A new settlement for financial services

6 min read

What does this new settlement actually mean? Specifically, what does a change of leadership mean for the FCA, in the midst of some of the most important reforms to wholesale financial markets since Big Bang ?

The Chancellor’s Mansion House speech clearly set a pro-growth agenda and has been widely seen as signalling an end to bank-bashing. But it would be wrong to see this as a U-turn.

What it means is the sun setting on the era of confrontation and a new era of collaboration is dawning.

As the Chancellor makes clear in his speech:

“Now we can raise our ambition and ensure we have the best, and most competitive financial services in the world. I want us to be able to say this of your industry five years from now: UK financial services will be the best regulated in the world, with markets of unquestioned integrity and the highest standards of conduct. There will be more competition, more innovation and more players in retail markets – offering customers a better service. There will be new firms disrupting the status quo, and big firms raising their game in response, with Britain leading the fintech revolution… We will continue to work together with you to ensure we get the balance right over the next five years.”

The message is we’re all in this together, and major reforms are needed, but working in collaboration with the industry to achieve those reforms, not against it.

This pro-growth agenda is exactly what the big initiatives currently facing the regulator are designed to achieve. MiFID II and the Wholesale Competition Review are not about bashing banks. The aim of unbundling and price transparency is to enable competition and innovation to thrive, reducing cost, increasing efficiency, making the UK the world’s leading centre for asset management and other financial services as well as levelling the playing field across Europe.

The claim of an end to bank bashing needs a little more examination, too. More accurately, the aim is to refocus the bashing from the banks to the individual bankers themselves. As the Chancellor observes, ratcheting up ever-larger fines penalises shareholders, erodes capital reserves and isn’t a long term answer. It also leaves those guilty of misconduct untouched: “The Governor and I agree: individuals who fraudulently manipulate markets and commit financial crime should be treated like the criminals they are – and they will be.”

The irony for Martin Wheatley is whilst the messenger has been shot, the message remains intact. It’s the method of delivery that needs to change. The reform agenda has always been about transparency, competition and innovation – with the aim of making Britain a better place to do business. But this message needs to be better communicated to the industry so that the industry is onside and embracing the pace of change, not resisting it and digging in its heels.

What will the impact be on MiFID II?

One of the changes coming our way irrespective of who sits at the controls is MiFID II. It is worth considering what the change of leadership means for the implementation of MiFID II and the direction of European regulation.

“Not much” is the short answer. While the FCA certainly had considerable influence within ESMA, MiFID has moved beyond this stage. The European Commission appears to be taking the same tough line as ESMA and is due to present final texts to the parliament in September. The arguments surrounding MiFID have morphed from intensive lobbying of the European Commission to moaning at MEPs in a desperate bid to get them to veto the entire Delegated Acts.

This seems unlikely. It is worth us remembering that Martin Wheatley remains in post until September 12 and Tracey McDermott, who will replace him as acting chief executive, is a member of both the FCA Board and the Executive Committee was fully involved in the FCA’s stance and approach.

The MiFID train has now well and truly left the station and is due to arrive on time on January 3 2017, albeit now with a reduced risk of any FCA gold-plating.

The Wholesale Competition Review

Promotion of effective competition is one of the FCA’s three operational objectives and the regulator acquired new competition powers in April 2015. The Wholesale Competition Review, initiated in July 2014, is now in full flow, with the launch of an in-depth market study in May this year.

Initial conclusions are due to be presented around the turn of the year, with a final report in the spring of 2016. As is clear from the Chancellor’s speech, promotion of competition is absolutely core to the new settlement so don’t expect a volte-face.

Effective competition encourages innovation, new entrants, better service and strengthens incumbents by keeping them on their toes. It is entirely consistent with a pro-growth agenda and the aim of building a better Britain. We should anticipate this work will continue unimpeded.

Conclusion

The City regulator will soon have a new chief, plus ça change. It doesn’t matter too much whether the watchdog speaks softly or simply carries a big stick, so much of today’s regulatory agenda is driven by the Treasury and by Europe that it would be a mistake to think a new public face means a whole new ball-game.

Good regulation goes hand in hand with effective competition and innovation and it is in this nexus between the three that the FCA has its best chance of finding a truly new settlement for financial services.

Michael Hufton is founder and managing director of ingage, a fintech disruptor in the corporate access arena. Prior to this he spent 10 years as a fund manager and eight years as a broker.

Martin Wheatley
Michael Hufton