FCA’s Wheatley Emphasizes Judgment and Ethics in Approach to Securities Regulation

While regulations and guidance are important for securities regulators, noted Financial Conduct Authority Chief Executive Martin Wheatley, they become a blunt instrument if used as a substitute for good judgment and are not enough, in and of themselves, to regulate effectively. The FCA’s solution to this has been to use a broader array of judgment-based tools and techniques, including competition, behavioral economics and more sophisticated modeling, to get under the hood of the financial services industry and ensure that consumers in all financial markets are treated fairly. Mr. Wheatley delivered his remarks at the recent CFA European Investment Conference.

Britain’s new Financial Conduct Authority came into being on April 1, 2013 as part of the new twin peaks regulatory regime under which the Financial Services Authority was replaced by the Financial Conduct Authority and the Prudential Regulation Authority, two new regulators with discrete remits. This has effectively meant that prudential regulation, the safety and soundness of firms, has been separated from conduct regulation, noted Mr. Wheatley, which is about the broader behavior of firms. There is also the Financial Policy Committee, with a remit to manage risks to the financial system and build its resilience.

According to the Chief Executive, the FCA’s focus on conduct regulation means there is much greater regulatory emphasis on integrity and ethics in the U.K. financial markets today. Recognizing that culture is notoriously difficult to measure, let alone change, the FCA is developing a deeper understanding of the sectors that it regulates, and the consumer experiences within them. The agency is also probing on sources of revenue, trying to divine how a firm makes its money. Similarly, it wants to understand how a firm’s business model delivers against the expectations of consumers.  

The Chief Executive said that the FCA’s toolkit is more sophisticated and more in tune with the changing political and societal context. It is fair to financial firms, he continued, and reflects where the financial industry is now and where it is going. Mr. Wheatley believes that effective judgment-based, forward looking financial regulation should actually and ultimately translate into reduced enforcement activity and more confidence in the financial industry.

In earlier remarks, he indicated that the main duty or Government remit of a securities regulator is to ensure that the financial markets work well for all the market participants. He noted that the FCA has developed a forward-looking and judgment-based philosophy of financial regulation to ensure the well-functioning of the markets. The FCA will employ real time regulation  and eschew box-ticking and regulation based on historic data collection. The FCA espouses regulation that is outcome-based and employs the tactic of early intervention.