Regulation in the time of Covid: Part 3 (80) 7/5 - Outcomes' realism (finally)

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.

It's rare to read a major speech on regulation that explicitly walks through the history of an issue and recognises its complexity and difficulty. This speech on regulatory outcomes, by Charles Randell (FCA Chair) joins that select group and builds on a broader speech of his a couple of weeks ago. At the time, I outlined three core problems the FCA would need to overcome to make outcomes-based regulation work: (1) the influence of the macro economy; (2) finding metrics that work, and; (3) the long-term nature of the effort required.

I was closely involved with the FSA's approach to outcomes and the speech summarises this history well, covering in the process the first two problems and using the same examples of the financial crisis and TCF to illustrate. However, it only really alludes to the third problem, the long-term effort required. This comprises several different challenges but two of the most damaging are: (a) objective interpretation of the metrics; and (b) the attention span of ExCo and Board given the pace of events they have to deal with.

Taking these briefly in turn... On (a), few outcomes can be measured by single metrics - typically you need a basket of proxies, and all can be challenged; so building a credible story involves acknowledging the imperfections and not overclaiming, both of which have proved to be a challenge. And regarding (b), ExCos and Boards have consistently not wanted to devote the time required, meeting by meeting, to properly consider the evidence of success (or not) in achieving outcomes and the trade-offs that have been made. None of this difficulty will go away but the FCA has a better chance of solving it by approaching the challenge with its eyes open.

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