Balancing acts – FCA General Counsel on growth, technology and consumer protection

Which factors have had the biggest impact on the financial services sector in recent years and how is the FCA responding to that? 

I would highlight two factors. First, increasing geopolitical fragmentation, with an increasingly bipolar world, is having a significant impact on the financial services sector and its regulation. In the UK, Brexit has created some new challenges, but also some opportunities, as a result of greater regulatory flexibility. We are keenly aware of the challenges businesses now face in adapting to a changing world. We work with our international partners, such as IOSCO, to implement a coherent, rules-based regime which fosters collaboration and growth across multiple markets.

The second factor, which is increasingly important, are new innovation and technologies, such as AI and quantum computing, which are expanding in their reach and impact. We are seeking to understand their impact on markets and to operate as a thought leader in this sphere.

How is the (FCA) adapting its regulatory approach to accommodate the rapid growth of fintech and other emerging technological innovations in the financial services sector?

Emerging and more mature technologies are evolving at pace, and part of a regulator’s responsibility is getting up to speed to understand how these new technologies are impacting and/or will impact upon markets and consumers. We have had a lot of success with our innovation services, which recently marked their ten-year anniversary. The FCA was at the forefront in establishing its regulatory sandbox and its approach has since been embraced by other regulators with around 95 regulators around the world implementing something similar. We also assist firms to understand how their new business models may fit within the regulatory framework through our Innovation Pathway services. And, in August 2023 we also opened our digital sandbox permanently (rather than solely to be used for our tech sprints). Using synthetic datasets, firms can try out new technologies and products before rolling them out to consumers. The approach has the added benefit of fostering growth, and we have noticed firms are more likely to obtain funding having been through the sandbox.

We are seeking a regulatory framework which works regardless of the technologies used and focuses on principles and outcomes for consumers and support the development of beneficial and responsible innovation and use of technology, such as AI and are open to new approaches and ways of thinking about technology, AI included.  As part of our newly launched AI lab, we will among other things hold an AI sprint in January 2025 to inform our regulatory approach to AI and whether any changes or additions may be needed.

What measures is the FCA implementing to enhance cybersecurity within the financial services industry, especially with the increasing reliance on digital platforms? 

Cyber security and operational resilience are hugely important areas for regulators worldwide and the FCA is no exception in this. Regulators need to give good, practical advice which builds in operational resilience within companies and their supply chains, but also guidance on how firms can protect themselves. As the recent CrowdStrike incident has made clear, technology is deeply entwined within global business operations and has the potential to cause major disruption and damage. Our work with the UK Government and the Prudential Regulation Authority on the new critical third parties regime is part of addressing this problem and managing and maintaining stability within our financial ecosystem. Regulators have an important role to play in overseeing the links between financial institutions and the growing number of third-party service providers to ensure compliance with operational resilience rules.

Can you share insights on the FCA's approach to enforcement actions and how it balances deterrence with fostering a cooperative regulatory environment?

Enforcement is an impactful deterrent in the regulator's toolkit, but it needs to be put in the context of other regulatory tools and in conjunction with engagement with industry. We regulate roughly 40,000 institutions but only take enforcement action against a handful of these, when it is appropriate to do so. Enforcement is a pinprick of the total interactions we have with regulated firms, with most of our engagement through authorisation and supervision. Through enforcement, we highlight poor behaviour and we use enforcement as a deterrent. Within the enforcement process itself, how firms respond to investigations is an important factor, and we take into account the cooperation of the firms who are subject to enforcement proceedings.

The process of seeking authorisation or understanding what is required by those standards should not itself be a headache for firms.

Do you think you have a responsibility to promote growth within the financial services sector? 

Yes, and this is now reflected in a secondary objective we have to facilitate international competitiveness and medium to long term growth, which we take seriously. The financial services sector is vital to the UK economy – not only in terms of the significant tax revenue it generates, but also in the crucial role it plays in facilitating other important segments of the economy by providing liquidity and capital for investment.

Recent measures we have instituted, such as reforms to the UK listing and prospectus regimes, reflect a clear imperative to protect and drive growth in the UK. These are deliberate measures reflecting the reality of what it takes for economies to grow. Achieving growth is not easy, and will take more than just us acting, but fundamentally it requires investment, and that carries with it an element of risk.

Wholesale market reforms which reduce friction and provide more transparency are an important part of the growth equation, but so too is helping investors to make more informed decisions. Growth cannot be achieved without decent standards and trust; nor can you create a stronger investment base without more confident and educated consumers.

Are there any other factors driving adaptation within the financial services sector which we have not identified but which you would like to comment on? 

Sustainability is a key concern for us. This includes areas like sustainable and transition finance which are an increasingly prevalent and important part of the economy. Last year, we introduced new sustainable disclosure regime labels to ensure consumers can trust the claims made by firms about sustainability. New rules can help investors by adding a level of transparency, but they also require international coherence. At the FCA, we are ready to play our part in fostering more sustainability globally which will in turn help drive growth.