The Future of Regulation: From Culture to Climate Change

Published On April 20, 2020

The last few years have seen a significant shift in focus for regulators around the globe. Radar examined the most recent messaging and moves from international regulators, as well as speaking to former SEC Commissioner Mike Piwowar, to establish the direction of travel for future regulation.

United Kingdom

Brexit – a springboard for regulatory change

On 31 January 2020, the UK left the European Union. For many, this is a topic that has been laboured, so I’ll keep it brief. Political agendas aside, it is undeniable that Brexit offers uncertainty and change for the UK’s Financial Conduct Authority (FCA). Speaking at the UK Financial Services Industry Beyond Brexit Summit, the FCA’s Director of International, Nausicaa Delfas, commented on the potential effect of Brexit, “our markets are highly integrated and in some areas this integration may increase as firms both in the UK and EU27 restructure to be able to service their customers – though in other areas we may see markets fragment.”

The effect of Brexit on the regulatory landscape is not yet clear. However, FCA intends to use Brexit as a reason to look to the future, “It has been 10 years since the financial crisis and the subsequent reforms we put in place, and now is the right time to review our approach to regulation. And Brexit provides added impetus to look at things again”, said Delfas.

This is a sentiment that was echoed by Christopher Woolard, Executive Director of Strategy and Competition (and now interim Chief Executive), on 21 October 2019. In a speech entitled “Regulation in a Changing World”, Woolard announced that, while the FCA takes no position on the substance of Brexit, “leaving the European Union may provide us with an opportunity to do things differently.” As such, the future of regulation under the FCA looks likely to include reflection and change – with Brexit as a springboard.

Regulation in a changing world – an outcomes-based approach

Woolard’s speech at the City of London Cicero event on the Future of Regulation suggested a shift in attitude. Instead of ploughing ahead with potentially clunky rules and guidance, Woolard announced that the FCA is asking whether its regulatory model is “still the right one.” It has come to an “intersection”, potentially caused by Brexit, or by “the failure of light-touch regulation a decade ago” or by “the volume of regulation and the way it’s overloaded firms.” Whatever the cause, Woolard announced that the FCA needs to engage in a discourse about the type of regulation that will “best deliver for the public today and tomorrow.”

The FCA is waking up to the idea that the financial services landscape is changing fast, but existing rules, guidance and systems aren’t necessarily keeping up: “we live in a very different world to the one in which our rules were framed.” In its period of reflection, the FCA intends to move to an outcomes-based approach, where it asks what outcomes are most desirable in the market and therefore designs rules “to fit the end-purpose they serve.” It intends to move from “a narrower compliance with the rules, to a focus on delivering the outcomes we want for the users of financial services.”

Over the past few years, the FCA has put out numerous messages addressing the pace of change and its efforts to regulate in line with it. Woolard’s speech, in many ways, feels like a genuine reckoning with the FCA’s efforts and is almost an admission that current methods aren’t necessarily working to suit the market, “the reality is that we have a lot of actors on the stage – industry and regulatory alike – with differing statutory or commercial goals, many of which may be legitimate, but possibly unsynchronised.” Its current handbook, for instance, is “difficult to navigate and doesn’t make expectations clear” (by Woolard’s own admission). The FCA understands change is needed. “Simply put” Woolard said, “our aim is to be regulator fit for the age we’re in”.

Operational resilience & data

Woolard’s speech implied a seismic shift across the regulatory landscape as a whole. However, there have also been some more targeted messages coming out of the FCA – especially around technology and data. In a podcast in May 2019, Andrew Bailey (now Governor of the Bank of England but then FCA Chief Executive) set out his views for the FCA’s business plan and the future of regulation. In that podcast he revealed that one of the FCA’s chief strategic objectives is investing in data, particularly in data analytics, acknowledging that “we’ve got some quite heavy lifting to do on that front.”

Bailey also set out that “operational resilience is the risk that has come up the league table very quickly”, alongside cyber risk and data security. Firms, he said, should be “future-proofing their technology – they have to do everything they sensibly can do, they have to subject themselves to rigorous testing.” Not only is the FCA looking to invest in data and technology, but it is beginning to ask that regulated firms do the same.

At a Conduct Risk Roadshow in May 2019, Woolard set out similar ideals, noting that the FCA is embracing technological change in a bid to understand “not only how technology can drive new products, services and firms in consumers’ interests, but also what it can do to reduce the compliance burden of existing ones and make them more effective.” The future of regulation for the FCA is one that embraces and understands technology – both to meet its internal regulatory goals and in its expectation of firms meeting their regulatory obligations.


The FCA is quick to highlight that its predominant role as a financial regulator is to protect customers. In the past, it has adopted an outward-looking approach to culture insofar as the FCA would look at the way in which firms were treating customers and meeting their regulatory obligations. However, the future will see a new stance on culture, one that is not only based on external interactions but also how firms conduct business internally. Commenting on this issue in a podcast, Andrew Bailey commented that a firm’s culture “can’t be divorced from how they run themselves internally”. This includes internal issues such as workplace discrimination or sexual harassment.

Bailey acknowledged that some may ask “why is that relevant to the FCA given your statutory responsibilities are all about conduct towards customers?”. The answer, he says, is obvious: “what you do inside your firm and how you behave will have an effect on our objectives. So please don’t think that we are prepared to ignore what goes on and moreover, that we expect management not to ignore it.”


Green finance

For the Monetary Authority of Singapore (MAS), the future of regulation extends beyond the realms of finance alone. In a move that is not yet echoed by many other global regulators, MAS’s regulatory future is one planted firmly in tackling climate change, which it describes as “the ultimate challenge for humankind”. In a Keynote Speech by Ong Ye Kung, Board Member of MAS, he set out its ambition to “leverage green finance to make the world greener…finance rules the economy and business. It determines investment decisions. It drives action. We must make finance green, to drive climate action.”

In his speech, Kung set out that climate change poses increasing risks to the financial system. Firstly, physical risks arising from climate change can damage assets and property – this of course affects insurance claims and can lower collateral values of some bank loans. Secondly, loans and investments will gradually devalue, specifically in the energy sector, as old assets such as fossil fuels become “stranded”. He added that in order for the financial industry to be future-proof, “financial institutions should make early strategic shifts in capital allocation from carbon-intensive to greener businesses, or risk being stuck with environmentally unfriendly ‘stranded assets’.”

In 2017, the Singapore Exchange introduced a “comply or explain” regime for sustainability reporting, whereby listed companies are now required to disclose and explain their sustainability practices. Similarly, MAS is intensifying its supervisory focus in this area. Over the coming year, it will issue Environmental Risk Management (ENRM) guidelines across the industry that will set out its expected standards.

Climate change is an area of increasing interest to the financial markets – especially millennial investors. Singapore’s regulatory bodies seem to be ahead of the curve in recognising and facilitating this movement. As well as consulting on new guidance, MAS intends to use its pro-tech standpoint to develop and facilitate technology that will “spur Green Finance” adding “we are already beginning to see interesting FinTech solutions.’’

Technology and innovation

As we’ve written in the past, MAS appears to be techobsessed – frequently launching new initiatives to encourage innovation. By its own admission, MAS has a “strong base of technological capabilities”, which it will continue to develop into the future. MAS understands that everyone is using tech – from consumers to compliance – which it aims to facilitate and develop. It sees innovation and technology as a “force for good, to overcome challenges and improve lives” from climate change to cross-border systems.

MAS has made countless commitments to encouraging new tech; in a recent speech Kung noted “we encourage and expect our financial institutions to adopt new methods and technology”, specifically those technologies that help tackle anti-money laundering and risk mitigation. It has also highlighted, in a recent speech by Merlyn Ee, Director of MAS, that it expects firms to prioritise “surveillance” of representatives within the financial industry.

Learning from others

With trade wars and protectionism on the rise, the cross-border nature of financial systems is under threat. Financial regulation is becoming increasingly nationalistic, with less consistency across jurisdictions and less focus on information sharing. Ravi Menon, Managing Director of the MAS, noted that if financial regulators are to succeed in their pursuit of innovation and embracing tech, different countries will need to “learn from one another’s experience.” Other countries, he added “notably India, Estonia and the Nordics, have created advanced industry-wide digital infrastructures.” In order for MAS to keep up with this new landscape, it will focus on information sharing and learning from others “to meet our own country’s needs as well as to ensure seamless interoperability of these infrastructures across borders.


Election year – don’t rock the boat

Unlike other regulators, the US may see less change to its regulatory system than in current years owing to the fact that 2020 is, of course, an election year. As the country goes to the polls, it is likely to be business as usual for financial services regulators and hopefully orderly markets. The Securities and Exchange Commission’s OCIE Examination Priorities for 2020 remain largely unchanged from 2019 with the usual focus on AML programs and information security.

The 2020 examination priorities did, however, highlight FinTech and innovation as a key element and recognise that “advances in financial technologies, methods of capital formation and market structures, as well as registered firms’ use of new sources of data […] warrant ongoing attention and review.” OCIE will also examine SEC-registered firms that are working in the field of digital assets, as well as those firms that provide so-called “robo-advice”

OCIE is not the only body looking to sharpen its focus on data. In December 2019, the SEC announced that it had appointed David Bottom as its Chief Information Officer in a bid to bolster the security and operational effectiveness of the SEC’s systems. The election year may reflect a relatively passive regulatory landscape, but the regulators will need to keep up with advances in data and tech.

Shifting focus – holding senior execs to account

Although there may not be a tide of change coming from the North American regulators, particular elements of regulation may shift focus over the coming year. One example is more scrutiny of the conduct of executives and senior individuals within the banking system. In January 2020, the US Office of the Comptroller of the Currency (OCC) announced that it had issued former CEO of Wells Fargo, John Stumpf, with a $17.5m fine and a lifetime ban from the banking industry for the part he played in the notorious fake accounts scandal at Wells. OCC issued similar penalties to other executives there.

In a recent conversation with former SEC Commissioner Mike Piwowar, he suggested that this action could be an indicator of things to come: “It has been an issue in the US for a long time – something that I pointed out when I was at the SEC – the agency seemed to focus too much on settlements with big headline penalties paid by corporations. For the staff, there is incentive via career advancement for them to get a big headline penalty from a big name firm.” He added that nobody went to jail for the financial crash, which remains a contentious issue across all sides of the political sphere, “this could be the beginning of a trend where regulatory agencies start going after more individuals, including senior executives…it’s a big deal.”

While US regulators have historically focussed on lower level individuals, usually unscrupulous financial advisers, this new willingness to tackle those at the top could spark a new wave of enforcement action whereby individuals at the higher levels of the industry will be monitored and held to account for their actions – or inaction.


Conduct and culture – increased supervision

Australia’s financial system is facing perhaps its biggest sea change following the Royal Commission Report in 2019, which unveiled systemic misconduct across the whole of the industry. For both the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) the future of regulation is not just about keeping up with the pace of change, it’s about covering some of the yawning gaps that have been allowed to emerge over time.

It is no surprise therefore that conduct and culture are at the top of regulator priorities for the future. Misconduct and bad cultures were allowed to flourish in the past and are the key to developing a sustainable system in the future.

In particular, ASIC is aiming to bolster its supervisory regime so that it is better equipped to monitor illicit behaviour. As Commissioner Cathie Armour pointed out, “our aim is to promote permanent cultural and behavioral changes in firms individually and across the financial services industry”; as such it is “adopting an enhanced and more strategic supervisory approach.” This approach, Armour added, will ultimately help detect cultural, organisational and management failings that could lead to conduct issues down the line. “Supervision adds a focus beyond current known non-compliance by looking at factors that create significant risk of future breaches.”

Following the fallout from the Royal Commission, ASIC was criticised for its enforcement approach, which was not strict enough and had failed to effectively prevent misconduct. A new supervisory approach appears to be a nod towards a stricter system that is focussed on the prevention and detection of misconduct as well as enforcement action. ASIC has already made strides with this new approach and conducted onsite interviews with banking staff, organisations and CEOs to tailor the approach. APRA has similarly set out “Governance, culture, remuneration and accountability” as top of its regulatory agenda.

Emerging technology and international cooperation

Surveilling and monitoring culture is an increasing priority for regulators globally. If they want to succeed, they need to embrace emerging technologies and encourage adoption within firms. With this in mind, ASIC has placed a strong focus on the use of “next-gen technologies” in its 2019-2023 priorities. Innovation, technology and behavior form a common theme throughout its 52-page corporate plan, which was published in August 2019. It highlights that its Office of Enforcement, which was established in 2018, will oversee the use of emerging technologies to enhance its enforcement capabilities. ASIC is joining a global movement among other regulators to encourage new ways of thinking to achieve compliance goals, and forming new teams to ensure such action is taken.

ASIC also plans to bolster its regulations on cryptocurrencies and would like to see information sharing between international regulators to “clarify how crypto-assets should be or will be regulated.”

Protect whistleblowers – prevent misconduct

Business Ethics that whistleblower protections form a key part of Australia’s regulatory future. Price points out, that ASIC is looking to reform the system so that more whistleblowers can act – “companies need their own people to come forward within their company when they observe or experience misconduct in the workplace. Whistleblowers can act as an early warning system, revealing problems before they become systemic or develop into a crisis.”