing inputs rather than actual outcomes for customers.
Another 15 years later we are still trying to measure suitability of advice, and still finding that, despite the Retail Distribution Review and the increased professionalism that required of the industry, some advisers are still falling short of our expectations, particularly on pension transfers, with the risk all too often falling back on the Financial Services Compensation Scheme.
Principles and outcomes
Shortly afterwards, in 2007, the FSA issued a document called Principles-Based Regulation: Focusing on the Outcomes that Matter.
It said that it would measure its own performance against clearly articulated regulatory outcomes, using a wide range of metrics.
It said that it had developed a new Outcome Performance Report, with nearly 100 of these metrics. It also said that firms would have increased flexibility in how they delivered the outcomes which the FSA required.
Around the same time, the National Audit Office assessed the performance of the FSA. It said that the FSA had created 'strong and effective structures'. However, by then, despite the FSA’s confidence in its progress and the NAO’s endorsement of its approach, the key elements of the global financial crisis were already in place, including some critical blind spots in financial regulation.
In less than 6 months, Northern Rock would seek emergency liquidity support and by the autumn of the following year the entire banking system would be staring into the abyss.
Outcomes and the FCA
So given this bracing history lesson, it’s perhaps not surprising that the FCA has tended to use more cautious language about outcomes than the FSA. Nevertheless, the word 'outcomes' has continued to feature heavily in the FCA’s publications and speeches after the transition to the new regulator, including in our Mission and Approach documents.
In the last few years, I myself have been talking about outcomes more and more.
Is persisting with an outcomes-focussed approach a case of insanity – doing the same thing over and over again, and expecting different results?
I don’t think so. We need to keep going. We need to focus even more on defining the right outcomes, we need to measure them even more and we need to act on the results even faster. That way we will be able to prioritise where we focus our resources even more effectively against the sources of harm that need the greatest attention.
A measure of success
There are already some really positive examples of how focussing on outcomes and measuring them has enabled the FCA to deliver its objectives of consumer protection, competition in the interests of consumers and market integrity.
For example, we want clean equity markets, where people don’t trade on inside information about corporate takeovers.
To support this outcome, every year we publish a market cleanliness statistic which shows how often there were abnormal share price movements before a takeover was announced. While there’s some volatility from year to year, this shows a generally improving trend over the last decade.
We also want investors to get a good deal from asset managers. When we studied the asset management market, we found that many active fund management firms were making persistently high profits, despite failing to add value for their investors (when compared with benchmarks which can be tracked by cheap index funds).
So we implemented a range of remedies to increase competition and said that firms need to demonstrate and be accountable to their customers for whether their funds really deliver value to their customers as an outcome.
The data we published last autumn show that active fund prices have come down – by nearly 30 basis points per annum between 2015 and 2019.
For a person retiring at 65 with £50,000 of investments, that apparently small reduction could give them an extra £2,000 by their 80th birthday.
If we could only get the reduction to 50 basis points, we could be talking about an extra £8,000. Those improvements make a big difference to someone’s life in retirement.
A call to action
Being transparent about the outcomes we seek and publishing metrics so that people can judge whether we are achieving them also provides better accountability and ensures that both we and the firms we regulate are called to action when things are not going right.
For example, we want consumers to have access to high-quality advice and guidance at the right time in their lives, to give them the confidence to make better investment decisions.
At the end of last year, we published an evaluation of the impact of the Retail Distribution Review and the Financial Advice Market Review. It showed that although there have been improvements in some areas, we have more to do – a lot more - in order to achieve the outcome we want to achieve.
This evaluation is a call for us to do more and enables stakeholders to hold us to account to deliver that.
We also want a healthy consumer credit market, where people get credit they can afford to repay.
High-cost credit is a part of this market where we already had to intervene with quite intrusive remedies in order to produce better outcomes. For example, in one area, Rent to Own, we set a price cap – perhaps the simplest outcome we can impose in certain cases.
When we evaluated the impact of our intervention, we found that the cap had led to an average fall in prices of 19% for the two largest firms that were in the market, bringing Rent to Own prices much closer to the high-street average.
However, there are still significant issues in consumer credit. Last August we published the findings of our diagnostic work into relending by firms in various other parts of the high-cost credit market. It found evidence that too many consumers were getting a poor outcome, trapped in a cycle of increasing debt as they borrowed the next loan to pay off the last.
When we are clear in this way about the outcomes that are happening and clear that they are not good enough, this acts as a call to action for firms and for us.
So I believe that outcomes-focussed regulation has already had a measure of success at the FCA. In some really important markets we are making a difference, to the benefit of millions of consumers. But a focus on defining and measuring outcomes and acting on the results is not yet sufficiently embedded in everything we do.
The barriers to overcome
Sometimes, progress is overtaken by events. This happened with the FSA, whose ambitious vision to be an outcome-focussed regulator driven by transparent metrics hit the buffers of the global financial crisis.
This has also happened at the FCA in the last 15 months to a lesser extent, as we have had to prioritise our short-term emergency response to the coronavirus over some of our longer-term policy work.
Sometimes, defining the outcome and linking it to a success measure is simply very difficult. The unsecured credit market is such an area: we say we want people to have access to sustainable credit, but should we be measuring the impact of our actions not only on those who do get credit from an authorised firm but also on those who don’t?
What if people can’t put food on the table or turn to illegal lenders? The outcomes we want are often affected more by broader social policy than by actions that we or the firms we authorise can take.
Sometimes, we find that we simply don’t have - and can’t have - all the data. An example of this is the problem of unregulated high-risk investments, where we have been asked what detailed evidence we have for the harm caused by loopholes in the Financial Promotions Order and weak regulation of online platforms.
By definition, providing extensive quantitative data on products and sales processes we don’t regulate is hard if not impossible. But where the risk of serious harm to vulnerable consumers is very clear, the case for change shouldn’t need to be supported by the same type of evidence.
Overcoming these barriers
So we have to recognise just how hard we will have to work to overcome the barriers to further progress towards outcomes. For this audience, I will concentrate on consumer outcomes but the same goes for wholesale firms.
First, we will need to embed a focus on consumer outcomes in our governance, in our Board and Executive processes, in the design of our organisation and in the objectives of our leaders. I’m very lucky to chair a Board which is already asking the questions which good non-executives should ask: 'What will success look like?' 'How will you measure it?' 'How will we be assured that it’s working?'
Answers to these questions need to be embedded in the information coming to our Executive Committee and the Board. We will use our Board evaluation this year to ensure that oversight of the focus on outcomes is sufficiently clearly defined in the functioning of the Board and its Committees.
At the Executive level, the restructuring of our senior leadership which Nikhil Rathi has initiated aims to bring a much sharper executive focus on outcome definition and measurement, on data, and their use in our decision-making.
Through improved governance, we can help to ensure that the outcomes we work to deliver are specific, measurable, achievable, realistic and timely.
Secondly, we will continue our public commitment to transparency of outcomes. We have been transparent about our framework for ex post impact evaluation and we commit to continuing to review the impact of major interventions using this framework.
These evaluations will help to produce the calls to action which are necessary to maintain the momentum of change. They will be part of a broader philosophy of measuring and reporting on outcomes, and learning what interventions work well.
Transparency can also be a useful regulatory tool in changing firm behaviour. For example, the Payment Systems Regulator is currently calling for views on publishing the performance of different firms in reimbursing customers who fall victim to push payment fraud.
This transparency could be beneficial, but we need to make sure that the picture it gives isn’t misleading: for example, firms which are bad at warning customers not to fall victim to scams may end up reimbursing a larger percentage of those who do end up transferring money than firms which are good at warning customers.
Thirdly, we need to make sure that we are collecting and using the right data so that we can act quickly to achieve the outcomes we want. Some of the tools we use in market interventions – the market study, followed by remedies, followed by ex post impact evaluation – can be very powerful but also take time as they almost always need to collect bespoke data afresh.
We should not have to turn to market studies in order to collect data on outcomes in some of our core markets if we could be collecting and acting on those data already.
Therefore, one of the key strands of our transformation programme is a data strategy which identifies data gaps in our everyday supervision of firms and markets and remedies those gaps, so that we can turn data about outcomes into prompt, agile and more preventative action.
We have already made a significant investment to modernise our systems so that we have better capacity and tools to collect, store and analyse data which will transform our ability to act. This investment in data and analytics will continue for the next several years, and it’s a key part of our pivot to outcome-focussed regulation.
Fourthly, we need to be bold about stating and measuring the outcomes we are seeking, even when we can’t fully control these outcomes ourselves. Much of what happens in financial markets is affected by forces beyond our direct control: by the economic cycle, by changes in consumer behaviour, and by broader social policy.
High risk investments and speculation are examples of this. Many of the products lie beyond our legal powers. Some may be fraudulent and we are simply not set up to be the lead enforcement authority for fraud, which is now the most commonly experienced crime in the United Kingdom.
The legislative framework and the balance between risk to consumers and consumer responsibility is often decided by Parliament, not by us.
However, despite these difficulties in controlling outcomes, we should as a minimum define what we can expect to achieve with the powers we have and track progress towards achieving those outcomes. At the same time, we should not hesitate to call out where we see that action by others is needed.
That leads to a fifth and critical point: the role of the firms we authorise in this outcomes-focussed approach.
Too often regulation is seen as a compliance or box-ticking exercise. If we regulate with detailed inputs we can make it worse, as firms focus on the regulatory requirements rather than the outcomes.
As we develop our approach to regulation in the post-pandemic world, we need to reset our expectations of how firms define the outcomes their customers can expect from their products and services and how they measure and demonstrate whether those products or services are producing those outcomes. We’ll be consulting on a New Consumer Duty that could embed this approach shortly.
And finally, achieving outcomes requires us and the firms we regulate to start with outcomes when we plan what we do - what the military call backward or reverse planning - and that we think more about the whole system which contributes to achieving those outcomes.
As Phil Connors discovers in 'Groundhog Day', changing outcomes for the better is not something you can achieve just by changing your actions.
It has to be part of a deeper change, which in his case involved changing the person he was.
In our case, it has to be part of a transformation of culture and capability. That’s the way to make sure that a day dawns when it really is different.
As I said last month, I’m cautiously optimistic that the changes underway at the FCA will deliver what we want them to, but the road to hell is paved with good intentions and we need to continue to learn from history as we go about our ambitious transformation programme.
We’ll be announcing more detail about our transformation programme in the summer, including more detail about the role of outcomes in transforming the FCA.