On 2 October 2018, the Financial Conduct Authority’s (“FCA”) Chair, Charles Randell, delivered a speech on the damaging cycle of deregulation, crisis and regulation (the “Speech”) at the annual Association for Financial Markets in Europe (“AFME”) conference, and ultimately warned against the dangers of deregulation.


The FCA recognises how damaging the cycle of deregulation, crisis and regulation can be and Mr Randell shared his thoughts on how the FCA could approach in limiting the effects of this cycle. He believes there may be momentum to break the cycle, and to better learn from the financial crisis that hit the global economy 10 years ago, particularly in regard to the UK about to leave the EU.


There have been a few ways of deregulating which may have, as shown by the International Monetary Fund (“IMF”) working paper published earlier this year, have lead to financial crises occurring which have allowed industries to deregulate themselves by diverting financial activities into new unregulated channels, such as by:

  • repealing existing rules. For example under the Consumer Credit Act 1974, the cap on interest rates in the consumer credit market was repealed however, with the rise of payday lenders using loose affordability criteria and excessive interest rates led to widespread consumer harm and the eventual re-imposition of the cap in 2015; and
  • not applying existing rules to financial innovations presuming that it would not make a difference. An example of this was the 2008 global financial crises where subprime lending boomed without the correct regulatory oversight. Moreover, loose regulation of derivatives and securitisation structures allowed for too much leverage to enter the subprime market which lead to the bursting of the real estate market bubble.

This cycle is particularly damaging for the following reasons:

  • the public and industry can lose confidence in the regulatory process;
  • regulatory change can damage competition as generally only big firms are able to absorb compliance and lobbying costs to influence the process; and
  • the quality and efficiency of regulation decreasing overall.


Keeping an open mind

Mr Randell stressed, that whilst the FCA has to stay on top of innovation and technology within the financial industry, it is even more important to stand back and have a look at the overall coherence and consistency of the rulebook. He believes it has become a large patchwork of regulations and policies as a result of both local and EU regulations needing to be implemented into the FCA rulebook. As a result, the FCA has committed to a review of its Handbook as part of its Mission once the United Kingdom has left the European Union. The FCA’s Mission is a high level document setting out the framework for the strategic decisions and reasoning behind the FCA’s work and the way they choose the tools to implement their decisions, reflecting their aim to be more transparent and accountable to the UK public.

Emphasising on the necessity for regulators to acknowledge they do not always know best, Mr Randell, commented that the FCA will keep an open mind about the best ways to achieve the outcomes wanted in each regulated area. This has been materialised by the recent use of ex post evaluation, a tool to measure the impact and efficiency of the FCA policy interventions. Ex post evaluations seek to assess what would have happened if the FCA hadn’t intervened and take into account other external factors that have created changes in the business environment of the relevant sectors. These evaluations assess whether the intended outcomes have been achieved.

A great asset for regulators to achieve the best practical outcomes for regulatory change, is the insight obtained from the independent expert panels and the stakeholder feedback that they receive directly from consumers, businesses and industry professionals.  The FCA is committed to utilising the insight to the best of their ability.

In his Speech, Mr Randell highlighted several key points for UK regulators to safeguard against the cycle of deregulation, crises and regulation, in particular:

  • that not all regulation is good and that regulators sometimes wrongly follow in governments’ footsteps in prioritising legislation over practical delivery where in some circumstances the focus should instead be on enforcing effective compliance with existing rules;
  • using sound evidence to evaluate policy decision to avoid unjustified regulation/deregulation, stressing that the use of cost-benefit analysis is not sufficient alone and merely focusing on microeconomics means not all questions can be properly answered and dealt with;
  • the need for strong regulatory independence by maintaining robust governance structures and diverse governing bodies; and
  • engagement with international policymaking and regulatory colleagues in Europe and across the world in order to continue to influence global standards of financial regulation, this is especially important in the wake of Brexit.


To review Mr Randell’s Speech, please click here.

To review the IMF report, please click here.

For more information, and any guidance or advice on financial regulations,Cleveland & Co External in-house counsel, your specialist outsourced legal team, are here to help.