Regulators usually talk about contagion risk in relation to the firms and markets they regulate, and we have seen this in action recently with prudential risk, both in the US – Signature Bank, Silicon Valley in March, First Republic, PacWest in May; and in Europe – the search for the next domino to fall after Credit Suisse. But contagion risk also applies to regulators.

Depending on your perspective, the Bank of England’s latest grilling by the Treasury Select Committee over high inflation was either a welcome sign that the central bank is being held more accountable for its actions, or the latest step in the politicisation of the Bank that began with the Brexit rows under the previous Governor. Either way, the age of political deference to the Bank, which reached its peak in 2010, seems over.

The contagion effect on PRA regulation is likely to be seen most acutely in the debates over the Edinburgh Reforms and the PRA’s proposed “strong and simple” changes to bank capital requirements, which ironically are themselves quite political.

Listing towards risk

Traditionally, of course, it’s been the FCA, and the FSA before it, that has been the main target of political influence, and it’s hard not to see political fingerprints on the FCA’s proposed reforms to make listing in the UK more attractive. Indicative of this is that the proposals make a virtue of the shift towards transparency but are more coy about the extent of the “change to risk appetite” they would entail.

An even more important debate, however, would be about how much difference regulation really makes to the likelihood of firms choosing to list in London. As alluded to in the press release, the last 20 years have seen multiple regulatory initiatives in this vein, usually encouraged by a political nudge. But none of them has visibly shifted the dial, except in lowering due diligence standards; just possibly, other factors might be much bigger – see FT article The Everything Blueprint — how British chip company Arm became a global powerhouse.

Less regulation often makes for easy rhetoric but isn’t always the answer.

Consumer Duty imminent?

The FCA is continuing to raise expectations of the Consumer Duty, with a speech from Sheldon Mills promising that if firms “get the implementation right … it will deepen their trust with customers and deliver better outcomes for people and small businesses”.

This is a high bar, and success will be almost impossible to prove, not least during a cost of living crisis, and it’s doubtful any regulation can meet the weight of ambition that’s been loaded onto the Duty. And while it’s true that the idea of a “duty of care” had cross party support in Parliament, it’s not hard to imagine this unanimity disguising a multitude of beliefs, splintering on exposure to daylight.

Neither are we likely to see the Duty’s impact as early as is often implied. The July implementation is only for existing business on “a forward looking basis”, and will only apply to closed books from next year. Meanwhile, enforcement cases will take several years and some, such as Duncan Minty, have questioned the effectiveness of the Senior Manager Regime in this context.

At best, therefore, the Duty will demand patience if it is to succeed, but this virtue is likely to be in short supply from politicians facing an election year.

Woodford saga latest

The FCA’s response to the 2019 collapse of the Woodford Equity Income Fund is another area attracting political scrutiny.

Four years on, the regulator has negotiated a proposed redress scheme, but its figures have already been questioned in an FT opinion piece and the story could well run on, a possibility implicitly acknowledged in Enforcement Director Therese Chambers’ recent blog. If so, it will be in good company, with mortgage prisoners and British Steel pensions other current cases where the FCA has struggled to draw an effective line under the past.

There is a long history of the regulator negotiating redress deals and then presenting them to consumers as oven ready. The split capital trusts scandal, in the 2000s, is probably the most famous example. And although the regulator’s motivations – to secure a good deal and rapid pay out, so avoiding a prolonged, expensive and uncertain legal case – are honourable, its reputation usually takes a hit along the way.

The meaning of access

I’ve written recently about the risk of increasing financial exclusion, and access to cash, on which the FCA has just published the latest statistics, is the most visible element of this dangerous trend.

The headline numbers can look almost positive – 96.5% and 99.8% of the population within 2km and 5km respectively of a cashpoint – but it doesn’t take much digging to get worried (eg the declining availability of post office branches, when post offices are meant to be a big part of the solution).

More broadly, however, the figures disguise some of the reality – the market town about to lose its last bank branch when it had four a decade ago, the inner city estate with no free ATM. In such cases the impact goes way beyond financial regulation financial regulation, and it wouldn’t be a shock if journalists began investigating this more. It’s a surprise that they haven’t already.

Regulators have played their part in getting us here but if it becomes a political issue they are likely to be landed with more than their share of the blame.

Enforcement’s double-edged sword

More on this next month but there is a big argument looming over the purpose and effectiveness of regulatory enforcement. The political aspect of this has usually been in the shadows, and some of the basics – that enforcement fines are returned to the industry in the form of fee rebates, that so many firms get discounts for early settlement even when cases take forever to settle – might well dismay the public.

And enforcement’s profile is growing … the increasing focus on financial crime, the review of the senior managers regime (SMCR), proposed amendments to the Financial Services & Markets Bill, questions over whether the Consumer Duty is bark or bite.

Politicians have usually wanted it both ways – lots of bad guys getting caught without it costing much – but the story’s foundations could now be eroding.