Speech by Sarah Pritchard, Executive Director, Markets and Executive Director, International at the City and Financial Global: Future of UK Capital Markets Regulation event.
Speaker: Sarah Pritchard, Executive Director of Markets, and Executive Director of International
Event: City and Financial Global: Future of UK Capital Markets Regulation
Delivered: 25 September 2023
Note: This is a drafted speech and may differ from the delivered version
Highlights
- Proportionate regulation and a debate around risk appetite are key considerations as we move to make the UK even more competitive.
- Now is a pivotal time for resetting our financial services rules and it will set the scene for decades to come
- The FCA is just one partner of a bigger family that can help make the UK more competitive. We need industry engagement in our reviews on advice and guidance boundaries, tech sprints and sandboxes to make the most of futureproofing our new Smarter Regulatory Framework.
Rules help us thrive
What would happen if you unleashed a small group of humans on a deserted island without any preparation or plan for survival or escape?
According to William Golding’s Lord of the Flies, the inevitable outcome would be anarchy and violence.
That was a work of fiction of course.
But in 1965, life came close to imitating art[3] when 6 boys fled a Tongan boarding school aboard a stolen wooden vessel, hoping to sail it to Fiji – an island that was 500 miles away.
They had no experience of sailing, no navigation equipment and no food or supplies.
As a mother of boys, let me be the first to say I am not entirely surprised by this lack of preparedness.
After 8 days, the boys drifted to an abandoned island. Luckily it came complete with crops and a volcanic crater they could shelter in.
There, they survived for 15 months before being spotted by an Australian fisherman.
The boys formed a routine, singing songs every morning and night. They collected rainwater for drinking and made musical instruments out of remnants of their boat. They organised badminton games and managed to reset one of the boy’s legs when it broke.
They had a rule that whenever there was a row, one party would walk to the other end of the island to cool off.
The only lawlessness that had occurred was the original theft of the boat.
Far from Golding’s anarchic vision of humanity, the boys had gravitated towards structures and rules to make the most of their tropical island prison.
Playing by the rules
When it comes to rules in general, it is worth taking a step back to work out why we bother with them.
At the FCA, we don’t set out to be fun or freedom extinguishers.
Rather, we recognise that without rules, there is no freedom or fun or indeed sustainable markets.
That is because the survival of the markets upon which we rely is imperilled without clear rules of engagement.
I think of regulation as the building block for enabling markets to work well, which is handy as that is our overall statutory objective.
Markets are more likely to thrive if there is confidence in them. And that confidence is created and sustained if there is integrity and transparency. They thrive if there is resilience, and interoperability across borders.
Confidence is maintained if action is taken against fraudsters, scammers and market abusers.
They work well when there is competition within because it makes service providers strive to serve their customers better.
They work well when there is competitiveness globally.
And markets work better when there is confidence in the regulatory system – which means predictability of the regulatory system, accountability, agility and proportionality too.
We expect firms to have appropriate and proportionate controls to tackle risk. So it is right that we too have regulation that is proportionate.
That is why, in unveiling our consultation on Diversity and Inclusion[4], we have proposed that the annual reporting will largely not apply to firms with 250 or fewer employees.
Regulation is an enabler of competitive and growth-driven markets. But it needs to adapt, particularly as markets change, technology develops and the way in which services are provided transform.
That is why you hear us talk about becoming an outcomes-based regulator.
What does this mean?
It means defining what the desired outcomes are, measuring them more accurately and acting more quickly so we can meet those desired outcomes together.
We set out what is important to give regulatory certainty around the approach we will take and the approach we expect firms to take.
In doing so, firms and markets are enabled to innovate. That innovation can take place in the knowledge of the outcomes that are important to regulators – without waiting for detailed, prescriptive rules to follow. This is an approach which will help our markets thrive.
Encouraging investment – what we can do, and what we cannot
We are already playing a major part in enabling markets to work well and we stand ready to keep doing so.
We have signalled an intent to significantly reform the regulatory regime for the listed market[5].
We have set out a clear ambition to change and streamline the listings rules in the UK to help attract a wider range of companies, encourage competition, and improve choice for investors.
These rule changes – which we will explain and confirm before the end of the year and will then seek to implement speedily – will not alone solve all the problems of our capital markets.
But they will lay the foundations for a thriving capital market – and can help to encourage domestic investment, cementing the UK as a leading global market of choice.
In finalising the rules, we know that there are a range of views. The UK regime has historically had very different protections from those of international counterparts, including in Europe, Singapore and the US.
There are a range of views about whether those differences add any value in helping make sure that markets function well. Right now, we have a significant “moment in time”, when this set of regulatory change will inevitably set the rules for the next few decades. We want to achieve consensus as much as possible.
Consensus does not necessarily mean compromise – it means achieving the right outcome that balances our objectives, in a way that supports the UK’s international competitiveness and growth.
It also means making sure our regulations are consistent with international standards – not making changes for change’s sake.
And with that in mind we are doing this differently. To get this right, we need to work with industry so we are convening roundtables with external stakeholders with the aim of reaching agreement on the right balance to set.
We are making use of our statutory panels across market participants, firms and consumer groups, to test our proposals.
And we have openly said that we want a public debate around our appetite for risk as consumers, industry participants and law makers.
Nothing is risk-free – such fundamental reform will inevitably involve a differing level of risk. And we want a public discussion on where that balance should be.
While we are finalising the proposals for listings reform, we have been busy making sure that the regulatory regime helps to support investment in productive finance and long term assets.
We quickly created the framework for a long term asset fund[6], a vehicle that supports investment in different asset classes in 2021 – and earlier this year, after 3 market participants had launched funds, confirmed that access could be extended to certain retail consumers.
Confidence is key
Markets work well if there is investor and consumer confidence.
Too often, speeches about the state of capital markets forget to reference the consumer, or investors – and the importance of maintaining confidence in how markets operate.
Resilience is a key driver of confidence. We are adapting our approach recognising that the way that financial services now operate is significantly different from a decade ago.
Thanks to the recently passed Financial Services Markets Act[7], we, together with the Bank of England, will in future have the ability to directly supervise third parties who provide critical services to financial services – subject to a Treasury designation process.
Again, before the end of the year, we will set out how we and the Bank propose to carry out that supervision, so that we can consult on how it operates before it goes live.
This work is crucial as some third parties threaten to overshadow the size and might of the firms they serve. It is right that in a world increasingly reliant on technology and data, the holders of this precious commodity be held to account to prevent things going wrong. Our markets must be resilient if we want them to thrive.
Advice and Guidance boundary review
Knowledge is power and we want consumers to be empowered and feel confident that they have the right information about their investments.
While the FCA does not lead on financial education or literacy (this responsibility is with the Money and Pension Service) – creating confident consumers is the strapline of our Consumer Investments strategy.
Since 2021 we have been seeking to get clear messages out on how to invest, how to make informed decisions, and where to go for help or advice. We have tried to get our message to consumers in innovative ways – taking to cinema with our Don’t Get Played campaign and getting our messages about not getting sucked into the hype out on social media platforms such as TikTok and Instagram. Just this week you may see us in cinemas[8] or on social media linked to the launch of the movie 'Dumb Money', which covers the story of GameStop.
We are also prioritising regulatory reform, through our Advice and Guidance Boundary review (joint with the Treasury), to help people get more access to help and advice. Our annual survey of over 9,000 consumers shows that nearly a quarter of adults (24%) had low levels of confidence in managing their money.
Some 38% rated their knowledge of financial matters as low. This needs to change if we want our markets to thrive.
We are taking advantage of the new Smarter Regulatory Framework to identify what needs to change. As we bring the legislative framework inherited from Europe into our rulebook, more fundamental change is possible – we can depart from the existing way of doing things if that is the right thing for the UK to do.
We have set out with the Treasury the principles that will guide this reform so that we can create the environment and set the foundations, for the UK to thrive.
We know that the solution to this challenge will not be met by changes to regulated advice alone. People’s needs are diverse and vary over their lifetime. So we have said that we need firms to actively engage and provide flexible forms of support that can adapt to different types of financial decisions.
We know that to provide more support to more people it will be necessary for firms and consumers to manage risk, rather than eliminate it. This is because risk is a key driver of cost to firms and ultimately to consumers which directly impacts on the availability of support.
We also know that any solution will rely on support being provided on a commercial basis so our review will need to focus on outcomes and design a regulatory system where commercially viable models of support can emerge.
Pursuing competitiveness
One of the objectives we have been set transcends borders – and that is our competitiveness – or our performance in attracting investors and growing our markets internationally.
Although this has become a recent statutory secondary objective, we have always had a clear focus on making our markets work well.
We know that the way that we operate and our operational efficiency work can drive competitiveness.
That is why we have been improving our authorisation processes, cutting backlogs and now reporting quarterly metrics on our decision making so that you can monitor our efficiency. We are also trialling new authorisations forms which will make the process far simpler from the start, enabling firms to get the right information to us in the first instance.
As well as efficiency, proportionate regulation, innovation and market stability are all important ingredients for trust, reputation and therefore competitiveness.
Importantly this objective does not apply to our supervision work, and nor would you expect it to if we are to have strong and resilient markets. We are open for business, not for exploitation.
But let me give you just a few examples of how we are taking competitiveness into account now and going forwards.
One of the first pieces of work for us under the new regulatory framework is tackling the rules around securitisation. Overhauling 700 pages of EU legislation is not for the faint-hearted but it is worth it to tailor the rules to our market.
We are consulting on new rules which will provide clarity and confidence to UK investors. They will also lower the costs, allowing investors to expand and diversify their portfolios. The proposed changes will also make reporting requirements less onerous for firms.
If you’ve read our proposals you’ll see that we are making some changes as we bring these rules into our rule book, but not fundamentally overhauling everything. We are using this opportunity to make changes to support UK markets, but only making change where it’s needed, as we recognise the importance of international consistency to support those who operate across borders.
More broadly we are seeking to look forward, and make sure our regulatory attention supports current and future need, given the pace of change (such as AI). We are asking industry and consumers what they want our focus to be – and have heard – loud and clear – from the asset management industry about the changes it wants to see after we asked earlier this year. In asset management going forwards we will focus on:
- making the regime for alternative fund managers more proportionate
- updating the regime for retail funds
- supporting technological innovation
We cannot stand still but there will only be reforms of regulation where there are clear benefits. And in doing so, we will continue to pursue efficient international investment flows based on strong international cooperation.
From regulation to innovation
Finally, innovation is also key in supporting the UK economy to thrive.
The FCA offers world respected innovative services to firms that are new to market, and existing firms who want to test adaptations to their business models. These services are now always on – help can be requested at any point. Our services range from dedicated advisory support to the provision of synthetic and other data sets which firms can use to test how their products or services might work.
Before the end of the year we will also be setting out how we can allow a testing environment for those who want to test different ways of operating financial markets infrastructure. While we know that regulation should be technology neutral, we have to accept that the current legislative and policy framework was created before digitisation and AI really took off.
We are using our Digital Sandbox to support and test the development of AI business propositions and plan to run AI tech-sprints in the year ahead.
We are working with the Treasury on a new Digital Securities Sandbox which will give firms the ability to trial new technology before they are unleased on the markets.
Alongside this, we are working to support the implementation of the intermittent trading venue, announced in the Mansion House speech.
We are supporting the Government’s commitment to establish the framework for this intermittent trading venue because it will broaden access to institutional liquidity while expanding the investment opportunities for private companies and their shareholders.
To be effective, this framework will need to blend elements of the UK regime for private companies, respecting the structure that such companies have chosen to adopt, with appropriate features drawn from public markets, to ensure investor confidence. This is a great example of where we are taking new approaches to deliver an even more effective capital market.
Conclusion
The regulatory agenda is busy – we are not standing still – just above I have confirmed many significant reforms which will be progressed by the end of the calendar year – including an overhaul of listings rules, new sandboxes, advice/guidance and a new regime for critical third parties.
Through regulatory reform, enabled through the smarter Regulatory Framework, we have a moment in time where we can make change if that is the right thing to do for the UK and for our markets.
But writing rules alone and passing legislation (before rules can be made) will not by itself cause the markets to succeed.
As the 6 boys who were castaways on a south Pacific island showed, ground rules are however the essential foundations for not just surviving but thriving.
Our role is to enable, to prompt the questions that need public debate, to be transparent about the approach that we are taking, and to share what we are learning with government partners, market participants, and members of the regulatory family where there is more to be done.
This is not the first or the last speech that we will give on the role of regulation in enabling markets to thrive. We recognise the important role that we play but know that we are part of a broader system, all of which has to work together to help markets work well.