The Analysis Comment
Changing the game
Regulators need to appreciate that they can be innovative in their approach and so have a beneficial impact on consumers
Mark Neale Interim chief executive, Lending Standards Board
No-one thinks of regulators as great innovators. Indeed, regulation and innovation can be uneasy bedfellows. But in fact regulation must be ready to embrace innovation.
Working well for consumers Regulators – including quasi-regulators like the Lending Standards Board – exist to ensure that markets work well for consumers. This is especially true of markets that are natural monopolies, like many utilities, or markets marked by complexity, in which providers enjoy big information advantages over consumers. Financial services are very much in the
latter category.
Conduct rules In these markets, regulators set conduct rules to limit the market power in natural monopolies or to ensure transparency and fair dealing for consumers faced with complex and often poorly understood products and risks. Innovation can, of course, introduce new
Regulators’ relationship with innovation should not simply be reactive. Regulators can also be innovators themselves or enable innovation to secure better outcomes for consumers
risks for consumers. Major market reforms, like the liberalisation of retirement savings, expose consumers to choices they are not always well-equipped to make. New products can contain hidden costs and vulnerabilities: think here mini-bonds or so-called death bonds.
Innovators themselves So regulators need to be well up with the curve of innovation foreseeing emerging risks and identifying the potential harm of new products. But regulators’ relationship with innovation should not simply be
reactive. Regulators can also be innovators themselves or enable innovation to secure better outcomes for consumers. Let me give some examples of how the Lending Standards Board
has done both these things. Our Standards of Lending Practice for business customers are a
great example of our work as an innovator. Small businesses – SMEs – are themselves a source of innovation and growth in the UK economy. But most small businesses are not financial experts. They do,
December 2019
though, need to borrow in order to invest, to grow and to expand employment. Until the launch of our Standards in
March 2017, lending to SMEs was, however, unregulated, sitting outside FCA’s regulatory perimeter and exposing small businesses to the risks of poorly understood products and of unresponsive treatment by lenders.
Developing standards Enter the Lending Standards Board in partnership with the industry. We began work on developing the business
Standards in October 2016 through a series of workshops that included registered firms, challenger banks that were not registered with the Lending Standards Board,
trade
associations and the British Business Bank. We consulted business trade bodies (the Federation of Small Businesses, Institute of Directors, and EEF) and the All Party Parliamentary Group on Fair Business Banking. The resulting Standards of Lending
Practice for business customers applied to loan, overdraft, credit card, and charge-card products provided to businesses which have a turnover of up to £6.5m. Commercial mortgages have subsequently
come under the business Standards. And from this November the scope of the Standards – and hence
the greater consistency of treatment they promote – expands further to include business customers up to a turnover of £25m.
Lending appeals Additionally, with the agreement of Professor Russel Griggs and UK Finance, we formally assumed responsibility for the oversight of the business lending appeals process on 1 April 2019. So this is a great example of innovative regulation – fully supported
by the industry itself – which will support the growth of the UK’s SME sector. It is striking that many of the signatories of our business Standards are also supporters of the new SME Finance Charter. Regulators can also change the game in other ways too, by
promoting understanding of how innovation in the industry will affect consumers. CCR
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