The last fortnight has felt a bit like the regulatory 12 days of Christmas.
The regulators have published papers on the regulation of critical third parties, Basel 3.1, Strong & Simple, Remuneration and Access to Cash, and the Basel Committee is reviewing IRRBB (and if you don’t know what IRRBB stands for then please don’t ask). One paper that you may not have noticed is CP27/23 the PRA’s Approach to Policy, which is required under the new FSMA. You may also not have noticed the new section starting on page 54 of the Regulatory Initiatives grid titled ‘Smarter Regulatory Framework.’ So, to add to your Christmas reading let me share a few thoughts on smarter regulation.
What is smarter regulation? Often smart means effective, but is there a common view on what makes regulation smart or effective? Who would want regulation that is ineffective? Perhaps that is why the Government has made a call for evidence on smarter regulation. The House of Lords Industry and Regulators Committee is also seeking evidence on how the 90 or so UK regulators carry out their duties.
To re-cap on the current regulations, many of these derive from the EU. They were ‘cut and pasted’ across into the UK statute with only minimal changes to make them work. The EU ‘Acquis’ as it is known is littered with cross references, contradictions, and generally bad English. So-called ‘constructive ambiguity’ whereby political agreement is only reached by different people having a different understanding of what the text actually means. The deviations in implementation are accepted as being less bad than having no rules at all. Hence the ambiguous nature of some of the rules text. So, as we shift away from inherited EU text, this feels like the ideal point to do some tidying up along the way.
There is also a sense that regulatory rulebooks are forever growing. Following every crisis, new rules are designed and added. Rarely are older rules reviewed or taken away. As a minimum, I would advocate for a ‘one in, one out’ rule. Whereby regulators have to look at which existing rules can be amended or extended before adding in any new rules. This would align well with new FSMA requirement for the regulators to keep their rules under review and the HMT power to direct rule reviews. Where existing rules need to be kept, then this should be well understood. The PRA floated the idea in DP4/22 of including a purpose statement alongside each section of its rulebook. I think this is an excellent idea as it aids compliance. Firms will find it easier to implement rules where they understand the underlying purpose. Or put another way, firms will be better able to comply with the spirit as well as the letter of the law, if the logic is clear. It will also make it easier to keep track of older parts of the rulebook and to review whether those rules continue to be relevant.
I think regulators can also learn from each other. The FCA’s Consumer Duty has ruled out ‘sludge practices.’ These are tactics such as making it deliberately difficult to contact your financial services provider. I question why this doesn’t also apply to your wifi, water or electricity provider or, dare I say it, …HMRC!
Finally, I think regulations should encourage diversity. They should be designed to create a conducive environment for a range of business models. Mutuals don’t have to pay dividends to shareholders, so by default, they are better placed to provide better outcomes for their customers who are also their owners. The FCA and PRA are required to ‘have regard to’ how their policies impact mutuals. All too often it feels like policies are designed for plc banks and consideration of the impact on mutuals is merely an after-thought. A box to be ticked on a policy paper at the end of the policy-making process. I believe that putting mutuals at the heart of the debate at the beginning of policy development would drive better outcomes.
Talk is cheap. It’s easy for me to say these things. Much harder to do in practice, which I acknowledge and accept. However, this is important work, so it’s not a reason not to try, and I’m glad to see regulators making it a priority. As Marie Curie once said “One never notices what has been done; one can only see what remains to be done.” So perhaps smart and effective regulations can be judged as much by what they don’t do as well as what they do do, such as by avoiding confusion and not favouring one business model over another. Crucially they should remain relevant for the longer term, and not just remain in place like unwanted Christmas gifts or outdated reactions to the last crisis.
What do you think?
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