UK regulators ‘sleepwalking’ to next financial crisis

The culture of the UK’s financial regulators needs to change to avoid ‘sleepwalking’ into another financial crisis, according to report by the Cass Business School which warns that crucial changes following the 2008 crash are already being watered down

The report, which was prepared for the financial services think-tank New City Agenda, is based on analysis of reviews of regulation, speeches by politicians and senior regulators, third party reports, and interviews with current and former regulators at both senior and junior levels, and a number of other stakeholders.

Its analysis suggests the UK is stuck in a ‘regulatory spin-cycle’, whereby following a crisis, politicians respond to public outrage by introducing new legislation and more detailed regulation. However, this new regulation is progressively watered down, not sufficiently enforced or repealed, it says.

Secondly, it identifies a ‘deep seated culture of box-ticking’, with the administrative costs of regulators now over £1.2bn a year – six times what they were in 2000. There are over 13,000 pages of rules, guidance and supervisory statements published by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).

The research points out the FCA handbook costs £3,641, the same as a second hand Mini Cooper, and says that while ‘this complex box-ticking gives a veneer of safety and security’, the move to increasing amounts of rules ‘creates regulation which is both bureaucratic and ineffective’.

The research says there is often a gap between the rhetoric and the reality. The Bank of England and the PRA sought to transform their cultures through the ‘One Bank’ initiative and have made steady progress. However, it says the FCA’s ‘piecemeal efforts’ to change its culture were blown off course by pressure from powerful stakeholders, citing the scrapping of its review of bank culture.

The report highlights that the government has already removed a key recommendation of the Parliamentary Commission on Banking Standards by weakening the rules – known as the ‘reverse burden of proof’ – which were designed to ensure individual senior bankers were held accountable for misconduct.

It states: ‘This was a particularly swift example – the fastest in the 300 year history of financial regulation - of the process of watering down of the regulatory framework which inevitably follows as memories of the crisis fade.’

According to its research, stakeholders viewed the Bank of England and PRA as high quality regulatory agencies, but were less positive about the FCA.  They pointed to the variable quality of staff, excessive box-ticking, a culture of secrecy, a lack of willingness to use new powers granted by Parliament, a lack of clarity about what the regulator was trying to achieve, a lack of independent evaluation, internal silos and poor engagement with small players in the financial industry.

Professor Andre Spicer, professor of organisational behaviour, Cass Business School, and he report’s author, said: ‘Britain’s financial regulators must change to avoid sleepwalking into another financial crisis that will have a devastating effect on our economy and political system. 

‘If we want to avoid this, just making minor tweaks to the ever expanding rule book is not enough.  We need to ensure a meaningful change of culture at our major financial regulators – they must practise what they preach.  There is evidence of positive change but more needs to be done – or there is a big risk these important transformations will be derailed.’

The report makes a number of recommendations. They include more efforts by the PRA and Bank of England to improve transparency and reduce group think, and greater support from politicians for tackling what it calls ‘the culture of secrecy’ in UK regulators by removing section 348 of FSMA.
It says financial legislation must be reformed so regulators are transparent, and calls for a more diverse leadership and board members.

In addition, the report calls on Andrew Bailey, the new FCA chief executive, to demonstrate his independence from politicians and the financial industry and prioritise cultural change. It states: ‘Leadership changes and the perception of political interference are in danger of making the FCA into a timid and cowed regulator.’

Lord Sharkey, non-executive director New City Agenda, said: ‘Andrew Bailey, the new CEO, has a unique opportunity to put cultural change at the heart of his plans for the FCA. It is encouraging that he has prioritised creating a clear mission for the FCA and ensuring that it can be held accountable for progress. It is vital that this process of cultural change in the FCA is consistent and helps restore confidence in the regulator.’

Practicing what they preach? Cultural change in regulators is here.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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