Financial Watchdog Calls for End to Regulatory Codependency
The Financial Conduct Authority has issued a stark warning to Britain's investment industry, urging firms to break what it describes as a "codependent relationship" with regulators. Speaking exclusively to City AM, Simon Walls, interim executive director of markets at the FCA, argued that excessive reliance on regulatory guidance is stifling innovation and economic growth.
A Culture of Dependency
Walls explained that despite the regulator's efforts to reduce red tape following Brexit, the investment sector continues to seek regulatory prescriptions for even minor decisions. "It's a bit like a codependent relationship," Walls stated. "They have come to expect, ask for and want the regulator to make the decisions."
The FCA executive cited recent attempts to reform fund description requirements as a prime example. After moving away from European-mandated formats that "everyone hated," the regulator allowed firms to describe fees, performance and risk in their own way. Instead of embracing this flexibility, many firms demanded the FCA "prescribe the page number" of how information should be presented.
"We've got to break this cycle," Walls insisted. "If you want a more buccaneering market, then stop asking us to prescribe things. We need to step away from this."
Risk Aversion and Economic Consequences
Analysts have noted that over-regulation creates risk aversion through higher compliance costs, prompting asset managers to favor low-risk products. Walls emphasized the broader economic implications of this cautious approach.
"People aren't investing enough in the UK," he warned. "First and foremost that's bad for the individuals but it can also be bad for the economy, because that's a source of potential capital that's not being invested."
The government and industry are launching campaigns to encourage investing, with Walls urging society not to become "twitchy" during market downturns and immediately seek regulatory intervention. "Of course the downs are unfortunate, but they're utterly an inherent part," he noted. "If we can't get the culture right when these things happen, then we won't be able to invest for the long term."
Changing Investment Culture
Walls identified a fundamental cultural problem where investment losses are perceived as gambling rather than prudent risk-taking. "This is the heart of it, a fear in some way that investing isn't safe," he explained. "That has to change."
Meanwhile, younger investors are increasingly favoring speculative assets like bitcoin over traditional stock market investments, drawn by prospects of short-term gains. Walls called this trend "a shame" given the steady returns available through FTSE investments and access to unlisted companies like Space X through investment trusts.
Although the FCA no longer oversees financial education, Walls expressed strong interest in improving financial literacy, noting that only nine percent of Britons receive professional financial advice. He highlighted the incoming 'Targeted Support' scheme that will allow firms to provide tailored advice to individuals.
Institutional Responsibility and Investment Trusts
While focused on retail behavior, Walls also addressed institutional responsibilities, arguing that investment trusts must stop relying on the FCA to solve their problems and instead utilize existing company law tools.
His comments follow Edinburgh Worldwide Investment Trust's 100 percent tender offer to shareholders amid a stalemate with Saba Capital. Several investment companies subsequently called for greater regulatory intervention, claiming current frameworks allow minority shareholders to "repeatedly attack investment trusts."
Walls noted that investment trust boards can seek court intervention under the Companies Act when shareholders engage in abusive behavior or harassment through constant voting. He criticized "special pleading" where firms request rules to protect them from activist investors, arguing that such approaches don't necessarily prioritize shareholder interests.
Regulatory Reform Debate
Despite the FCA's plea for reduced regulatory dependence, the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services recently called for a royal commission into UK financial conduct regulation. The group argues that fundamental review is needed to address persistent failures and warns against relaxing regulation in pursuit of economic growth, fearing consumer protection compromises.
This tension highlights the ongoing debate about regulatory balance in Britain's financial sector as the FCA pushes for greater industry independence while parliamentary groups advocate for strengthened oversight mechanisms.
