Regulation in the time of Covid: Part 3 (103) 16/6 - regulation, red tape & risk

Starting on 16 March last year, I began writing daily blogs about the impact of the Covid crisis on financial regulation. Other issues, notably Brexit and digitisation, have featured as well but Covid remains the dominant driver of regulation as we enter 2021.

Yesterday's report by the task force for innovation, growth and regulatory reform, led by Iain Duncan Smith MP, contains a raft of recommendations around financial services (and other) regulation and is the biggest manifestation so far of the "bonfire of red tape" rhetoric that preceded Brexit. The headline recs for FS cover pensions, venture capital, a common law approach, Fintech, and proportionality around disclosure; others, such as its proposal to replace GDPR with a "more proportionate" framework, would also have a big impact on FS. It will be worth following how much influence the report has on the future regulatory framework (FRF) for UK regulation. But today I'll take a step back and touch on a couple of the trends that have led us to the present position.

(1) The decreasing UK political appetite for consumers to be subjected to risk, particularly in financial services. Fuelled by the financial crisis, this runs through, for example, HMT's 2011 decision to exempt FS from the 2011 "one-in-two-out" approach (resurrected here), SMCR (which emerged from a parliamentary commission), and the extending definition of vulnerability/Duty of Care.

(2) The increasing quest for consistency, which has led to regulators (largely at firms' behest) writing rules of ever greater granularity, often at the same time as they are advocating greater reliance on principles and outcomes. And while the EU is at the "detail" end of the spectrum, this is a global trend and is unlikely to go away anytime soon, not least with digitised rulebooks coming over the horizon.

In both instances, the gap between rhetoric and reality reflects tensions at the heart of most regulatory debates: Without regulation, is there too much risk to consumers and/or markets/the system? With regulation, should the risk diminish or just move elsewhere? How important is a level playing field? Do the right actors pay the cost and is it worth it? The next step is probably to see how HMT responds to the report in practice...

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