Regulation by rules or outcomes: the importance of context

In this second post concerning the FCA’s Call for Input on reviewing FCA requirements following the introduction of the Consumer Duty (the “Call for Input”), I will consider some of the external factors relevant to an assessment of whether the FCA Handbook might be simplified to increase firm efficiencies and the competitiveness of the financial services sector.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

On 14 November, Rachel Reeves gave her first Mansion House speech as HM Chancellor of the Exchequer. In this, she announced no less that ten calls for input, consultations or pilot schemes relating to regulatory change in the financial services sector. These will need to be reviewed, considered and responded to by an industry which (amongst many other things) has just spent two and a half years interpreting and implementing the Consumer Duty. We have seen an explosion of regulation in areas such as ESG and operational resilience. Looming above all of this is the spectre of the Smarter Reg Framework and the mammoth task of incorporating retained EU law into the Handbook. 

Consequently, many have questioned whether this is an appropriate time for an extensive review of the FCA Handbook. Whilst simplifying the Handbook could, in the long-term, enhance customer outcomes, help streamline compliance processes and reduce costs, these advantages might not be felt for some time. In the interim, any move to simplify regulation will present firms with yet more costly regulatory change projects with no immediate benefit in sight. Its vital that the FCA consider carefully the pace and sequencing of any further changes and subject them to a full cost / benefit analysis. The FCA needs to pace change programmes to take account of other ongoing regulatory initiatives. On the shift to outcomes-focused regulation specifically, its also important to note that the full impact of the Duty – a flagship piece of outcomes focused regulation - is yet to be fully understood or evaluated. It remains a work in progress. It would be unwise to rush to replicate a regime whose true impact is not yet clear. 

To return to the Masion House speech, one of the reviews announced was Call for Input on Modernising the Redress System. This seeks, amongst other things, to improve how the FCA and the Financial Ombudsman Service (FOS”) work together to “provide a more predictable regulatory environment for firms which helps to support investment and further international competitiveness.” This is timely. When considering whether more outcomes focused regulation will increase efficiency and the willingness of firms to innovate, the role played by the FOS is an important consideration. Many firms are concerned that the FOS uses its ‘fair and reasonable’ jurisdiction to require firms to act even where this is not required by FCA rules or guidance. This risks the FOS potentially creating a parallel regulatory regime which is not subject to the same level of accountability or scrutiny as the FSMA rulemaking process. This risk is heightened the closer the FCA moves to outcomes or principles-based regulation, because of the latitude afforded to firms in how they achieve the outcome in question. If the FCA wants outcomes-based regulation to deliver efficiencies for UK financial firms, it and the FOS must take action to mitigate this risk for firms. This Call for Input is a potentially encouraging first step. 

Regulation doesn’t exist in a vacuum. Whilst simplification is a noble objective, change for changes sake helps no one. Any new approach to regulation needs industry buy-in to the benefits it will deliver, supported by a framework for supervision and enforcement that allows a new approach to flourish.

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