David
Yes, risk of its own and potential cost. There are a few elements which will cost real money and then you mentioned the £120m data transformation, it's £40m a year, so £20m over three years, yes, let's call it £40m a year out of a budget of £600m or so which, as you say, is only increased slightly so the Business Plan doesn't say what's going to be scaled.
Gavin
And you have other increased costs so the PRA budget also went up 4% which gives your idea and they cited inflation post Brexit because you have more direct supervision of firms because you can't rely on EU supervisors, operational resilience, cyber and so on. So, there are concrete things that will cost more money anyway and on top of that the FCA wants to do a whole lot of different stuff.
David
Let's just talk about it a little bit maybe about the structure of the Business Plan. Only in the sense to draw a line between what Business Plans have certainly under the previous leadership included and this one, how this one differs, because you are right, there are some very big messages and very interesting pointers as to the direction of the Financial Conduct Authority in it, but what's not in it? Well, it's a shorter document than previously and what's not in it compared to previous plans are, for instance, sort of a detailed review what they have done in the last year.
Gavin
There are references clearly, but then you would expect more of an annual report but obviously it was just published the same day. Yes, the follow on there is clearly some kind of clean break.
David
Yes, that they would like to indicate an exemption, so we don't get a sense, as we have in some business plans. The past here is a review of last year, here’s how we spent your money. We also don't get down into the sort of the sector focus pages of the Plan, you won't get what you would have seen in the past potentially which was essentially an agenda with thematic reviews, supervisory exercises, consultation papers that can be expected. So that's sort of quite granular, setting out of activities isn't present, we've got high level themes and objectives they must be seen to achieve in those sectors.
Gavin
So, I think there are a few things going on. One is the pandemic, frankly I think we should give the FCA a bit of a pass on that account because clearly, they have been pre-occupied with all that stuff that we would expect them to be doing. So, it won't have been as thorough a planning process as it would be normally and I think the FCA board minutes from a few months ago talked about this, one being a sort of transitional plan. I think they are trying to do a much more, baseline build-up of activities, what are we going to do for next year. But having said all that, I think there is a sort of stepping away from the detailed commitments that you might have seen in previous years.
I mean I remember working on this back in the early 2000s and there was quite a lot of emphasis on accountability for how the fees we were raising from regulated firms were being spent and almost a kind of a line for line attempt to justify in the annual report, what you had said you were going to do in the Business Plan and that kind of accountability and transparency stuff seems quite weak. I think if I was looking forward and writing next year's annual report, I think I'd struggle to say, “well actually what did we really commit to in the Business Plan”?
David
Yes, and to do that I don't think we will spend much time in this podcast talking about that sort of sector specific sections, because if you look at the wholesale markets, one, you will see the objective being restated if they had ever been felt to undertake activity to prevent market abuse, reduce financial crime, in respective you know wholesale firm, I mean there are things detailed.
Gavin
I think there are things we know about. So, we do not have generally the Regulatory Initiatives Grid, I kind of read the handbook and talked about all that so we have good regulatory initiative, which does have layout, you know, various things with a timetable, initiatives, new bits of regulation that are coming in and so on. So, there are things like LIBOR and so on that we know are coming down the line and Basel III etc. But like you say we will do a piece of thematic work on this aspect of potential mis-selling in whatever sector. That's not there.
David
Yes, and then the Regulatory Initiatives Grid, I'm sure most of our listeners think that is incredibly useful and is a big step forward and that is a real plus. I think there is no reason to replicate that in the Business Plan, historically, we would also have seen sort of the non-big ticket supervisory themes, activities that were going to be pursued.
Gavin
And there used to be spreadsheets that scheduled those and there used to be quite a lot of negotiation over what was in those and which quarter they were done in because in an attempt not to overburden particular firms or particular sectors with a view to all that then going into the Business Plan.
David
Interesting. I mean it's not to say that that thinking isn't still there it is just no longer being spelled out in quite the way it was said. But that means that is kind of what is not in the Business Plan.
Let's focus on what is in the Business Plan. The really interesting parts are, I think, that the high-level messaging in the direction of travel, statements of intent, simple, however, you want to spin it and there's a few to pick through.
Testing limits has got to be the one we start with of those in the group because if anyone's looked at the Business Plan, the FCA has set out quite clearly that in order to get things done to deal with harm that they perceive this is happening. They wish to test the limits of their powers in the regulatory perimeter to deal with those harms and we talked about this in a previous webinar but then we have seen in the FCA board minutes relatively recently this expression that the organisation should be willing to take a more legal risk, which is consistent with the testing limits, so that was interesting seeing the document. I know Nikhil Rathi’s speech in announcing the Business Plan that was referenced multiple times, so this is clearly a significant change they are trying to signal.
Gavin
Yes, I think it will be fascinating to see how far it goes. So, the sea change in the FCA is the FSA’s enforcement took place back in 2005/2006 with the Legal and General case which they had partially lost, but mostly it won and that triggered the Strachan Review, which put in place lots of checks and balances and transparency around time enforcement that would happen in the future. And that by and large has kept the FSA and then the FCA on the right side of subsequent judgments? There's undoubtedly questions over “Do you take the most important cases”? “Do you take the most egregious cases”? Because there might be a greater risk of losing because you don't have all the things that would make it a slam dunk?
But by and large that there is that, in parallel, there has been a greater willingness to take more individual cases and obviously they tend to be more litigious because people are fighting for their careers, so they tend not to settle, and certainly not settle early. And then in 2017, the FCA Mark Stewart said he was going to open more cases and I think they now have a very, I think, clogged is probably not the term, but a sort of clogged pipeline of self-enforcement cases. So, if you are talking about taking more legal risk, I think that must mean things are more likely to be contested. You run a decent chance of having longer and more expensive cases and obviously, if you start losing a few of them, yes, it's much easier to say we have an appetite, but we are not going to win them all when it happens in practice. Unless something has changed dramatically since I was there, it is a really big deal internally.
David
And then Nikhil Rathi, in his introduction to the Business Plan references - this is literally the opening paragraph, I think that within a day or two of him walking into the building, the business interruption court case was launched.
Gavin
I think that was a good judgement because he arrived last October. They may have launched it.
David
Sorry, no you are right, well, I will have to check, we are going to have a disagreement now, we will check back to the phrasing. Okay so this is clearly a case or an example of testing the limits of the law in this area and winning, winning big,
Gavin
Although interestingly they put it in the context of “we just want to clarify what the position is”, but then obviously, once you are in court you are arguing one side that it will be interesting to see what the headlines would have been if the FCA had lost as it is they wanted and I think we are all in as you know a clear position about what the law says.
David
So, on one level, I heartily support what the FCA is doing, because we will get things done in a way probably that hasn't happened in the past. I think there are genuinely points that would benefit from being pushed and clarified to the benefit of everyone's understanding. However, I think it does change the dial for regulated firms. You mentioned individual enforcement cases tend to go forward every step of the way regardless because some person is probably losing their livelihood but for firms most regulated firms it seen you are a long, long way, in your own line usually from feeling you should open a court case against the regulator to challenge their decision.
Gavin
No, you settle early and take 20% discount.
David
Exactly, however, if you are the regulator saying no, we are pushing the limits, we are testing the boundaries then does that not move that dial a bit? Does it not say to regulated firms well actually the regulator draws its statute, there are sensible legal questions that need to be determined here. I think you are right. I think in some cases they won't in some scenarios, they will get into some quite interesting and long running and expensive cases, if regulated firms push back and if they lose those cases, what that does to the strategy we'll see.
On a slight tangent but an interesting one, and I don't think it has been heavily reported, but last week, the Upper Tribunal handed a decision down in the case of Stuart Forsyth. This is an impersonal enforcement case. Stuart Forsyth had been banned; I remember seeing the notice in 2018 I think it was made. It was a small insurer, the facts were he was accused of diverting some of his salary to his wife, who was also working for the organisation paying her more than the work was worth, in order to reduce his own tax bill, he was also accused of fabricating documents that suggested the Board had approved all of this. Yes, this is a serious case. So, on the facts they slam dunk. The Upper Tribunal last week found the PRA and FCA say he was banned and fined by both BI and FCA because it is an insurance company. The Upper Tribunal found on the facts there was not insufficient evidence and strongly worded insufficient evidence to support findings of fact on any of those points and that he should be completely exonerated. I know the PRA has already apologised. The FCA will have to issue a statement at some point. But I just mean it's a small individual case, however as you mentioned it losing cases brought that to mind.
Gavin
There is clearly reputational damage over something like that for a regulator and so you know that is why the checks and balances are in place internally which slows down cases but hopefully this eliminates the chances of something like that happening but clearly not quite even now. We will see but I think there is a real challenge for the FCA to be more efficient in how it prosecutes the enforcement of cases that are worth prosecuting but actually getting it right all the time or nearly all the time, it’s difficult.
David
In one of the tweaks, it was mentioned in a Business Plan, although we haven't got details, it appears to suggest that the FCA Executive will have more authority to make decisions relating to enforcement and bands and other measures, moving the balance basically away from the board or I should say the Regulatory Decisions Committee, which is a Sub-Committee of the Board and moving that back. We haven’t got a lot of details. I don't think we have details anyway of exactly what that means but the implication is, decisions will be easier to make.
Gavin
There is a transparency and accountability issue around all of this because you've got a regulator who has significant powers, you know, can take cases on the basis it can raise fees, taxes from regulated firms and so on. So, there is clearly a high hurdle of responsibility it has to satisfy in terms of all of this stuff. We will see, it will be quite interesting to see how the whole accountability debate runs through the Government's future regulatory framework, proposals and so on. But you know, accountability and transparency are clearly going to become a bigger issue over the next couple of years.
David
Yes, you are right, tying the wider strategy. So yes, to whom is the FCA going to be accountable and to what degree, time will tell. Another big theme related in some ways to the sort of testing the limits discussion we just had, but his concept that the data will be used to make the regulator much more rapid and responsive. As you said, under £20 million being added over three years to transform data. Yes, it will transform it, FCA generally has £40 million I think for data, several £10s of millions at least so I am not sure how much we could sell. This is clearly the plan that has just been tried in other speeches as well. I am not sure how much we can say by way of detail because it's just a thing. It's just the thing that's going to happen again.
Gavin
I think it’s inevitable and I think it's a positive move for the FCA to become more data focused data led interestingly, Nikhil Rathi said in his speech that they were now as much a data regulator as a financial regulator, and I think that is an interesting statement. We will have to see how that pans out. The only other thing I would say is that I think that the assumption that having more data will enable the FCA to make clearer decisions and to intervene earlier, I think, needs a bit of a caveat. My experience of having more data is that it becomes harder to sift through and work out exactly what you rely on and also doesn't necessarily make it easier to intervene earlier because you are always waiting for something else. You are also going to see more things, you will have more leads, you'll uncover more stuff, but some of it will be red herrings and you have more of a kind of decision to make about what you follow and what you don't, so it doesn't solve all the problems. No path is no panacea.
