The FCA's changing emphasis

It was a genuine honour to have Nikhil Rathi (the CEO of the Financial Conduct Authority) agree to be our first ever guest on the Fairer Finance podcast last week. He gave us an hour of his time – and we were not asked to approve questions in advance, or steer clear of any topics. Instead, we were given free rein to ask him anything we wanted for almost 60 minutes - and to push him on areas where we think the FCA could be doing better.

His willingness to take on an unfiltered, unscripted interview is an incredibly positive indication of the culture of the FCA. I can’t think of many – maybe any – other CEOs or senior politicians who would do the same.

Nikhil is an incredibly skilled communicator – and is impressive in his ability to talk articulately both about the macro picture whilst also being able to dive into the detail. Unsurprisingly, what he said was very consistent with what we’ve heard from him in other public forums such as the Treasury Select Committee.

But we did get the chance to push him for clarity on some trends that we have seen emerging over the past 18 months. Here are my main takeaways from the interview.

The FCA wants to avoid writing new rules

It’s clear that the Treasury’s pro-growth, deregulation agenda continues to drive the direction of travel at the FCA. This is not something that Nikhil says in the interview. But he acknowledges that the government has been clear about its ambition for growth – and acknowledges the importance of the letters sent by both the Chancellor and Prime Minister which have urged the FCA to get behind that.

As you would expect, he tries to take that direction from Government – and then explain why it’s important and why it makes sense.

While the Treasury has not explicitly told the FCA to stop writing new rules – its request to streamline the rulebook implicitly does that. And it’s clear that as well as reviewing and repealing some old rules – the FCA is trying not to write new ones unless it absolutely has to.

Obviously, the FCA is in the process of writing regulation for the Buy Now Pay Later Sector, and there are other pieces of work (such as pensions value for money) that were already in the pipeline. So new rules will be written.

But Nikhil is clear that where possible, their preference is to use the levers of Consumer Duty – mostly through supervision – to raise standards.

For me, this approach is problematic for a few reasons. Firstly, you cannot solve market wide failures with firm by firm supervision. You can eliminate the worst conduct – but this approach bakes in an acceptance of some of the broader market failures which need market wide responses.

Where I agree with the FCA is that Consumer Duty can do most of the heavy lifting here. But we still need the FCA to issue new clear guidance around the Duty if we are to fix those market issues. And it seems like there’s less appetite to do that at the moment.

In my view, Consumer Duty sets a bar that is well above where most firms are operating. When it was first launched, the FCA began to pick off areas where firms were falling short – and publicly address them. For example, at one point in 2023, it made an example of the investment platform industry – calling them out for the very poor interest rates they were paying on cash. Some platforms were also “double-dipping” paying low interest as well as taking platform fees on the cash.

In the two and a half years since, double-dipping has stopped but many platforms still pay no cash interest at all. And the FCA now seems to have dropped this issue.

There are hundreds of examples like this across dozens of different markets: areas where markets are not operating within the spirit – and arguably even the letter - of the Consumer Duty rules. But until the FCA steps forward and states that it feels a market is not meeting the Duty – then providers will take comfort from the fact that everyone else is still doing exactly the same.

In our interview, we asked him specifically about the 0% credit card market. This is a business model where good outcomes of wealthier individuals are subsidised by the poor outcomes of the least financially resilient. Objectively, this doesn’t pass the fair value test - but the FCA is choosing to look away. In our interview, Nikhil suggested this was a social issue that would be more for the Government to deal with. We don’t agree on that point.

VREQs are an increasingly popular tool

We also talked about the FCA’s approach to enforcement – and the fact that there is a growing use of so-called “voluntary requirements” (VREQs). These are voluntary deals with the regulator where firms agree to change their behaviour – and sometimes even compensate consumers – but aren’t necessarily subject to formal enforcement action or public sanction.

I accept that a VREQ can be an expedient way of stopping poor conduct. But equally, I think it’s important that firms are held to account publicly for really poor conduct – and that there is accountability for the directors who oversaw and directed that conduct. The oddity with VREQs is that while they are usually published on the firm’s FCA register, there is no public announcement. So it’s possible to find out who has them by trawling through the register – or submitting a Freedom of Information request – but many have been and gone without getting into the media or the public consciousness.

Again, the Treasury’s influence here is clear. And actually this was the one moment in the interview where Nikhil was more explicit about the Treasury playing a role. A year or so ago, the FCA consulted on rules to name firms who were under investigation – in certain circumstances. But after a backlash from industry, the plans were dropped. Nikhil also says in his interview that the Treasury were not fans of the name and shame proposals.

But as a result, not only did these plans get shelved, but my perception is that the FCA is now more reticent to make a public example of any firm – unless there is a very serious breach of the rules. And moving forward, the increased use of VREQs means that we are likely to see less mainstream financial services firms being sanctioned for misconduct. Breaches are more likely to be dealt with by supervisors behind closed doors.

Nikhil pushed back on this in the interview, pointing to fines against Natwest, Monzo and Nationwide over the past couple of years. But cases tend to take a while to reach the public domain. And I think it’s likely that in a couple of years time, there will be fewer cases to point to like this – which have reached conclusion with fines and a public sanction.

Nikhil points out that the FCA is still very busy in enforcement – reaching 40 outcomes last year vs 30 the year before. But many of these are for market abuse – at an individual level. These are important of course. But we would obviously like to see the regulator being more proactive in mainstream retail markets – which I think is less likely.

Nikhil certainly bristled at our suggestion that the general mood music from the FCA could leave firms feeling like the pressure is off. And I know that many firms we speak to do feel like they are under pressure at a supervisory level. But I guess when it comes to the broader market wide issues – our view would be that firms do feel the pressure is off for now.

A difficult era for social fairness campaigners

The final thing that occurred to me from our interview was that it is going to be a tough environment to get movement on structural market issues that lead to unfair social outcomes. We talked specifically about the premium finance market study – and Nikhil suggested that the broader unfairness of lower income households borrowing to pay for their car insurance upfront was a social issue for Treasury rather than something the FCA could tackle.

I can certainly see his point of view – but I think in days gone by, you might have seen the FCA deciding to weigh in on something like this.

For campaigners trying to eliminate the poverty premium – and I count ourselves amongst those – his comments highlight that this is a difficult environment in which to make progress.

In its motor insurance taskforce report, the Government said the FCA would deal with the issues of premium finance in its market study. But in the end – while rates have come down slightly – we are left with no appetite to deal with the broader unfairness that is inherent in this market. The Treasury points at the FCA, the FCA points at the Treasury.

We recently wrote to the FCA – along with other consumer groups – about our disappointment with the premium finance market study. At the very least, we would like the regulator to write back to ministers acknowledging some of the social issues in the market and formally putting the matter back on ministers’ desks.

If we can’t get movement on these issues under a Labour government – it seems unlikely we ever will.

Rebalancing risk

One final takeaway was that it’s clear the FCA continues to be willing to let consumers take more risk – particularly in the context of mortgages. We had a broad discussion about how repossessions have remained low in the UK for a long time, and how that might change now as lending rules are relaxed. I felt Nikhil went a little further than he had before in saying that it was worth risking a few more repossessions to enable tens or even hundreds of thousands more first-time buyers onto the property ladder.

I don’t think that’s an unreasonable position to take. But I worry about how that concept is evolved across other markets.

I don’t think it’s the job of regulators to wrap consumers up in cotton wool and prevent all harm. But I do think that financial regulation should try and prevent as much harm as possible - particularly harm that has life changing consequences. Prospective first-time buyers might be gung ho about doing whatever it takes to get on the housing ladder. But if that ends up significantly restricting their life choices or ends with the trauma of a repossession, we know that they may eventually feel differently. So we should closely monitor how this loosening of the rules changes outcomes. And of course, we mustn't lose sight of the obvious point that lending more money to today’s first-time buyers does not help with the fundamental problems in the property market. We need to address the supply problems.

Final thoughts

As I’ve said before, being a regulator is not an easy job – and I think the FCA has some thoughtful, smart and principled people running it. But the change in emphasis is a little dis-spiriting. For me it underlines the need for more independence for our regulator from Government. As Meg Hillier said in her op-ed for the FT last week, this Government is giving too much air time to the financial lobby – and not listening enough to the consumer view. Its direction to the regulator is to do the same. But the FCA should be free to interpret its statutory remit and make longer-term decisions without fear of short-term political whims. It’s encouraging at least to have a strong chair of the Treasury Select Committee – who sees the current picture clearly, and who is willing to stand up to her own Ministers. If you've not read her piece in the FT last week - please do.