John Griffith Jones, Chairman at the Financial Conduct Authority, (“FCA”) has recently given a speech about good conduct regulation. We set out below a summary of that speech, which draws out the key points:

Mr Griffith Jones’ speech makes clear that:

  • good conduct regulation is built upon government policy, clear objectives and perimeters, shared understanding of risk tolerance, operational excellence, and efficient measurement of outcomes; and
  • our future success as a good conduct regulator is dependent upon continuing to hone these blocks so that they are individually sound and properly joined together.

Mr Griffith Jones noted that with Brexit imminent, the focus for regulation will be less aligned to the EU and global initiatives, but that we should not lose sight of what has been achieved so far and what needs to change going forward. It is vital that Brexit’s impact on regulation is determined as quickly as possible.

In conjunction with the FCA’s ‘Mission’ (a project designed to provide a guiding set of principles around the strategic choices the FCA makes that will inform the FCA’s strategy and day-to-day work over the coming years), Mr Griffith Jones believes there are five building blocks to creating an optimal outcome for conduct regulation:

  1. Government policy

Regulation is appropriate where intervention will produce a better result, ie. in cases where vulnerable consumers need protection or to ensure cyber security. However, it is often the case that different governments decide to change policies and want different regulatory regimes. The regulator has to follow suit and comply with new legislation. However, it is important that government is responsible for creating policy and that regulators are there to simply support policies and ensure they are complied with.

  1. Objectives and perimeters

The FCA’s three high level operational objectives are to: (1) protect consumers, (2) promote competition and (3) enhance integrity. Although clear, they are not very helpful for specific cases and it is hoped that the Mission will attempt to drill down into greater detail. Determining perimeters as to what firms, what transactions and which products and services are covered by regulation has been difficult, not least because of the rise of technology, ie. robo-advice.

It is essential that the regulator keep up with changes, and the FCA is attempting this through its Project Innovate and Regulatory Sandbox initiatives. However, Mr Griffiths Jones warned that the more detailed regulation becomes, the greater the challenge is of making sure that it is current.

  1. Risk tolerance

It is a fact of life that rules are going to be broken at some stage or another. The FCA may be accused of being deficient in allowing rules to be broken, however it is impossible to have a zero tolerance policy for regulation. There has to be some level of acceptable deviance, although Mr Griffith Jones accepts that this leaves the consumers affected by such deviance, unhappy.

In some cases, the FCA are forewarned and can prevent issues happening, but inevitably there has to be some level of learning with hindsight, and this is regrettable, but better than mistakes being repeated.

  1. Operational excellence

Mr Griffiths Jones highlights the importance of creating a regime where it is in a firm’s best interests to self-regulate. He gives the Senior Managers’ regime as a good example of this, which has the aim of raising standards of governance, increasing individual accountability and helping restore confidence in the banking sector. However, he also points out that human behaviour can be unpredictable and that for some people, the temptation to cheat is too powerful to ignore.

  1. Measurement and transparency

Mr Griffith Jones notes the importance of some kind of measurement, not least because it gives the public some comfort that regulators are doing a good job.

There is still much to achieve in conduct regulation, the FSA in its new format has only been in operation for four years and the weaknesses in the regulatory chain are apparent. However, the FSA has hope for the future and believes that much can be achieved, although it may take some time: “We should be ambitious for our future, if a little patient with our rate of progress.”

To access Mr Griffith Jones’ full speech, please click here.

For any help or advice on the FCA’s regulatory objectives, Cleveland & Co, your External In-House Counsel are here to help.