Accused of Going Too Far, UK Finance Regulator Plots Where to Go Next

The UK’s top financial regulator has spent much of its eleven-year history in combat with the industry it oversees, a tone set by its first chief executive Martin Wheatley, whose zeal for fining banks got him ousted in 2015.

Now, top executives at the Financial Conduct Authority are trying to rewrite the script by devising a five-year strategy they hope will shore up support among the more than 42,000 companies policed by the agency, as well as a new government pushing for a more growth-friendly approach.

Two people familiar with the project told Bloomberg News that “Strategy 25,” on which officials have been engaging with stakeholders for months, would target longer-term work around boosting consumer resilience, pension reform and tackling financial crime, with growth at its heart.

“The FCA is at a turning point on the secondary competitiveness and growth objective and on their approach to risk,” said Miles Celic, head of industry lobby group TheCityUK, referring to the secondary mandate given to the UK’s financial regulator last year.

Chancellor Rachel Reeves said last Thursday regulators had “gone too far” in their efforts to curb risks and ordered them to turn their attention toward supporting the economy.

“The concern is that they end up being a drag on government ambitions rather than an engine for them,” Celic said. On the growth agenda, he said “to whatever extent thishas permeated the top of the organization, it needs to cascade down into the levels where there is day-to-day decision making and engagement with regulated firms.”

It’s a longstanding tension that’s continued to simmer during the stewardship of Nikhil Rathi, the former London Stock Exchange executive whose five-year term ends next October.

Controversies have included a plan to “name and shame” companies under investigation that’s being reassessed after an industry backlash, as well as a wide-ranging consumer rights push that triggered a clash with the former City minister, and a contentious probe into motor finance that has torpedoed shares of affected companies.

Sky News recently reported Rathi, whose signature initiative was a three-year “transformation plan” that concludes in April, will not ask for another term and alsospeculated that he was among the candidates for the UK’s top civil service job. The FCA declined to comment. People familiar with the situation, who asked not to be named discussing the regulator’s internal operations, said he had been actively working on Strategy 25.

Bank Bashing

The new Labour government, which has the power to reappoint or replace Rathi at the end of his term, last week issued the FCA and several other regulators with new “remit letters” asking them to do even more to boost the competitiveness of the UK’s financial center.

In doing so, the FCA must balance its duties to protect consumers and prevent other harm as it oversees everything from banker misbehavior to market infrastructure and the explosion in online fraud, while enticing staff to stay with the regulator instead of defecting to better-paid roles in industry.

Rathi came to the FCA at a time of crisis. Within months of his appointment, the regulator was publicly lambasted for its handling of the London Capital & Finance mini-bond scandal and ordered to make improvements. Previous FCA chief Andrew Bailey, now governor of the Bank of England, was criticized by lawmakers for being too soft on the finance industry.

Rathi has positioned himself as a tougher enforcer, issuing fines for banks failing to monitor money laundering and cracking down on tech giants that host get-rich-quick scam advertisements. The new consumer duty extended the FCA’s powers further. He also overhauled the watchdog’s pay structures, in a move that briefly sent some staffers to the picket lines.

Yet the 45-year-old has remained a low-profile figure in the finance community. Industry leaders, who asked not to be named discussing the regulator, complain that they see Rathi less often than his predecessors, and that when they asked for him the FCA typically offered other executives like markets head Sarah Pritchard or chief operating officer Emily Sheppard instead.

“I don’t like the way the FCA operates at the moment,” said Sharon Bowles, a member of the House of Lords financial regulation committee. “You’ve got the chair and the CEO and they’re in some kind of ivory tower.”

Rathi has given ten keynote speeches since September 2023, and been a panelist at a further seven events. He is also active in international regulation, including chairing the financial stability engagement group at global securities standard setter Iosco and speaking with consumer groups and charities.

Rathi has defended the agency’s achievements in public appearances, and the FCA has ample data pointing to improvements. At last count, it was publishing 51 operating metrics annually, along with quarterly data on authorizations, where holdups were a major bugbear for industry when Rathi took over.

The authority is now dealing with 98.5% of all authorization applications within the statutory deadlines, up from 97.8% in 2021/2. The FCA has also claimed victories in enforcement, where the number of cases opened shot up from just over 1,200 in 2022/3 to almost 4,200 in the year through March.

Several finance executives, lawyers and regulatory experts offered a less complimentary take. Almost all asked not to be named, citing possible backlash for publicly criticizing their regulator.

Bowles, a Liberal Democrat lawmaker, said her committee has encountered similar issues where executives air grievances in private session but “won’t go on the record” when the hearing begins. The committee is carrying out a review of the effectiveness of UK’s financial regulators, including the FCA.

Some people in the industry said that while overall waiting times fell, some applications still took too long – particularly for crypto licences – because of FCA staffing and other operational issues. The FCA has repeatedly rejected this criticism.

The data on enforcement is similarly disputed. Some, including a recently departed member of the FCA’s enforcement staff, argue that the higher numbers of cases reflects the pursuit of low-hanging fruit rather than complicated problems, where real harm is being done but wins are less certain.

Still, the FCA can point to results in several complex cases, such as the former Barclays Plc chief executive Jes Staley, whom the FCA banned from the UK’s financial services industry last year for “recklessly” misleading regulators and his employer over his relationship with Jeffrey Epstein. Staley is challenging the decision.

The most high-profile initiative of Rathi’s first strategy was overhauling how FCA staff were paid, scrapping discretionary bonuses and raising minimum pay. Some staff were so aggrieved they staged an unsuccessful push for union recognition.

Despite the initial backlash, the FCA says levels of attrition among its 5,000-strong workforce are back at pre-Covid levels. Its most recent employee survey shows that its Trust Index has rebounded from a low of 48% in 2022 to 64% now. One staffer told Bloomberg the agency had completely transformed culturally and was now a better more modern place to work.

Others disagree, including two individuals who told Bloomberg they had left the FCA because of the changes.

New Priorities

The budding 2025 strategy comes as the FCA’s responsibilities grow. The regulator will begin supervising Buy Now Pay Later firms and how they treat millions of British customers in 2026 and will continue its work on private markets, a key risk identified by regulators across the world.

Its focus on pensions reform comes as the government plots legislation to create “megafunds” by pooling existing funds into pots of at least £25 billion so they can take bigger risks and make bigger investments.

Consumer resilience describes how well individuals handle shocks such as losing their income. It covers everything from encouraging individuals to save for a rainy day by pressing banks to offer them a fair interest rate to tasking companies with supporting customers in distress.

Industry figures are focused more on the FCA being a predictable and thoughtful supervisor than specific policy areas.

“At a time of significant macro-economic and geo-political uncertainty, the FCA will need to ensure that it brings the market as well as consumers along on that journey – policy surprises such as the enforcement transparency proposals and unexpected or far-reaching supervisory interventions will not aid this process,” says Nik Kiri, partner at Linklaters’ financial regulation group.

Chris Cummings, chief executive of the Investment Association, said the FCA should strive to tackle “an overemphasis on eliminating risk, without considering the wider unintended consequences.”

“Risk is necessary if the economy is to grow, and we encourage the regulators to consider the cumulative impact of regulation and as well as its practical implementation,” Cummings said. “With technology continuing to rapidly evolve, speed and regulatory responsiveness will also be critical to the success of the FCA over the coming years.”

Bowles, meanwhile, would like the FCA to do more “mystery shopping” in its next era to check whether customers are being treated fairly. She highlighted cost disclosure rules that make investment trusts appear less attractive.

She is not particularly hopeful of being able to influence the FCA’s course on that, or anything else, even though the watchdog is a frequent visitor in Westminster, providing oral evidence 38 times in the last parliament alongside 41 written updates.

“The problem is we’ve created monsters,” she says. “In financial services, we have delegated too much so that they feel that nobody can get at them. They’re supreme beings.”

Photograph: FCA Chief Executive Nikhil Rathi; photo credit: Chris J. Ratcliffe/Bloomberg