Greg Kilminster
Head of Product - Content
FCA speech on calmness in a sea of reform
In a speech at City & Financial Global's City Week 2024, Sarah Pritchard, Executive Director, Markets and Executive Director, International at the Financial Conduct Authority's (FCA) spoke about ensuring regulation supports the UK’s position in global wholesale markets, facilitates economic growth, and enhances international competitiveness. She also highlighted an outcomes-based regulatory approach that fosters innovation and maintains market efficiency.
Importance of the UK financial sector
Pritchard began by reflecting on the significant role of the UK financial sector, which employs more than 2.5 million people and contributes £278 billion to the economy, generating £100 billion in tax revenue. She noted that an efficient and effective capital market is crucial to the success of this sector, stressing the FCA's commitment to supportive and adaptable regulation.
Regulatory reforms
Pritchard discussed the FCA’s ambitious agenda for regulatory reform, rooted in the strength of the UK’s financial markets. London, ranked second globally as a financial centre, is set to benefit from reforms aimed at increasing market efficiency and international competitiveness. Key reforms include the listing rules overhaul which represents the most significant change in 40 years. The move from separate premium and standard categories to a single, disclosure-based category aims to empower investors to make informed decisions based on comprehensive disclosures while preserving market integrity.
Proportionate capital markets reform
Pritchard also noted ongoing adjustments, such as the establishment of a consolidated tape for bonds to enhance data accessibility and the recalibration of bond and derivative transparency regimes to improve transparency at a lower cost.
The FCA, said Pritchard, is focused on sensible, incremental changes that support regulatory objectives without unnecessary alterations. Key initiatives she mentioned included:
- Investment research payment flexibility: Greater choices in how firms can pay for research, promoting competition and aligning with international standards.
- Enhanced transparency: Efforts to provide timely and relevant information to investors, supporting informed decision-making and market confidence in a cost-effective manner.
Predictability and future-focused regulation
Pritchard stressed the importance of predictable and agile regulation to support innovation and adapt to changing markets. This approach is vital for the UK’s growth and competitiveness. The FCA aims to learn from past issues to set future-focused frameworks and outcomes. For instance, the regulation of artificial intelligence (AI) will focus on ensuring safe adoption, digital infrastructure, resilience, consumer safety, and data protection.
Innovation and international engagement
Pritchard argued the FCA's innovation services, including the 10-year-old innovation sandbox, are world-leading and support market developments in areas like Distributed Ledger Technology, AI, and blockchain. Key points she made to back up her claim included:
- The Global Financial Innovation Network (GFIN): A global sandbox bringing together 80+ members, facilitating cross-border tests and fostering international cooperation on innovation.
- Environmental, social and governance (ESG) leadership: Initiatives like the Sustainability Disclosure Regime and ESG labelling have garnered industry support and encouraged international alignment.
Collaboration in a changing world
Recognising the increasingly turbulent geopolitical landscape, Pritchard emphasised the need for international cooperation and consistency in standards to navigate global financial markets. She added that the FCA is committed to:
- Testing and engaging with the market: Convening roundtables and consultations to ensure regulations drive desired outcomes and avoid unintended consequences.
- Responsive regulation: Listening to market feedback and being evidence-led, particularly regarding sensitive issues like the timing of enforcement investigations.
Pritchard concluded by encouraging ongoing dialogue and engagement with the FCA to support effective and efficient capital markets. She added that the concerns regarding recent proposals to announce the names of firms in enforcement investigations earlier on in the process where it is in the public interest to do so have been noted, and that the regulator will take time to consider the feedback, engage further with industry and explore thoroughly the concerns and evidence shared with an aim of reaching a broad consensus.
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DFSA speech: a modern regulator for the future of finance
In a speech at the HFM Middle East Summit, Ian Johnston, Chief Executive of the Dubai Financial Services Authority (DFSA) shared insights on the evolution of the DFSA to meet the needs of the Dubai International Financial Centre (DIFC) and emphasised the importance of being a future-ready regulator.
Early days: a new regulator for a new financial centre
The DFSA was established to regulate the newly formed DIFC, set up to manage regional wealth and act as a local agent in capital transformation. The regulatory framework was initially based on the UK model and the old Financial Services Authority (FSA) Handbook, creating, it was hoped, a familiar environment for international institutions. Building credibility was critical, achieved through membership of international organisations like IOSCO and signing bilateral MoUs with key jurisdictions such as the UK, US, and Hong Kong.
Establishing the regulatory framework
In the early years, noted Johnston, the DFSA introduced key regulatory frameworks, including the Collective Investment Rules and the Hedge Fund Code of Practice. These measures set high standards, helping to establish the DIFC as a credible financial centre with strong regulation. By the Centre's 10th anniversary, the DFSA regulated 461 firms, including more than 50 asset management firms.
Growth and development
Over the years, the DIFC has grown significantly, becoming a major hub for reinsurance and asset management. In 2023, the DFSA recorded its highest number of authorisations, licensing 117 new firms. The DIFC is now home to over 700 regulated firms, including many of the world's top banks, insurance companies, and asset managers. The asset management sector, particularly hedge fund management, has seen robust growth, with the DFSA regulating in excess of 200 asset management firms. He added that “Our regulatory approach generally is risk-based, and outcomes focused. This means we focus resources where we consider the greatest risks to our statutory objectives. To achieve this, we supervise firms in a data-led and proportionate way.”
Adapting to change
Johnston highlighted the importance of evolution to avoid stagnation. The Dubai Economic Agenda (D33) aims to double Dubai's economy in the next decade, positioning it among the top global cities. The DFSA has adapted to support this vision, introducing crowdfunding rules in 2017, the Innovation Testing Licence for fintech innovations, and regulations for investment and crypto tokens.
Future focus
Johnston emphasised the need for the DFSA to be more approachable, less risk-averse, and more engaged with stakeholders. Recent changes he mentioned include:
- restructuring operations,
- restoring a dedicated licensing team, and
- digitalising forms to streamline the licensing process.
The DFSA has also introduced regulatory fee waivers for ESG listings and has relaxed rules for funds investing in crypto tokens.
Commitment to standards
Johnston stressed that the DFSA continues to prioritise AML/CTF regulations, preparing for another FATF evaluation in 2026. The authority is also concluding thematic reviews on outsourcing, complaints handling, and disclosures. Enforcement remains targeted and proportionate, focusing on protecting investors while encouraging industry growth.
Johnston concluded by acknowledging the significant global shift in the financial landscape since the DIFC's inception in 2004. The DFSA aims to prepare for the next 20 years, supporting the growth and development of the DIFC and Dubai as a leading financial hub.
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PSR finds lack of effective competition in card scheme and processing services
The Payment Systems Regulator (PSR) has released its interim report on the market for card scheme and processing fees, identifying significant concerns about competition. The report focuses on the dominance of Mastercard and Visa, revealing that the two major card schemes face no effective competition, allowing them to increase fees substantially without corresponding improvements in service quality.
Scheme fees are charged by Mastercard and Visa to participate in their card payment systems. Processing fees are charged by Mastercard and Visa for authorisation, clearing and settlement services for card payments
Key findings
Mastercard and Visa dominate the UK card market, handling 95% of transactions involving UK-issued cards. This near-monopoly has resulted in a lack of competition in the supply of core scheme and processing services to merchants and acquirers. During the past five years, fees for these services have increased by more than 30% in real terms.
Limited competition and transparency
The PSR's review found that competition is limited, especially in optional services where alternatives cannot match the comprehensive offerings of Mastercard and Visa. Additionally, pricing structures are complicated and often unclear. Acquirers, who enable merchants to process card payments, face challenges in accessing fee information and often receive insufficient notice of fee changes, hindering their ability to negotiate better terms.
Potential remedies
To address these issues, the PSR is considering several remedies aimed at increasing transparency and competition:
- Improved transparency: Ensuring that businesses and acquirers receive clear and detailed information about fees and services to make informed decisions and consider alternative suppliers.
- Fee change documentation: Requiring Mastercard and Visa to explain and document the reasons for any price changes and the pricing of new services.
- Increased reporting: Mandating greater financial reporting from Mastercard and Visa to enhance the PSR's oversight of their UK operations.
The PSR also emphasises the need to explore alternative payment methods, such as account-to-account payments facilitated by Open Banking. This could provide greater choice and reduce reliance on the dominant card schemes.
Next Steps
The PSR is inviting feedback on its interim report from stakeholders, including businesses, card issuers, acquirers, and cardholders. The feedback period is open until 30 July 2024. The regulator plans to publish its final report in Q4 2024, and if the findings are upheld, it will consult on the implementation of the proposed remedies.
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Michael Barr discusses reform of capital, liquidity and resolution resources
In a speech at the 28th Annual Financial Markets Conference hosted by the Federal Reserve Bank of Atlanta, Michael S Barr, Vice Chair for Supervision at the Federal Reserve, spoke about the current stance of monetary policy and the conceptual framework of prudential bank regulations, in particular adjustments under consideration following the banking stress of spring 2023.
Following a brief summary of the current monetary policy and reminder of current employment and inflation levels, Barr moved on to discuss the existing prudential regulatory framework for the banking system and in particular three components that underlie its resilience: capital, liquidity, and resolution resources.
Capital
Capital, said Barr, serves as a primary buffer against losses and financial instability. The Federal Reserve employs multiple models to set capital requirements, including leverage ratios, risk-based rules, and stress tests. These measures ensure banks can absorb unexpected losses from various risks.
Liquidity
Liquidity regulations, said Barr, ensure banks have sufficient high-quality liquid assets to manage sudden funding outflows and support orderly resolutions. While liquidity cannot fully guarantee survival in a bank run, it stabilises banks and prevents stress from spreading when combined with ample capital.
Resolution resources
Finally, Barr cited resolution resources, such as long-term debt and resolution planning, which can help facilitate orderly wind-downs of failing banks. Long-term debt provides loss-absorbing resources post-failure, reducing the need for taxpayer support and increasing market confidence.
Barr pointed out too that all three elements “are tiered so that larger firms that pose a greater risk to financial stability are subject to stronger requirements. This tiering runs through all of our regulation and supervision and reflects the diversity of banks that support our economy”.
Periodic adjustments
Barr noted that post-global financial crisis reforms strengthened the US banking system significantly. However, the Basel endgame proposal aims to finalise these reforms by ensuring accurate risk-weight measurements for capital requirements. The Federal Reserve is currently reviewing public comments on this proposal to refine and improve it.
Lessons from the spring 2023 banking crisis
The failures of Silicon Valley Bank (SVB), Signature Bank, and First Republic in early 2023 revealed vulnerabilities in the regulatory framework, said Barr. SVB's exposure to rising interest rates and a slowdown of tech sector activity, coupled with unprecedented deposit withdrawals, highlighted the need for better management of interest rate risks and liquidity resources. Signature experienced a deposit run that resulted in the bank's failure in the same weekend as SVB and First Republic failed a few months later. Both SVB and Signature Bank were resolved after the Board and the Federal Deposit Insurance Corporation (FDIC) recommended to the Treasury Department that it invoke the systemic risk exception, allowing the FDIC to guarantee these banks' deposits.
Capital reform
Barr suggested the Basel 3 endgame proposal would extend requirements for reflecting unrealised losses on capital to all large banks, which would better address interest rate risks observed in recent bank failures.
Liquidity reform
Adjustments to liquidity regulations being explored by the Federal Reserve include:
- Requiring large banks to maintain a minimum amount of readily available. liquidity proportional to their uninsured deposits.
- Restricting reliance on held-to-maturity assets in liquidity buffers.
- Recalibrating deposit outflow assumptions for high-net-worth individuals and venture capital or crypto-related businesses, which tend to withdraw funds quickly under stress.
- Revisiting the details of the application of our current liquidity framework for large banks.
Barr noted also that “many firms have taken steps to improve their liquidity resilience, and the regulatory adjustments we are considering would ensure that all large banks maintain better liquidity risk management practices going forward”.
Long-term debt requirements
The events of last spring underscored the importance of long-term debt in managing bank failures. Long-term debt enhances loss absorption and aids in orderly resolutions, reducing reliance on the Deposit Insurance Fund and minimising the need for emergency interventions. The Federal Reserve is considering a proposal requiring large banks to issue and maintain a minimum amount of long-term debt, which received supportive feedback during the public comment period, currently being reviewed.
In concluding his speech, Barr reiterated that capital, liquidity, and resolution resources form the foundation of the post-financial crisis regulatory framework. Recent banking stress has highlighted the importance of each component and the need for ongoing adjustments to maintain a resilient financial system. By refining these regulations, the Federal Reserve aims to ensure that banks can continue to provide essential credit to households and businesses under diverse economic conditions.
Click here to read the full RegInsight on CUBE’s RegPlatform