Tracey McDermott, acting Chief Executive of the FCA, called last week for a more sustainable regulatory framework that does not just reflect the atmosphere of the time. She was referring to what is being increasingly seen as the regulatory pendulum – the process of intense regulation following a financial crisis which then wears out to a sufficient lack when the policy engineers believe their job is complete.
What is needed, says McDermott, is something which breaks this cycle. Too often history has shown the self-destructiveness of the pendulum – financial crises have occurred when regulators have become too lax, and economic stagnation has tended to creep in when the regulations have tightened up.
So, is she alone in this criticism? No, it wouldn’t appear so.
Complaining about regulation seems to be the new trend, and now even the regulators themselves have jumped on the bandwagon. Whether it be issues with regulatory exuberance (over-complexity) or exasperation over an alleged one-size-fits-all model, it does seem to be turning into the winter of discontent in the financial world. It may not be fair to criticise those crafting the policies for the exceedingly difficult job they have – indeed the FCA, in particular, are mandated to foster innovation while having to be on the lookout for out-of-the-ordinary behaviour (difficult, perhaps oxymoronic, at times!). Maybe there is a need for a design overhaul.
What is interesting about this news is that it comes from the top figure of the very organisation set up to provide effective and efficient regulation. It is always important to announce and discuss future strategy, but is something more sinister going on here? Have the FCA lost control of the very thing they created? There does seem to be something quite Frankenstein-like about regulation following a crisis – while it may start out as an agenda crafted by the regulators, it very quickly develops a mind of its own. As the increasing complexity of financial markets demands increasing complexity of respondent regulation, it’s easy to see how quickly the original plan can be lost as regulation suddenly seems to almost outpace innovation.
It doesn’t seem like we’re quite at the point of revolution yet, though. Upcoming regulations remain present and persistent, and it may take some time before the regulators work out the sweet spot between too much and too little.
In the meantime, there is always the potential for keeping the debate lively about creating this future regulatory framework to foster innovation, yet still punish recklessness. Indeed, the recent moves towards harmonisation in worlds such as trading, client classification and market abuse via growing global initiatives such as the LEI and CRS are perhaps building the foundations of something more stable and consistent.
McDermott is right, regulation does need a haircut; it can’t just be left to grow, but neither can it be allowed to be cut short and expose the market to another crisis. Better to forge the debate than sit in the corner and watch the pendulum gain momentum.
And dialogue has stormed in to the room as the main challenger to the pendulum. Indeed, disparities between regulators, firms, jurisdictions and new regulations could all be solved a lot easier if all the stakeholders weren’t making decisions in such a compartmentalised manner. JWG’s CDMG and MIG meeting groups have found themselves at the forefront of the provision of dialogue – many of our participant firms and vendors are now praising the simple, yet startlingly successful, achievement of getting people in the same room.
Discussions are opening up new ideas for meeting regulations with the most efficient methods, and, in turn, creating the case studies of today and tomorrow as to how the financial sector acts and reacts to its own issues. Maybe this is what McDermott was talking about when she talked of encouraging self-regulation – and it’s starting right here!