In response to a letter from Kier Starmer, urging the Financial Conduct Authority (FCA) to support economic growth, CEO Nikhil Rathi issued a sensibly enthusiastic reply (given recent events at the Competition and Markets Authority), promising a ‘fundamentally different’ way of collaborating (with the government).
The FCA is under some political pressure, including further to its handling of recent financial scandals and less then complimentary independent and cross-parliamentary reviews including the Gloster Report and this very damning but rather partisan effort from the All-Party Parliamentary Group (APPG) on Investment Fraud and Fairer Financial Services. The former made a number of recommendations to improve the FCA’s supervisory approach and culture. The latter described it as ‘incompetent at best and dishonest at worst’ and called for a fundamental overhaul. The truth is perhaps somewhere in the middle but the story is always in the telling.
Growth; a cornerstone strategy
Alluding to, and perhaps eluding, these criticisms, Rathi’s response offers that to achieve the necessary ‘deep reforms’ the FCA will need the government’s acquiescence to take greater risks. Given the climate it finds itself in, this is a highwire act with limited latitude for further missteps. Growth will be a cornerstone strategy for the next five years, he promises.
In a November 2024 speech the FCA had already responded to Chancellor Reeve’s commitment to growth. COO, Emily Sheppard unveiled the FCA’s new five-year strategy which will focus on four key themes of economic growth and innovation, financial crime, consumer resilience, and (becoming) a more efficient and effective regulator.
Rathi develops this theme, linking amendments to, inter alia, the investment research rules, the launch of long-term asset funds and fixed income and commodity markets transparency to the effort to ‘sustain UK market leadership’. Further, moves to streamline regulatory requirements on investor disclosure, the asset management sector and the launch of the long-awaited consolidated tape for fixed will all unblock capital investment and liquidity.
Reducing the burden(?)
It is noted that the FCA is already working to reduce ‘unnecessary’ regulation and the data provision burden, and Rathi promises to go further with unspecified reforms on the Senior Manager and Certification regime (abolishing the Certification regime anyone?) the minor reform and ongoing review of the Consumer Duty, and the regulatory gateway. The ultimate regulatory burden of ‘change fatigue’ is not addressed and that any of these proposals are meaningful in supporting growth remains an act of faith.
Supervisory style
Underscored throughout the response is the FCA’s need for resources and restatement of the risk-based approach it intends to pursue. We can see from the last FCA Annual Report that investment is being made in front line supervision teams, which suggests that the FCA’s increasingly proactive approach will continue. The regulator has been active on a range of issues in the alternative asset management space, such as the ‘use or lose it’ initiative, prudential returns data quality, and also thematic topics such as the private markets valuation. We can expect this proactive approach to continue in 2025. Supervision by dialogue as much as enforcement – an approach the market can get behind.
Conclusion
Can the FCA succeed under this pressure? Can it support a political mandate, meet four statutory objectives and 13 cross-cutting commitments’ and supervise 42,000 firms across the myriad of financial service sectors? Endorsing the government’s growth message is an act of self-preservation and encouraging competition an operational objective but does the suggested prioritisation present a potential for conflicts of interest?
The FCA remains a highly influential and respected regulator globally (including as noted in the 2024 Global City Report) and its success – however that is measured – is vital for financials services in the UK. 2025 could be significant year for Rathi and the FCA.