On 16 June 2020, Charles Randell, Chair of the FCA and PSR, delivered a speech addressing a virtual roundtable of bank chairs, hosted by UK Finance. Mr Randell considered the immediate impact of Covid-19 on the financial services sector in the UK and the FCA’s role in the recovery of the industry. The key points from his speech include that:
- The crisis has highlighted the significant volume of customer debt, lack of savings and ongoing sale of unsuitable investments to consumers. There needs to be a purposeful response to these issues, particularly as small businesses emerge from Covid-19.
- Digitisation has impacted the way consumers have behaved during the crisis and will continue to change our societies. Therefore we need to consider the impact of this, particularly for vulnerable customers.
- The demands on the FCA, as we recover, will be large. The FCA is turning its mind to the future of regulation and a shift in focus to consumer outcomes.
Mr Randell started his speech by offering his thanks to all those who have kept the financial system functioning throughout Covid-19. He explained that we are now moving into the next phase of the crisis. Although we do not know how quickly the economy will recover, the FCA is considering the type of system we need for, and following, the recovery and what kind of financial conduct regulator we need to support that system.
Mr Randell explained that there have been a number of areas where the pandemic has heightened the speed and severity of pre-existing challenges. None more so than debt, both business debt and personal debt.
During the pandemic the FCA has adjusted its rules so that lenders can lend quickly to small businesses who needed it most under a government-backed scheme. However, these are loans and not grants and, as Mr Randell has said, some of these loans will turn out to be unaffordable. The FCA knows that the industry needs to respond well to this ‘overhang’ without it becoming a ‘drag on the recovery’. It needs to be dealt with fairly and quickly which may require lenders to increase the size of their arrears handling functions. The FCA, the Financial Ombudsman Service (FOS) and the Business Banking Resolution Service will need to ensure they have capacity to deal with the volume of dispute resolution which may be seen. Mr Randell explained that the FCA is keen to ensure that there is not a repeat of 2008 where business borrowing by some small and medium-sized enterprises was dealt with inappropriately.
A significant number of people have taken mortgage holidays. Echoing Chris Woolard’s podcast on 8 June 2020 on ‘Emergency regulation and future planning’, Mr Randell explained that, as we emerge from the crisis, some of these borrowers will not be able to return to a normal repayment plan and will need a tailored package to get them through. Looking to the longer term, the FCA is saying that the crisis has highlighted the number of people with very little financial resilience and who are not able to pay their bills leading Mr Randell to comment that we need to use this as an opportunity to examine ‘the role of debt and saving in our society’.
Mr Randell pointed out that although interest rates remain at low levels, consumers will continue to look for returns on investments. Therefore, it is as important as ever ‘to reduce harmful borrowing’ and to help savers achieve a return without taking on more risk than they can afford. It is the FCA’s view that the system needs to be redesigned in order to achieve this. In addition, the FCA believes that people need to be educated about savings, how to diversify their portfolio and to understand what they can afford to lose. Although innovative business should be encouraged, it should be provided in a way which is consistent with consumer protection. Mr Randell referred to comments he made last year that unlisted and illiquid investments are risky and not suitable for most individual savers. The FCA is also of the view that firms who market investments inappropriately should not be able to pass on the bill for their misconduct to well-run firms through the Financial Services Compensation Scheme (FSCS).
Mr Randell linked the issues presented by unsuitable investments to the ease with which they can be advertised online through the digitisation of financial services. In addition, digitisation presents a risk of exclusion to those who are not online, who are often the most vulnerable in society.
In addition, Covid-19 has driven social changes which have accelerated the digitisation of financial services for consumers. When the pandemic is over and life hopefully returns to something resembling ‘normal’, these changes may be permanent. This may have a disproportionate impact on vulnerable customers. Mr Randell also warned that as banks continue to feel squeezed in a low-interest rate environment, they may continue to withdraw services which they see as unprofitable but which are immensely valuable to some customers.
The FCA’s business plan for 2020/2021 also focused on each of the issues above and described them as business priorities. The FCA proposes to provide more details on these issues as the year progresses.
A financial system and a financial conduct regulator for the recovery
It is the FCA’s hope that firms can build on the trust they have earned from their customers during the pandemic and that there is an increase in trust in the UK financial services industry as a whole.
As the FCA also said in their 2020/2021 business plan and as mentioned by Megan Butler in her speech at the start of June on the FCA’s expectations for 2020, Mr Randell referred to the FCA’s need to transform its own operations. This course was set for the FCA in Mr Randell’s forward to the FCA’s Annual Report in July 2019.
The FCA expects to effect this transformation by intensifying its focus on consumer outcomes, moving away from the traditional rules-based approach. The FCA hopes this will start to deal with the shortcomings with the current system.
The FCA has said that one focus needs to be dealing with the information asymmetry which exists between many financial firms and their customers. Although the FCA’s existing rules will go some way to dealing with this, there may need to be changes to the regulatory perimeter to deal with particular issues, for example, stopping ‘harmful sludge practices’ which deter customers from shopping around for, switching or claiming on, their insurance.
Although the task may seem daunting and the effects of the pandemic long-lasting and far-reaching, the FCA is positive in their view that it also presents many opportunities including to reshape the financial system and to transform the regulator to support a thriving financial services sector into the future.