Financial Services Regulatory Enforcement mini-series, season 2, episode 6: Leading Enforcement: A deep dive with regulatory insider Miles Bake

Nathan:

Hello, and welcome to the Ashurst Regulatory Enforcement Podcast. I'm Nathan Willmott, and I'm joined here in the Fruit and Wood Exchange in London by two fellow specialists in financial services regulation. We have my colleague Adam Jamieson, and we're fortunate to have Miles Bake as our guest today. Welcome.

Now, Miles I think has a unique perspective on the topic of regulatory enforcement in practice. You've spent time working in private practice in a law firm, you've spent time working in a legal team at a bank, and you've worked extensively at the PRA and at the FCA. You were the Bank of England's Head of Enforcement between 2017 and 2021. And more recently, you were Director of Governance at the Financial Conduct Authority, which included the role of Head Secretariat for the Regulatory Decisions Committee. So, it's great to have you with us today.

Miles, I wonder if we could kick off with a broad topic of why is it that regulators choose to take enforcement action?

Miles:

I think that's a really great question, Nathan. Why do they? There's probably a number of pressures on this. First of all, they need to be demonstrating that they have teeth. And that's a market expectation, and it's a political expectation. And I think as regulators, firms need to have a line they cannot cross. So that's probably the main reason. Beyond that, I think it's very hard to know some big strategic questions like when to do it and how much to do it, and perhaps we could explore that, because they're questions that I and the PRA wrestled with quite a lot.

Nathan:

Yeah. And it feels that, well, when the Financial Services Authority was first created, and I think equally when the PRA was first created, they both had this concept that they weren't enforcement led regulators. And then over time, that sense of embracing enforcement as a way of, not only punishing firms that don't comply with the rules, and sending out a message of deterrence to the market, but also increasingly as a way of communicating what the relevant standards are, and what the regulators expectations are. Does that reflect your experiences?

Miles:

It does. Just to step back about how the PRA approached enforcement when I was there. There was really very little of a history of prudential enforcement from the FSA. There'd been very, very few cases. So when the PRA is created, it gets these powers, these enforcement powers. Not really got much of an idea about how they fit into the supervisory model. So I think the first few years there were spent thinking about when it is best used. And there were a number of small baby steps that we took with some cases sometimes jointly with the FCA starting to build that up. I think during my time, we were established as having a function that was there to pick up situations where supervisors would lead for 90% of the work, but there were these core of issues that they couldn't quite get the results they needed, whether it's attraction with the firms, or the messages to the market that they needed to do. And that's where enforcement stepped in. So, it's very much a kind of supervision-led, but there's a tail of matters where enforcement was the right thing to do.

And a couple of things that we were thinking about there, one of which was making sure that nobody in the market, no sector of the market that the PRA regulated, felt that we wouldn't take enforcement action against them. So you'll see from our record that we took action against everything from credit unions to global systemically important banks, we took action against insurers, we took action across the breadth of our rule book, and we also took action against senior individuals, whatever sort of firm they're in, from the smallest to the largest. So there was a bit of a principle that we want to make sure everybody knows, that enforcement is an option on the table if their situation demands it.

Beyond that, it was very much a sort of random walk, because crystallised risks crystallise when you don't expect them. And you could never really say, "Well, we're going to target a case in this area, we're going to target 10 cases this year," because misconduct in that environment is quite a random walk.

Adam:

Miles, it's interesting, the public side and the deterrent side of the question around the purpose of enforcement feels more straightforward. But from a regulator's perspective, thinking about the relationships that they have with firms and the supervisory relationships from a supervisor's perspective, what's their perspective on enforcement?

Miles:

So, two things there. And it's maybe worth drawing out the distinction between the PRA and the FCA. The PRA I think supervises roughly 1500 firms, and has roughly 1500 people working for it. So crudely one-to-one ratio. The FCA has something like 50,000 firms, plus unauthorised business, plus market oversight, and has got about 5,000 people working for it. I think that's one-to-ten ratio, right?
So, I'm putting really, really crude terms. The whole nature of the engagement that the respective organisations have with their regulated population is different. I think that means that the PRA can be much more supervision-led, simply because the balance of numbers is such.

And now to the second part of your question, one of the challenges was to make sure that supervisors didn't feel that "their firm" going into enforcement, represented a supervisory failure in some way. And that just because enforcement was coming in, that wasn't a sign that they sort of slipped up, or didn't have the traction they should have done. I think we got there, and actually was seen as a helpful supplement to their toolkit, very much positioned it as we are here to help you in the supervisory activity rather than a sort of competitor for glory, if you like. But that was definitely with some areas more than others.

Nathan:

Definitely that sense of, you talked about it being perceived as a supervisory failure, and the concern that someone else would be looking through your activities in great detail. And certainly from the outside it feels like that has changed significantly almost under the FSA and FCA, and I guess under the PRA, that it's been converted into almost a success, where the right case is referred across to enforcement, and the right messages are sent out to the market.

Miles:

Absolutely. And I think that's a cultural thing as well, how you behave as an enforcement team, and the way that you interact with people. I mean, for example, one of the things that I did when I was heading enforcement was that we had a committee that would help decide when to take on new investigations. And I was always really keen to make sure that representatives from both the supervisory team and the policy area would come along to those meetings to discuss it so we could get all the different views. And the FCA occasionally did as well, actually. So we got all the views in the room. And then whichever way we landed, at least everyone had had a good hearing, and it wasn't always the end of the story as well, we could continue the dialogue as we went along.

Nathan:

Yeah, and from the outside, that issue of which cases get referred to enforcement is a fascinating one, and it can lead to some quite surprising results, I think, for regulated firms. Sometimes they expect to get referred to enforcement and they don't, sometimes they think that they've done absolutely nothing wrong and get referred to enforcement. And what's that process like, that dynamic like, in terms of assessing, "Okay, does this one hit the threshold?"? And obviously that threshold moves up and down from time to time depending on caseload, depending on the sort of messages that you want to get out into the market. Certainly the FCA has talked about doing far fewer cases and raising its evidential threshold before it will take on a case.

Miles:

So, there's published investigation referral criteria, and we always really anchored the decision in those public criteria, because we know that's what is expected by the market, and it's also what we should expect of ourselves. That's our policy, we stick to it.

Nathan:

Yeah.

Miles:

Equally, you will tell me there's a lot of discretion under that. And there is. So, part of the go back to the benefit of having lots of people in the room is that you should be able to get a bit of a consensus around this, is it in line with strategic objectives of the organisation?

One thing that you've kind of alluded to there is where you choose to investigate and where you don't, whether you have targets for that sort of thing. We never had a target of either how many cases we should be taking on. I would report it, I would get management information on it, and I would report it upwards, but it was never a target, and I was never incentivised to get more, or to close them and reduce the caseload. I think that's just because it's going to say random walk goes up and down.

Beyond going through the investigation referral criteria, we didn't really have a particular rationale, but I think sometimes the things that would come in was have, is this an outlier? How aligned is this with the business plan, strategic objectives, particular types of policy that are coming through? You can't always tell that at the investigation stage, but definitely some of our enforcement cases were really well aligned with policy and supervisory priorities. I think that was a case we took against Citigroup, Citibank, around regulatory reporting, which was very much really well coordinated, internally was probably one of the cases I was most proud of because it coordinated really well between supervisory and policy priorities at the time.

Adam:

It brings up quite an interesting question, which is quite a live one, I think, particularly on the FCA enforcement side, given the direction of travel that they've taken over the last year in particular, which is, how much enforcement activity is the right amount? And it's quite a complex question, because it goes to both resource, timing expectations for how long these things should take, which has been a big issue for the FCA, but also it comes back to that purpose point. What's your views on how do you work out how much enforcement? In the absence of targets or metrics, how do you work out what the right amount of enforcement is?

Miles:

That's a genuinely difficult question, and I don't think I or anyone has properly answered it. You can start off by looking at whatever your binding constraint is and then work backwards from that. So you could say our binding constraint is that we've got 30 people, which we had in PRA, or however many people it's at the FCA, that's our binding constraint, and we will fill up the jar with cases until we've reached that limit. That's one option. The other one is the one that the FCA took several years ago, which set the binding constraint around what the threshold for opening investigation was. So, if it looked like serious misconduct, we'd open the investigation. If that's your binding constraint, then you have to be completely relaxed about either how many people you employ, or how long it takes to do things. So I think as an organisation you have to try and crudely triangulate across the three of those, and hopefully manage it in a sensible way across time, but being absolute about any one of those is probably going to be problematic.

Adam:

We'll talk about naming and shaming proposals maybe a bit later, but in the context of the discussions around those, a big play I think has been made by the FCA around the fact that they only anticipate 10 to 12, I think they say, investigations into regulated firms going forward, and they make a big point around the breadth of their responsibilities, policing the perimeter, etc. I mean, I don't know what your view is on whether you think that that's what we will see over the next few years, or actually as that portfolio comes down in numbers to a more manageable number of cases and the timing improves, which it looks like from some of the cases they're announcing it already is, that gradually starts creeping up again.

Miles:

It's a really good question. Go back a little bit to my comment about it's a random walk. I remember when I was in the PRA's enforcement function, your caseload might go up 25% over a year, and then people in the market would say, "Oh, goodness me, caseload has gone up 25% of the year. That shows a trend that they're doing much more enforcement these days and we should expect that trend to continue." The next year it would drop by 50%. They say, "Oh, PRA is not so interested in enforcement now the trend as it's going down." And you can't pick it over those cycles. And when you're talking about relatively small numbers, 10, 12 and that could easily blow out to 20 or it could go down to three, and you've really got very limited visibility over that, I think. So, be careful about trying to control those in two micro a way.

I think the second point is, going back to what I said before, if you think about enforcement as arising in situations which cannot be solved more simply, more directly, more quickly by supervisory action, if that's one of the ways you think about it, if you're supervision-led, then clearly the capability and strength of the supervision function to some degree acts as the controlling factor on how much enforcement's going to happen. So going back to the PRA, really strong supervision teams, great engagement with firms, 90% of the time they'll be able to solve the problems, 10% of the time they won't, or whatever.

If you've got a much less mature, less capable for want of a better word, supervision function, then clearly they won't be able to do that, and much more will end up in enforcement. The FCA has put a load more effort over the last few years into improving its supervisory function. It's done that for a lot of reasons, it's got better data, it's beefed up its staffing on that sort of thing. So I don't think it's unreasonable to suggest that a long-term trend within the FCA would be for more situations to be solved through the supervisory channel than enforcement. And actually, you probably, fingers crossed and with a fair wind, wouldn't see that number spiraling certainly uncontrollably upwards.

Nathan:

I worry a bit that some of those statistics have been used strategically for the purpose of trying to justify aspects of the transparency proposals, particularly the number of cases it anticipates. As you say, you just don't know what's going to come down the line. They've also explained in the context of those proposals that they have set a target of the number of investigations conducted against firms that will result in public outcome. So it's moved from the historic figure being 33%, and they've said that they have a target of doubling that to 66%, so two-thirds of the cases, resulting in public outcomes. I'm interested in your views on that, because it feels like that may inject some problematic incentives or pressures on those conducting investigations.

Miles:

You're absolutely right, that whenever you set a target, you create an incentive. And that means that people will behave in a particular way to beat that target. Which can often be a good thing, but isn't necessarily. And anyone who's done supervision will know that firms arbitrage things, and workplaces arbitrage things. I never had a target at the PRA for the ratio of sanctions imposed to investigations opened. I would keep an eye on it, I keep management information on it, and I'd be cognisant of it, and I think it acts as a useful sense check after the event to say, "Well, were we right to have made the calls on what we opened there? Should we have done, shouldn't we have done?" I think it's a useful intelligent sense check. As a target, I don't think it's particularly helpful.

I'm not sure whether the FCA chief executive meant it to be a hard target when he was talking. I mean, he was talking ex tempore in front of a select committee. So, I think perhaps aim off a little bit for that, and it was maybe more of an expectation that the right amount would probably be about a third rather than a hard target that he's setting his leadership team there. But generally speaking, I think hard targets on things like that are probably not a great idea.

Adam:

We talked a bit about enforcement in the context of firms, and I guess a lot of questions we get are around the senior manager's regime. What's your view, I'm interested in your view, Miles on, from an enforcement perspective, and I guess thinking about the context of the senior managers' regime and when it came in following the Parliamentary Commission on banking standards, et cetera, from an enforcement perspective, what's your view on how successful the senior manager's regime's been?

Miles:

So, when it was introduced, probably the one thing that didn't really change was the substantive conduct standards for senior managers. The ones that you see today are very, very similar to the ones that predated 2014 in that report. The stuff that really changed was around the designations of senior managers, and some of the annual fitness and propriety tests, and the certification regime, and all of that sort of stuff. And some degree strengthening the gateway for approval. The enforcement bit was comparatively untouched. The bit that would've touched it, as you'll recall, was what was characterised as the reverse burden of proof. And that was dropped before it even came into effect. So, stepping back, you probably wouldn't have imagined that the black letter law on this would've really moved the dial on enforcement against senior managers. That means it's really just a question of regulatory appetite for taking those cases, because the legal regime didn't really shift materially.

In terms of regulatory appetite for it, I guess a couple of points to make there. One is, from the PRA point of view, we were always interested in senior managers. I think some of the earliest cases were against small insurance chief executive, the chief executive, the cooperative bank, and another of his senior managers. That was back in like 2013, 2014. That was coming through even before the senior managers' regime, in parentheses, clearly you didn't need a senior managers' regime to take those cases, because they were coming through before, and then it's carried on.

And I think Oliver Dearie, who was my successor as Head of Enforcement at the PRA, gave a speech and said that enforcement against individuals continued to be one of their four or five priorities. So from that point of view, I don't think you're seeing too much of a trend. I think you're just seeing it is where it is where it is. I noticed, and have had conversations with people who've seen that the FCA's numbers of investigations individuals have dropped off a bit. I don't know whether that's a trend, I don't know whether that's in line with the overall dropping the number of investigations. So, I haven't done a compare and contrast.

Adam:

Yeah. We've got some data on that, haven't we?

Nathan:

Yeah. And really in the last year or so, in terms of investigations of individuals at regulated firms, I think it's correct that the FCA hasn't commenced any investigations into individuals at regulated firms, which is markedly down on previous periods. My own view is there's a whole host of topics together here, some of which you've covered, which is really the pressure on the FCA to speed up its investigations, which I think has fed through to its case selection process, the tendency to pick cases that don't really require proper investigation, i.e., the firm has already admitted the wrongdoing, or there is already a pretty clear professional report detailing breaches that the firm has accepted.

And then linked with that, the fact that when you investigate individuals, it is more resource intensive, because you're required to look into their own individual conduct and interview that individual, as opposed to documenting an admission effectively. And so I think that has been part of the FCA's mindset over the last year. But I think looking back more broadly, it's interesting that when you look at senior manager responsibilities, and managerial responsibilities, it feels like it's the PRA that has been pushing those, not just in terms of outcomes, but also in terms of the investigations it's conducted, much more than the FCA. And I wonder if that is something that you've noticed, and whether there's a reason for that.

Miles:

I would just speculate on that, really, which is, one of the pivots that the FCA's made over the last decade I think was to focus on things like customer redress. And where their priorities have been, have been very much around that. And they've achieved some amazing things, actually, on customer redress. By putting customers in the right place, if you're going to put your energies into that, then clearly, you're not going to be putting your energies into something else. Again, going back to our fixed set of resources, where do you put them?

So, I suspect there's a degree of trade-off there - that's purely a speculation, whether it's conscious or unconscious. But from a consumer's point of view, what matters more, getting your money back, or having a senior manager give up their bonus five years down the line? What's the exchange rate between those two? I don't know.

Adam:

Yeah. One more question I have before we talk about the enforcement transparency proposals, and I guess it does relate to them in a sense, is that one thing that I find quite interesting is the development of the PRA's enforcement function over the years, moving from a position where it had fairly limited resource and was reliant on the FCA to a certain extent to assist with investigations, to being more standalone. But also, I think at the same time what seemed from the outside to be more divergence in terms of enforcement policy. And I'm interested in views as to why you think that is, whether it creates any tension between the FCA and the PRA where actually they take different views about how enforcement should operate.

Miles:

So, at the very start, going back to what I said about the PRA's early days, there was only one real model that they could draw on, which was the FSA model. So you kind of import that lock, stock and barrel on day one, because you've got to have something up and running, and that's the closest, it's clearly not going to be the SFO, it's clearly not going to be Ofcom or whatever. The closest model is the FSA one. So you take that on board. And then over time, some of the distinctions that I've talked about, like the relative size of your regulated populations, and nature of supervision, the type of wrongdoing that you see, I mean, the PRA doesn't have to worry in the same way about customer redress.

So, all of those things play into whether or not the one size fits all model on legal cut over in 2013 really works best for you. And over time, you make tweaks to that to better fit the task of enforcement within the Bank of England. And that's where you see obviously those divergences, including things. And also, you can move at slightly different speeds and you might prioritise different things. So clearly the PRA more recently has done a couple of great initiatives, I think, with the early account scheme, and the penalty framework for firms with the sort of matrix. Equally, it didn't adopt certain things that the FCA did, like the focused settlement agreements, I think that's what they're called.

Adam:

Focused Resolution Agreement.

Miles:

Focused Resolution Agreements, sorry. Because they weren't the right fit for us at the time, and we keep an eye on it, and we think about it, and reflect on it, but if it isn't going to work, it isn't going to work. So, there's a few things like that where there have been those divergences. And I think it's more to do with, I'd rather say it's making it a little more bespoke or tailored to the organisation, rather than a fundamental difference of concept, if you like.

Adam:

One other question that I've always been quite interested is, where there's wrongdoing, or viewed wrongdoing, and the FCA and the PRA are taking action, what's the nature of the discussions around, well, should it be both? Is it appropriate to be both? Where does the conduct line and the prudential line really sit? Is there a fairness point in relation to, or is a firm being just fined twice for exactly the same issue? I mean, it seems to me to be quite a complicated question. Do you see it that way?

Miles:

It's a complicated question, it's a perennial question as well. The fact is that a large portion of the way that both regulators regulate is through systems control governance and process regulation. So, although the FCA will have its consumer outcomes, look at its rulebook, a large portion of its rulebook is how. How. What's the process you go through? What's the governance you go through? The PRA is actually quite similar. You've got a large corpus of very detailed rules about risk weightings, but then there's quite a lot that's governance led. There's the systems and control stuff in there as well. And so both regulators have clearly got a regulatory model which relies on trying to get firms to do things in the right way to get the right outcomes. And the things that they do feed into both of those outcomes. So, a governance failure is almost inherently going to be of relevance to both organisations, and I think something like, go back a few years, the Jes Staley whistleblowing case. Both firms have got whistleblowing rules because both firms care about whistleblowing because it's a really important cultural indicator and stream of information and stuff.

So both regulators have to defend those rules. And where there's no obvious customer impact, which might tilt it to the FCA, or impact on capital, which might tilt it more to the PRA, or impact on market integrity, which again, takes you to the FCA side, when none of those things are present, it's incredibly hard to disentangle us to who cares most about this, because you both kind of care about it an awful lot. So just to take that as one example of why it would be almost intractable as to see who should lead, who should do both on this, because we both carry an equal amount.

Where you have seen slight differences of nuance might be things like the more recent Citigroup case, to do with the algorithmic trading, and the trading incident that caused it on the one hand market disruption, but was clearly indicative of poor systems and controls, and also had prudential consequences. Both regulators came at that with a similar fact pattern, but nuanced their notices and penalties in different ways. So generally, I think my service collaboration good overlap bad, but if you are going to overlap, it's good to try and overlap in a way that's kind of where you don't draw divergent conclusions on facts.

Nathan:

And it has been intriguing to see where both regulators are investigating, the very different styles of investigation, particularly into individuals, between the PRA and the FCA, and particularly, I guess, whilst they were doing investigations into individuals under the Mark Steward regime, with the desire to get someone in early for an interview, whereas the PRA's mindset was more of a documentary approach, tell us which individuals had responsibility for this area of the business and how they fulfilled their roles. And where both were investigating, there was a real tension as to how they operated with one another.

Turning now to the FCA's proposals on greater transparency of enforcement investigations, and the idea that in certain cases firms might be named at the outset of an enforcement investigation, obviously hugely controversial, a lot of views expressed across the industry. It's very much a FCA proposal rather than a joint FCA/PRA proposal. I'm interested in your personal insights into whether you would've found it helpful as an investigator, or overseeing investigations, to get the message out early to the market that you were conducting investigation.

Miles:

So you're right that the PRA hasn't thus far picked up this proposal and wanted to run with it itself. And I think Sam Woods has indicated before, I think it was the House of Lords Committee, that there were some particular reasons why the FCA might be more attracted to this than the PRA. And if it's attractive at all, he's probably right. My experience, I think we had something like a quarter to a third of our cases were in the public domain, one way or another, when I was running it. And some of them been put there by the firms, some of them had been put there by the regulators, some by the FCA, I think. And clearly where there'd been a parliamentary interest. On the whole, it's very much pros and cons. So pros might be that you can get stuff done quickly because you can harness resources. Things go to the top of the in-tray, and seniors in-trays, so you get the answers quickly and the attention you need, so you can get slightly quicker outcomes that way. That's good.

Equally, senior people need more briefings, because they can be asked questions about it in public, "Well, we're going to have to write some more briefings about what's going on." That's a drag. I think there's a risk when something's in the public domain, you can end up slightly gold plating investigations. And I don't mean - all investigations should be thorough and rigorous - but it's much harder to run something that's streamlined if you think to yourselves, "Oh, well, we get scrutinised about this, we better just ask this extra question, we better just go into this extra area. It's not really core to what we're trying to achieve here, but we're going to be asked questions and it's going to be difficult to defend why we didn't do this. So, we better gold-plate it, or get a second opinion just to double check," and all of that kind of thing, which can have the opposite effect of doing it quickly, right? Can be quite stifling.

Like I say, pros and cons. Those are risks. I think there was one thing that I felt particularly about one investigation, which was in the public domain, which was that parliamentarians and the media very quickly, on the very limited information that was in the public domain, formed fairly strong views as to what the regulator ought to be doing about this. Broadly speaking, throwing the book at this person, and if you never work in the industry again, all that sort of thing. They formed very, very strong views. And then when our, and I think wholly defensible enforcement sanction came out, some of the media and some of the political commentary was around the regulators decision, they haven't lived up to our expectations, they've bottled it, whatever, quite wrongly I think. But anyway, that was what some of the commentary was, rather than focusing on the underlying wrongdoing in that case. And the story became more about what the regulator's decision was, rather than the actual kind of misconduct in question, which obviously leads to back to where we started, deterrent effect. It's not having the same deterrent effect that you wanted there.

Nathan:

I mean, obviously Therese Chambers has talked quite a lot about the transparency, putting pressure on the regulator to move things forward quickly, and the positive aspects of that. But I can also see the problems it creates for a regulator in increasing the questions that you are asked, and as you say, the expectations of the regulator. And it's interesting what you say in terms of that different perspective then, when the notice is published, there's already an expectation which really alters the way in which people then read that notice.

Miles:

I think that's a real risk, and I think potentially subjects of investigations could use that against the organisation. So, if they know you're under pressure to get things done quickly, tilt the balance in your favour by trying to make it go slowly, right?

Nathan:

And a real risk where an investigation is announced at the outset and the firm is fighting for its survival, that the firm then feels free to put information into the public domain about the underlying issues that the regulator may actually be constrained by statutory restrictions from actually responding to.

Miles:

Well, absolutely. And I think once you put anything into the public domain, it's very hard to contain it and not find yourselves giving a sort of blow-by-blow or running commentary about it. Because once it's in the public domain, if someone says something that's incorrect, do you feel the need to correct that? Do you feel the need to correct a misconception or something or other? Well, if you say no, then it'll just grow. If you say yes, then you get dragged into the running commentary. And again, if you're sort of saying, "Well, we need to give enough information to serve the public interest," how much is enough? And parliamentarians will always want more, understandably. But it becomes very hard to hold a line, I think, in principle, once you start down that road. I'm not saying that makes it a bad idea, I'm just saying you need to be really cautious about it.

Adam:

The House of Lords Financial Services Committee have been, I think it's fair to say, very critical, of the way in which the consultation process has been managed. They talk about the initial failures in communication and engagement being a concern, and that the FCA should review its internal processes and communication strategies employed throughout this process, including a review of how appropriate its internal processes were for consulting on a change of this scale, and that the FCA should publish a lessons learned document from the process, setting out where it went wrong, and how it will prevent similar mistakes from occurring in the future. I mean, from a governance perspective, what are your views on how it's been managed?

Miles:

The FCA chair, Ashley Alder, is on record as saying it wasn't the Board's finest hour. I think he used words to that effect. So, clearly he recognised some of what you've said. I think there are a couple of things there from the internal governance that would be questions that I would ask, at least, rather than conclusions that I would draw. The first is whether or not the Board's policy and rules subcommittee had been properly involved, and this is a really nerdy point about FCA's governance. But the Board has got a subcommittee of the policy and rules committee, which was set up to provide a sort of triage function for emerging policy, and work out the Board's touch points, particularly on sensitive subjects. Had that been properly involved prior to the matter going to the Board in January 2024? I don't know the answer to that, but I think that's a reasonable question to ask.

I think the probably even more powerful one is whether the FCA's external panels, like the practitioners' panel, markets' panel, had sight of the original consultation before it had been published. I mean, those panels exist as critical friends to provide a safe space to float emerging policy. You'd have thought something like this might be a good candidate to float with one of those panels before publishing it. I don't know if they did or not, but if they didn't, I think that's the question that should be asked. So, I don't know whether they did, but I know they've certainly engaged with the panel since, because Ashley said so. But whether they'd done so before, he didn't confirm.

I think looking at the part two of the consultation paper, the case studies have been, from what I've read from this law firm and others, very heavily scrutinised and strongly criticised. It makes me wonder a little bit whether they'd had that level of internal scrutiny and criticism as they're making their way through. Was there a sort of, I don't know, red team, or internal critical faculty that really gave the challenge that was necessary on those? I don't know, because they've clearly landed pretty badly as case studies.

Adam:

In terms of external scrutiny, they focus on consultation with government on the initial development of the proposals as well. And they pick up on the fact that the previous chancellor having to question whether they were consistent with the secondary objective was deeply concerning. I mean, as somebody who's been in a enforcement head role, if you're thinking about policy decisions, to what extent is government consultation viewed as part of the process? And when is that threshold hit? Is it a judgement call?

Miles:

I think there's fairly strong protocols of when you do engage with government on emerging policy, and obviously the PRA, I can speak for the PRA really on this, engages with government all the time. I suspect if you start off from the perspective, this is just about our internal guidelines, this isn't a big deal. We'll put it out in order to be transparent, but it's really just giving people a bit of a heads-up. No big deal here. If you start from that perspective, then you probably don't feel the need to do the same level of ex ante consultation, whether that itself was the right decision.

Nathan:

Yeah. And I would challenge whether that is really where they started from, in that they set up very quickly a huge roadshow to go out to industry. And I suspect that that was because they anticipated the reaction, and perhaps wanted to at least be seen to have spoken to industry about that.

Miles:

There's various things you could ask there. Why was it done as a consultation paper rather than discussion paper or issues paper? And just to be clear, I think the points that the FCA chief executive made before the House of Lords, the reasons, the problems that he thinks they're trying to solve by this are genuinely fair questions to be putting forward. So, giving whistleblowers effective feedback, that's a good problem. It was a problem that you want to be trying to solve. Parliamentary accountability is a really serious thing. Redress claims and helping customers not spend money on lawyers when there's going to be... That's redress coming down the line, that's a good thing, a good problem to identify and want to tackle.
Question is whether this is the right tool to do it. And I don't personally think that the decision on whether or not to use a particular section of FSMA to gather information under part 11 or whatever it is, the part line of the act is really, it's putting too much to bear on a particularly narrow question, I think. But the underlying problems are real ones. So, I don't think they're wrong to try to tackle those.

Adam:

Do you think they'll go ahead with it?

Miles:

Well, they've certainly had opportunities to draw back from it, and haven't done so far. I don't know.

Nathan:

One hot topic in regulation currently is of course the government's growth agenda, and the push in terms of the FCA's secondary objective in terms of promoting competitiveness of the UK financial services system. I'm interested in your views on how that's likely to shape enforcement policy, if at all.

Miles:

Enforcement's probably one of the hardest things to fit into that agenda, because inherently it's about punishing, punishing people for things going wrong, and extracting money from, by the way, financial penalties. So, it doesn't naturally fit within the growth framework. And the way that it's been explained by regulators is to do with transparency and clarity, and a level playing field. I think there's a strong level playing field type of argument for enforcement, which is, a competitive market is one in which all firms have to comply with the rules equally without fear or favour, and enforcement is an important way of doing that. So I think you can build a sort of narrative around it.

I think what the FCA has done on things like the consumer duty is quite interesting, where they've very much concentrated on remediation of firms, if you look at some of the early things on fair value, really focused on remediation of firms and trying to, if you provide carrots rather than sticks, try to incentivisze firms to do the right thing and give them opportunities to do that, and focus more on education rather than sanction as the way to get the compliance that they're looking for. I don't think that's a bad way of biassing it.

Nathan:

Yeah. So the simplistic answer to that might've been, well, pro-growth equals less enforcement, and that's not a message that you think the FCA and the PRA will subscribe to.

Miles:

Not really, because enforcement's an integral part of the supervisory mix. So, if you're saying pro-growth equals no enforcement, by extension you're saying pro-growth equals less effective supervision, and you're basically undermining the whole regulatory edifice.

Nathan:

Yeah.

Adam:

The level playing field argument I think is one of the better ones in terms of, if you come from a point of view that enforcement, for the reasons you say always feels incompatible with that inherently, I think the level playing field one is a good one, which is, well, if some firms are investing resource in complying with the rules and others aren't, then that needs to be called out.

Miles:

Absolutely.

Nathan:

Well, Miles, Adam, I'm afraid that's all we have time for today. Thank you so much, Miles, for joining us. It's been fascinating to hear your views. We have so many questions, we may need to get you back again, but thank you for joining us today and for being so open with your thoughts.

And thank you to our listeners for joining the podcast today. As always, we are really keen to hear from you to get your own views on the issues we've discussed. So please do get in contact. Thank you very much indeed.