Time for change?

Earlier this year, a House of Lords committee delivered a damning verdict on the FCA’s much debated ‘naming and shaming’ plans.

Consultation on the regulator’s proposed policy to publish the names of companies under investigation was called an ‘abject failure’ by the House of Lords Financial Services Regulation Committee, which advised that the plan be dropped until ‘poor engagement’ over the issue was addressed.

The committee noted that the average duration of FCA investigations was around three to four years, with no further action taken in 56 per cent of cases, observing that if the FCA pressed ahead with its proposals half of the firms it investigates – and the people involved – could have their reputations unnecessarily and unfairly damaged. This, it said, was not acceptable.

The HoL report followed last November’s FCA announcement of plans to explore new areas of compliance. FCA Chief Operating Officer Emily Shepperd put the industry on notice that together with the PRA, the regulator wanted to move into ‘non-financial compliance’, to include DEI goals such as ‘healthy organisational cultures’, by bearing down on ‘toxic behaviour’ and meeting diversity, equity and inclusion targets.

Many are relieved that in the past few weeks, and in response to considerable industry pushback, the FCA has backtracked on both these initiatives. It has cancelled its ‘naming and shaming’ plans and shelved its DEI moves, citing in both cases a lack of consensus.

Despite this apparent course correction, however, some say such initiatives highlight a broader issue: that of bureaucratic overreach.

Since its inception, the FCA’s direction of travel seems to have involved a steady widening of its remit to cover ever more areas of compliance. If it is willing to consider such frameworks based on unsatisfactory consultation, who is to say that this may not occur again in the future? (And some note ominously that the FCA intends to publish a policy statement on ‘non-financial misconduct’ later this year.)

Their worry is shared by Kemi Baddenoch, Leader of the Tory Party, who, while in government, said that the benefits of probing non-financial compliance claimed by the FCA were ‘speculative’ and such objectives ‘were a distraction holding back regulated firms from priorities such as delivering economic growth and improving services to consumers’. She went on to warn that such plans could hamper any government’s efforts to prioritise growth in the sector, one of the few in the UK that has international leadership.

It can’t have escaped her notice that oversight comes at an increasingly heavy cost to the industry in the form of fees and fines. The FCA’s annual funding requirement jumped by almost £100m between 2021/22 and 2022/23, from £587.5m to £684.2m.

And she, along with everyone else, will be aware that the chief competitor of UK financial services, the US, is embarking on a new era of lighter-touch regulation. A recent Trump Executive Order has even banned the mandating of DEI by federal institutions.

Would not the regulator’s resources be better focused on creating frameworks that foster growth in the financial services sector, rather than those set to load additional compliance costs on firms?

What about reducing application decision times that can currently be up to one year for more complex cases? And perhaps provide more assistance with the complicated application process. This might be helpful considering the operating license rejection rate seems to be rising – to one in four applications in 2022/23 from one in five in 2021/22.

Given that boosting economic growth is Labour’s claimed primary goal, we can only hope City Minister Emma Reynolds encourages the regulator to focus more on allowing the industry freedom to realise its full potential, while at the same time ensuring that consumer interests are safeguarded.

David Wylie is Commercial Director of LendingMetrics