Regulators Need ‘Cultural Change’ to Avoid us ‘Sleepwalking into the Next Financial Crisis’ – The London Economic
The London Economic

Regulators Need ‘Cultural Change’ to Avoid us ‘Sleepwalking into the Next Financial Crisis’

Regulators need to undergo a cultural change if we are to avoid sleepwalking into the next financial crisis, a new report has found.

The study by Cass Business School for New City Agenda revealed that the Prudential Regulation Authority (PRA) and Bank of England need to go much further to improve transparency and engage with the public, and that the new Financial Conduct Authority (FCA) chief executive Andrew Bailey will need to demonstrate his independence from politicians and the financial industry and prioritise cultural change.

It also advised that politicians must reform financial legislation so regulators are transparent and can be held accountable and that government must also appoint diverse leadership and board members.

The Most Reverend and Right Honourable Justin Welby, Archbishop of Canterbury and New City Agenda Advisory Board Member said: “New City Agenda’s report into cultural change in the UK’s financial regulators is an important piece of work which reminds us that restoring trust requires regulators to practise what they preach. The report sets out clearly the progress made by the FCA, PRA and Bank of England and where improvements are still needed.

“As the FCA has demonstrated with its action in the payday lending market, financial regulation can play a key role in protecting consumers. Regulators also need to ensure that their culture promotes access to financial services and supports the development of smaller community institutions and new entrants.

“I commend this report and encourage all those who care about developing a financial regulatory system which prioritises the needs of society to read it and act on its recommendations.”

The report finds:

Stuck in regulatory spin-cycle: Following a crisis, politicians respond to public outrage by introducing new legislation and more detailed regulation. However this new regulation is being progressively watered down. This lays the foundations for the next crisis.

A deep seated culture of box-ticking: The UK’s regulatory system is costly, complex, centralised and captured. The administrative costs of regulators are now over £1.2 billion a year – six times what they were in 2000. There are over 13,000 pages of rules, guidance and supervisory statements published by the FCA and PRA. The FCA handbook costs £3,641, the same as a second hand Mini Cooper. This creates regulation which is both bureaucratic and ineffective.

From rhetoric to reality: The Bank of England and the PRA sought to transform their cultures through the ‘One Bank’ initiative and have made steady progress. The FCA also made piecemeal efforts to change its culture and was blown off course by pressure from powerful stakeholders.

Forgetting the lessons of the crisis: The FCA scrapped its review of bank culture and is failing to make effective use of its new powers. The CEO of the FCA was removed in what was widely perceived to be a political sacking orchestrated by the Treasury. The PRA is disagreeing with Sir John Vickers on extra capital as it has an unevidenced faith that its supervision will stop banks taking excessive risks. Weakening rules designed to hold senior banking executives to account is the fastest example in over 300 years of watering down regulation following a crisis.

External perceptions: Stakeholders viewed the Bank of England and PRA as high quality regulatory agencies. However some stakeholders thought they lacked transparency and could be closed and even arrogant. Stakeholders 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.

Internal barriers to cultural change: Within the Bank of England / PRA, we found that the ‘One Bank’ strategy received a mixed assessment from employees, with some stating that it was not yet having a positive impact on the way they worked. Within the FCA we found that employees felt they had been better supported to take a more proactive approach but this was in danger of fading. We identified some significant barriers to change at the FCA including bureaucracy, silos in the organisation, lack of opportunities for career progression, and internal and external pressure on the organisation.

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