Mission control: plotting the right course for the Financial Conduct Authority
As the Council of Mortgage Lenders responds to the consultation by the Financial Conduct Authority on its future mission, CML director general Paul Smee sets out his own thoughts - and comes up with six principles that could shape the regulator's direction.
Someone once told me that a good mission statement should fit on a tee-shirt so the 50-page mission document from the Financial Conduct Authority – on which we have submitted our response today – is a bit on the long side. But it is none the worse for that.
It is a good read and an interesting reflection on the future direction of conduct regulation from a body which is tooled up to deliver conduct regulation like no other.
For the mortgage sector, it provides a moment for reflection; the sector has been in the cross-hairs of conduct regulation since before the FCA existed. We have some understanding of what works and what doesn’t. So we can welcome the emphasis on ensuring that markets function well. I will also tempt fate – we are after all only in the early throes of a market study – and say that I welcome the expressed preference for competition powers to be used to improve the functioning of markets.
The mortgage market does exhibit many of the features of a competitive market place, with a regular flow of new entrants, and a variety of routes to consumers.
I would also like to propose some tests by which the FCA can judge the effectiveness of how it evolves.
Less regulation, more focus on the customer
I hope that the FCA gives some stability. My five years at the CML have been dominated by MMR, MCD, FPC powers of intervention and now the market study; the list could easily be expanded and I do not complain. I knew what I was signing up to. But the next five years should surely not have such a strong regulatory theme.
The price of constant revolution in regulatory approach is too often a corresponding lack of focus and resource on evolving customer need. The welcome references in the FCA mission to competition should include giving room for the market to breathe and compete and innovate.
Delivering the spirit of regulation
I hope that the FCA demonstrates a continual emphasis on proportionality. Regulatory machines grind small. Lenders respond by grinding smaller. Clarification is piled upon interpretation. Woods and trees seamlessly merge.
I would like to see firms spending as much time understanding and responding to the spirit of regulation as they currently devote to unpicking its textual significance – but this depends on regulators consistently demonstrating that they too live by the spirit of what they seek to achieve and are less concerned with the technical foul.
Working with the industry
I hope that it gives opportunities for collaboration with the industry in the interests of finding speedy – or at least speedier - solutions to issues which impact on market operation and do not go to the conduct of individual firms.
The process by which the industry worked with the FCA on what became its guidance on handling arrears was not perfect; nor was the outcome ideal. But it worked at some pace and it was a lot better than if the solution had been devised behind closed regulatory doors.
Silver bullets are duds…
I hope that it also is clear on the absence of silver bullets. Regulatory commentators often identify those bullets which put the sector irrevocably on the path to salvation; but they always turn out to be duds. I have lost faith in them and the quest for them is like the Hunting of the Snark, doomed to failure.
Better co-ordination of regulation and broader policy goals
A mission cannot exist in a vacuum. So I was encouraged to read of the FCA’s discussion on its interface with public policy. Once upon a time, regulation was embraced by politicians as a means of avoiding responsibility for financial conduct. How innocent we all were then.
Regulation crosses over into most areas of economic life. It is inevitable that its impact will bounce off other goals of public policy and there is no way that the purity of regulation can be maintained. It has to work in full knowledge of what else is going on in the forest, to an extent which it has at times denied to date, regarding its own goals as inviolable.
You do not have to be the head of a trade association awaiting the publication of a major government statement on (housing) policy which will shape the way in which the housing market evolves over the next four years to appreciate that its objectives can be compromised if a regulator stands too rigidly on a narrow interpretation of what it has to do.
I welcome the FCA’s alertness to the cross-winds of public policy. It may well be tested in areas such as custom-build construction and shared ownership, where regulatory requirements, not just from the FCA, may inhibit the growth of particular activities.
Which brings me on to my favourite…
The law of unintended consequence
You are never free of it and a desire to avoid it at all costs leads to paralysis, not clean decision-making. But a regulator needs to be alert to its impact and – probably with the help of others in the relevant field – nail down what those consequences might be, and how or whether they could be addressed by some slight re-focus.
It is the blithe ignorance of unintended consequences which does the damage – to regulatory credibility as well as market coherence. Its examination should be part of the process.
A recalibration of the FCA mission is no bad thing. I suspect that this document is by no means its last word on the subject. But it is a good kick-start to the debate.