Sunday, August 04, 2013

UK FCA Charts New Course for Securities Regulation in First 100 Days

In a  review of the UK Financial Conduct Authority’s first 100 days, Chief Executive Martin Wheatley said that the authority is a new type of outcomes-based securities and financial regulator that eschews check-the-box regulation. Calling this a new epoch in financial regulation, the FCA Chief Executive emphasized that thematic reviews, market studies, and the increased use of judgment are regulatory features that are here to stay.

According to Mr. Wheatley, securities regulation has been based historically on a flawed model based on implausible economic assessments, such as the impossibility of perfectly rational consumers and markets. It was based on a false paradigm where everything and everyone behaved entirely predictably, or at least predictably in the classical economic sense, and where consumers were always rational actors and investors read and understood the terms and conditions. 

The FCA takes a pro-active regulatory approach that actively looks at market trends, innovations, business plans, products and outcomes to support both markets, as well as customers. The FCA is not just asking if a financial product is compliant and does it tick every legal box, he noted. Rather, the FCA is asking if the outcome is good and is the fair treatment of consumers designed into products and culture.

The FCA is also baking in the lessons of behavioral economics in all of its regulatory work. In particular, the predictable mistakes consumers make, how firms respond and the affect this has on competition. The FCA adds all this up when the agency looks at particular issues to see what regulatory intervention may be useful. But not all of the approach is new, said Mr. Wheatley, noting that in the area of enforcement the FCA continues to work to deliver the  robust message of credible deterrence. In the FCA’s regulation of securities and investment markets there is also an evolutionary approach, not a complete revolution.

The FCA will spend more time and effort looking at markets as a whole and whether they function well for consumers. They will look for remedies that help markets work better for consumers. And the agency, as part of its remit, will try to promote competition in the markets it regulates. Healthy competitive markets must  become the new normal, emphasized the FCA Chief. These are markets where people take on risks that they understand and realize that they can gain and can lose, he said, and where consumers can work out which products best meet their needs and can buy from the suppliers offering them the best terms. A healthy market is also one where firms can profit from putting consumers first and where they can’t, they exit the market without disrupting its integrity.