Financial competition is not a “regulatory race to the bottom”

The UK’s financial industry has seen no shortage of change over the past few months. From the Financial Services and Market Bill (FSMB) to rumours of ‘Big Bang 2.0’, through to the not-so-mini-Budget on 23 September. Government-driven change is not in short supply and, following news that UK regulators will now be tasked with increasing competition, they are peeking their heads above the parapet to set out what the government’s vision will mean for regulation.

Last week, the Prudential Regulation Authority’s executive director of prudential policy, Vicky Saporta, delivered a speech about the PRA’s future approach to policy. The speech, albeit indirectly, appeared to challenge the government’s latest deregulation drive – instead setting out a more measured approach from the prudential regulator. In particular, Saporta noted that, despite taking its new competitiveness objective seriously, it “will not mean entering a regulatory race to the bottom” which could damage financial stability.

Responsive and resilient, not racing to the bottom

Regulation is often addressed in metaphors – a changing tide or choppy waters. Saporta’s speech is no different (though mildly more morbid), comparing effective prudential regulation to a healthy immune system. A good immune system is “strong and responsive” – or rather – “it is strong because it is responsive.” Much like an immune system, effective regulation “remembers previous threats” and is easy to take for granted until its defences are challenged.

Regulation that is “strong and responsive” does not mean there must be a trade-off with competition, Saporta notes. Resilience does not naturally accord that regulation is stifling or unwavering – rather than it is stable, trustworthy, and able to quickly respond to innovation.

“The UK economy has more to gain by having a regulatory regime that is open to international business, non-discriminating, predictable, transparent, responsive to threats and opportunities rather than in weakening standards to attract business.”

Saporta’s comments come hot on the heels of newly-appointed Chancellor, Kwasi Kwarteng, stating that he will “outline regulatory reforms to ensure the UK’s financial services sector remains globally competitive.” It is not a stretch to suggest that her comments offer an alternative view to regulation – one that views solid regulation as a competitive boon rather than a hurdle to growth.

Regulation as a helping hand to competition

Expanding on the anatomical imagery, as well as her approach to regulation, Saporta notes that “responsive regulation can be a helping hand boosting competition, not a dead hand stifling innovation.” Innovation versus regulation is a well-worn debate and one that has largely been dispelled – regulation, if done right, can bolster innovation. Conversely, Saporta suggests, compromising on regulation in favour of ‘competition’ or ‘innovation’, can “unsettle financial markets and pose threats to wider financial stability”.

In remarks which come close to a direct criticism of the government’s deregulation dreams, Saporta adds that there is not a need for the UK to take a route of deregulation which is better suited to “centres that are seeking to start from scratch or from modest beginnings” rather than “global financial centres that already enjoy and want to enhance their existing strengths.”

Instead of stripping back, the PRA will look to make rules that “allow the UK economy to benefit the most from the UK’s strengths as a leading financial centre without compromising on safety and soundness”. Moving forward, the PRA will have “many opportunities to review” existing policy and regulation – doing away with those that don’t work for the UK and building upon structures that will bolster competition, innovation and stability in turn.

“Regulators can contribute to the success of UK financial services by maintaining a record of strong and predictable rules, openness to international business and alignment with international standards that they have a strong hand in influencing.”

Predictable, consistent, international regulation

Drawing on industry feedback, Saporta notes that the PRA understands that financial institutions of all shapes and sizes “value predictable and consistent regulation”. This is an area that, under current government reforms, has been thrown into a state of flux.

For compliance and change management teams, this has led to an unrelenting need to firstly keep up with regulatory changes and then implement those changes across their business. This is even more difficult for firms who operate globally, who must carry out this operation in each jurisdiction in which they operate.

The strains of the compliance team have not gone unnoticed by Saporta who, as well as advocating for predictability and consistency, notes that:

“Firms today face requirements scattered across primary legislation, statutory instruments, retained EU law, UK Technical Standards, PRA Supervisory Statements, PRA Statements of Policies, and Guidelines, Recommendations, and Q&As originally drafted by European Supervisory Agencies.”

This, says Saporta, needs to change. As well as a need for strong and resilient regulation the PRA is working towards international standards. Regulatory standards that are clear and can operate across borders boost competition insofar as they “avoid inefficiencies that would arise from international firms having to comply with a different set of rules” when they operate in the UK. Under the FSMB, the PRA aims to create a “single, easily useable rulebook” – though this won’t happen overnight and will be a “multi-year project”.

Strong, but not unbending

Strong regulation supports competition, but only where it is paired with the ability to grow and evolve with emerging needs, technology and market movement. Strength builds trust, but obstinance is off-putting. The PRA’s vision for regulation is not “stronger and ever stronger”, but instead a system of resilient regulations that will see a turning down of the dial where necessary.

Rounding off the speech, Saporta added that, where a menu of options is available to the regulator for pursuing safety and soundness, “we will choose the one that facilitates competitiveness and growth”.

CUBE comment

Vicky Saporta’s speech is an interesting one. It treads a fine line between setting the PRA’s approach and distancing the PRA from the government’s proposals. What is clear is that Saporta doesn’t believe that a “regulatory race to the bottom” will boost competitiveness or is needed given the maturity of the UK market.

Regardless of political speculation, it is clear that the PRA is taking its new regulatory objective seriously and setting out firm messaging about how it intends to tackle that objective.

What does this all mean from a regulatory compliance perspective? Much the same as it has meant for the last few months – an increased muddying of the regulatory waters. To stick with the anatomical messaging, it is a headache…perhaps more a migraine.

What is important to note is that the future – whether it is deregulation or increased regulation (or even both) – will still see a wealth of regulatory change. It still requires firms to consider and reconsider what their obligations are. There are some conflicting parallels here between the desire to de-regulate and the need to regulate for new innovation and investor preference (notably crypto, climate-risk and BNPL). Couple this with the FSMB and we have a heady mix of regulatory reforms.

I, for one, don’t envy the compliance officers, lawyers and regulatory change managers tasked with bolstering policies, procedures and controls in one area while simultaneously winding down in others. It’s hard enough to keep up with the change, let alone implement it. At least it appears the regulator is on side with a desire to offer stability and clarity. Here’s hoping it’s a commitment it can stand by.