Change is fundamental for surviving and thriving. This is true for individuals, firms, societies and markets alike. Throughout history, philosophical approaches have put different emphases on who the agents of change are, or indeed should be. Last week, the FCA’s Chief Executive outlined his vision that regulation too should be an agent that enables change. He said: ‘In philosophy, there is a view of regulation which is namely that rules are prescriptive statements that forbid, require or permit some action or outcome, and that one of these three must be present in any rule. So, three verbs: forbid, require, permit...I think there is a fourth verb...namely to enable change to happen consistent to our public policy objectives’.
While the speech sets clear parameters that the change must be consistent with public policy objectives, it does cast the net wide in terms of what the regulator's role could be and the kind of change that it could enable. Defining this will require a considered, iterative and consultative process over a long period of time, and I am sure all stakeholders will want to contribute to the debate. To kick-start my own thought process, I have identified two aspects that are intrinsically linked to the new verb and questioned how the new verb might sit with the other three verbs. Here are my initial thoughts.
There are two ways in which change can be enabled: (1) by not preventing or inhibiting change and (2) by stimulating change. To achieve meaningful progress, both strands need to be taken forward simultaneously and congruently. Generally, the first one might seem more passive than the second. But, in the context of financial regulation, the former requires a lot of pro-active work and determined focus. Most rules are devised to address potential harm in a specific set of circumstances. They evolve over time alongside other rules, often in reaction to changes in society and often at a slower pace than technological development. This can unwittingly lead to a patchwork framework that requires considerable reviewing if it is not to prevent or inhibit the change that is needed for consumers' needs and expectations to be met. An example of this would be the advice landscape. Its reform is needed to address the challenges posed by the advice guidance boundary and not to inhibit the greater development of robo-advice at a faster pace. The second strand, that of stimulating change, is equally important. Here, the regulator is starting for a position of strength in terms of its work to date on Project Innovate and the (global) sandbox. But the task is none the easier because of the pace of change and because of the agents of change, which could soon start to come more from players that sit outside its regulatory perimeter. As a result, both strands will require careful thought and execution, at both national and international level.
If the FCA is to embed this verb in the core purpose of its regulatory framework and in its DNA, how will it sit with the other verbs that have characterised rules so far, namely forbid, require, permit? An instinctive reaction would be to say that the new verb will sit alongside the other verbs, on a par with them, and create a healthy tension with them. However, I would suggest that the relationship between the verbs needs to go further than this, if the regulator is to be successful at enabling meaningful change. Rules should continue to forbid, require or permit specific actions or outcomes, but all rules should be reviewed through the lens of their ability to enable change. Whenever a rule forbidding, requiring or permitting specific actions or outcomes is considered, it should be scrutinised in terms of its impact on enabling change. Only rules that do not prevent or inhibit change and that stimulate change, within the agreed public policy objectives, should be taken forward. This approach would likely lead to a cultural shift within the regulator and the regulated community.
Putting this framework in place certainly has the potential to be a game changer for the regulatory framework and its impact on individuals, firms, societies and markets. It is an equally daunting and exciting task we shall all engage with in the months and years to come.