The boss of Schroders has called on the Financial Conduct Authority to more clearly separate its consumer protection powers from its duty to enhance the competitiveness of the City, as he issued a rallying cry to end “safetyism” in financial regulation.
Speaking at the City A.M. Summit at Aquis Exchange yesterday, the outgoing boss of the FTSE 100 asset manager, Peter Harrison, said investors had been forced to “aim off” risk by City watchdogs and British markets had been starved of capital as a result.
The comments came after months of criticism from the former government towards the Financial Conduct Authority over whether it has embraced a new objective to promote the competitiveness of the City and the growth of the economy.
Although the new mandate was introduced by the Treasury last year, it is only a ‘secondary objective’, meaning it falls behind the FCA’s primary duties to protect consumers and financial markets in its list of priorities.
Harrison said he would have liked the regulator to make competitiveness a primary goal and called on the FCA and the Treasury to make a clearer distinction between consumer protection and industry regulation.
“I think [consumer] issues need looking at holistically, and the workings of wholesale markets need looking at holistically,” Harrison said. “And if we blur the two too much, we’re going to get ourselves in a muddle. Now they do cross over, but I would love to see a greater clarity of those two things being separated.”
Asked whether he would like the FCA to be split up, he said the government should be “super wary of making those big structural changes”, but defining consumer protection and industry regulation as “very different work streams” and “not muddling them” would help develop a more favourable regulatory environment for British companies.
While the FCA has distinct units that oversee wholesale and consumer markets, the two bleed into each other in cases where City firms have an impact on consumers.
Therefore, asset managers were among scores of firms impacted by the FCA’s sweeping shake-up of consumer rules last year.
The Consumer Duty, as it is known, has increased the responsibility of regulated companies to deliver good outcomes for consumers.
Harrison said the change had been a “headache” for Schroders that had required “tens of thousands of pages of work”, though he added it was ultimately necessary.
The FCA has said the change sets “higher and clearer standards of consumer protection across financial services” and requires firms to “put their customers’ needs first”.
Harrison’s comments followed a wider call from City executives at the City A.M. Summit yesterday to embrace risk in regulation and unlock a wave of capital from big institutional investors.
The new Labour government is looking to unlock pension cash and divert funding toward domestic companies and infrastructure projects.
Chancellor Rachel Reeves said on Monday that the government would “turn [its] attention to the pension system” to unlock funding for “homegrown British businesses.”
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FCA cracks the whip on consumer duty
Nikhil Rathi, the FCA chief executive, has similarly said the regulator is looking to unlock more “firepower” from pension funds and encourage more money to flow into a wider range of assets
“The system has veered towards greater risk aversion in investment choices, rather than some of those long-term decisions,” Rathi said in parliament in May.
However, Harrison warned that big investors were still hamstrung by stringent rules and a culture of risk aversion, which had stymied meaningful investments in companies and assets like infrastructure.
“We’ve got a safety-ism that’s built into everything, every one of us that runs a regulated business – it’s aim off, aim off, aim off [risk],” Harrison said.
“The cumulative amount of agency ‘aiming off’ has got us in this position. When you’ve got prudential regulatory authority closing the net, there is no point in having too much risk,” he added.
Pension money managers and major insurance firms are restricted by rules that force them to match the predicted return of their assets with their liabilities, which is the amount of money they will pay out to savers.
The rules have typically lent themselves to investments in more predictable asset classes like bonds.
The government and Prudential Regulation Authority, which oversees banks and insurers, are looking to loosen the rules in a bid to free up capital to flow into assets like infrastructure.
However, the changes are unlikely to lead to a significant uptick in equity investment.
“The problem is entirely of our own making,” the Schroders chief added. “We defined risk-free as some form of cash-flow matched zero-risk instrument and everything was keyed off, no one thought, is that going to give us a good outcome for end [pension] savers?”
Under the previous government, the former chancellor Jeremy Hunt and former Lord Mayor of London, Sir Nicholas Lyons, corralled nine of the country’s top pension money managers to pledge five per cent of their assets into the private markets by 2030 under a programme dubbed the ‘Mansion House reforms.’
However, a year after the agreement, progress has been limited.
City A.M. revealed earlier this week that pension bosses are set to meet in the Square Mile on Thursday to discuss progress on the plans.
The Prudential Regulation Authority declined to comment. The Treasury declined to comment.