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“We meet today in what for many of us is a backdrop of rising costs of living, rising consumer harms and distrust of the financial market and its regulators. . The international financial environment is also changing rapidly with many innovations and new financial services products that consumers are far from understanding.
All of this presents challenges for the financial services industry and can threaten financial stability. But I hope to describe how we can all be better prepared to weather the storm if we work together, to build trust in the financial ecosystem, with better consumer awareness and financial education, higher standards and a better regulatory framework. .
I would like to share with you some ideas from the perspective of the UK Financial Services Compensation Scheme, because in the UK deposit insurance is only part of an integrated compensation scheme. Some of my comments may refer to our particular circumstances, but I hope they will also resonate with all of you here in this international audience.
Protection offered by the FSCS
An effective deposit insurance system is essential in a well-functioning economy. Its importance has become more evident than ever, both globally and in some countries, including the UK. After decades of complacency, the global financial crash of 2008 presented a stark warning about the need to protect consumers and it is clear that this protection builds trust in the system.
Before 2008, the FSCS was less well known. But we played a vital role in protecting the 4 million customers affected by the failure of five banks during the global banking crisis, when we sadly had to pay over £20 billion in compensation. This included the seamless transfer of 2.5 million savers from Bradford & Bingley to Santander and, over the next few years, the recovery of £20 billion for HM Treasury.
Early in the crisis, concerns about the safety of bank deposits led to long queues outside many Northern Rock branches, with large numbers of people at risk of losing large sums if the bank failed. At the time, customers could only be compensated up to a maximum of £31,700. But the subsequent rise to the current level of £85,000 now means the vast majority of depositors with UK banks have their savings fully protected by the FSCS – a direct contribution to confidence and ultimately a more stable financial system.
Today, industry leaders, regulators and government all recognize the key role the FSCS plays in protecting consumers and maintaining confidence in the financial industry. And while the FSCS is perhaps best known as a deposit insurer, its protection extends beyond simple deposit insurance. I am immensely proud of the unrivaled and unrivaled range of financial products and services that come under our protection, including insurance, self-invested personal pensions, pension advice and, most recently, funeral plans. Research among those who are aware of the FSCS shows that 85% believe that knowing the FSCS exists has increased their confidence in the financial services industry. And 72% said they were likely to invest more if their supplier was protected by the FSCS.
To look forward
But what does the future look like? And what do we need to do to embed an infrastructure and culture of financial stability?
High levels of financial education and literacy are essential in a well-functioning market so that people have awareness and confidence in the system and are confident that financial products are right for them. This allows them to take greater personal responsibility when making financial decisions. And ultimately, it leads to financial stability and better outcomes for consumers.
The FSCS exists to provide a safety net in the UK, but we are passionate about preventing consumers from becoming our customers. We therefore do everything we can to increase awareness and understanding of the products we cover and the protection available in the event of business failure, so that consumers can be sure that their money will be safe if things go wrong.
There needs to be a concerted effort by the FSCS, regulators and industry to bridge the knowledge gap among consumers and ensure greater clarity and simplicity in financial services products. After all, deposit protection only protects people if they know why they are protected!
The continued globalization of finance, the proliferation of some of the riskiest digital assets like cryptocurrencies, and the increased levels of cross-border transactions we see today increase the importance of cross-border businesses and the need for agility to guard against the risks they present. Very helpfully, an August 29 speech by Ravi Menon, chief executive of the Monetary Authority of Singapore, lays out with immense clarity the benefits of some digital assets and the risks of abuse with others. We need to carefully review our legislation and coordinate it internationally. It’s something innovative!
In a recent speech, former Bank of England Deputy Governor Paul Tucker warned of the dangers and risks of the growing shadow banking sector, which has grown outside the traditional banking sector. and now accounts for nearly half of all global financial assets. He warned that allowing it to operate unchecked could easily cause a crisis of confidence and threaten financial stability.
The FSCS, regulators and the UK government are considering appropriate consumer protections and what supports the uptake of new types of financial products into a regulated system, particularly in a rapidly changing market. This means thinking about how products such as digital assets are covered.
And at the same time, we also need to think about how we can eradicate harmful behavior in the financial sector that threatens stability and puts upward pressure on the levy that funds us. The role of entity governance is critically important, and often overlooked in these kinds of stability discussions. We MUST require our bankers to conduct themselves with the utmost integrity and with their duty to consumers in mind. We must use our licensing and supervisory powers to keep the bad apples out and allow the good bankers (who make up the vast majority) to stay focused on delivering good results for their clients. Good governance is important, and effective governance is rewarding.
At FSCS, we play our part in helping to identify and address the root causes of damage to reduce pressure on those who fund us through our levy and better protect consumers in the long term. Our recent publication, the compensation balancing game directly addresses the issue of consumer detriment. For example, we conduct consumer awareness campaigns and work closely with the regulatory family to combat scams and other forms of bad practice. Of course, these measures to address the root causes of consumer harm will take time to bear fruit. It is also important to find the right balance between affordable costs for the industry and appropriate compensation for consumers who have lost what may be the savings of a lifetime, and financial stability, and to find the right combination levers to pull, at the right time.
Innovation and new products can play an important role in a more dynamic market where UK financial services can make a significant contribution to growth. If the UK remuneration framework is to continue to fulfill its important role of helping to build confidence in UK financial services and driving a healthy and prosperous economy, we will need to be bold, encourage innovation and challenge the status quo.
Perhaps we should also recognize the vital role of global clearinghouses, capital compression and collateral, to provide stability and protection. I was previously president of the LCH group, one of the largest in the world. These entities are powerful and a force for good, and we must act responsibly to keep them that way.
This inevitably leads to the debate over the role of regulators and the protection of the FSCS, but we will still need the same tools of high standards and culture and a clearer regulatory framework, as this will help to engender trust, confidence and stability and eliminate bad practices. Of course, our broad coverage makes us even more dependent on the quality of other stakeholders and the effectiveness of regulators in enforcing them. And we need to educate consumers to only take the risks they want, and the risks they understand to be right for them. There is simply too much harm in the UK system. As we innovate, we simply need to do a better job of holding people accountable for product safety and purchases.
Deposit protection schemes and awareness of their existence will be particularly important during the difficult times that many global economies are facing. When recession hits, it increases the need for trust in the system to maintain market stability.
So, to recap briefly; UK financial markets are uniquely positioned to take advantage of the opportunities presented by technological change and disruption. But it also carries risks. Our common goal must be to ensure that innovation works in the interests of consumers and that they have the confidence, the skills and the guarantees of a strong regulatory regime to engage fully in this brave new world.