Speech by Emily Shepperd, FCA chief operating officer, delivered at the UK Sustainable Investment and Finance Association (UKSIF) Leadership Summit, IET London.
Speaker: Emily Shepperd, FCA chief operating officerEvent: UKSIF Leadership Summit, IET LondonDelivered: 6 November 2024Note: This is a drafted speech and may differ from the delivered version
Highlights
Our objectives underpin the growth of the economy and encourage investment required for UK and financial services to achieve net zero by 2050.
We will continue to engage with industry, balancing proportionate regulations more broadly while recognising and avoiding unnecessary regulatory pressures and costs on businesses.
Our expansion to Leeds and Edinburgh enables us to attract new talent and better reflects the demographic of firms nationwide.
The building we’re in, Savoy Place, was designed by one of our greatest architects: Charles Holden. He’s known today for his work for London Underground. The local stations he worked on – each modernist masterpieces in their own right – populate the outer reaches of the Tube.
His designs are a visible reminder of the change London was going through at the time. Of an overcrowded city, dense and unforgiving, expanding to provide Londoners with somewhere greener to live and raise their families. Metroland, as poet John Betjeman called it.
That development was made possible by infrastructure – the rail lines and Holden’s stations – that allowed people to pass easily from the centre to home. Those tracks laid by the Underground in the 1920s and 30s allowed London’s growth.
Regulation must play a similar role to provide the underpinning, or regulatory infrastructure, that will support the growth of the economy. It can also help support the significant investment required for the UK and global transition to net zero.
This was recently highlighted at the Government’s investment conference held in October and aligns to the Mansion House Compact.
Sustainable and transition finance
Let’s take sustainable finance and specifically transition finance as an example.
It is estimated that in the UK we need £60 billion of additional annual funding per year by 2030 to achieve net zero by 2050. Globally, the figure stands at US$4.5 trillion.
The Global Green Finance Index ranks London as the leading green financial centre – a position it has held since 2021.
UK asset managers are responsible for £11 trillion in assets under management, making us the world’s second-largest investment manager. Our bond market is US$4.3 trillion.
I’m not suggesting that financial services alone can plug the net zero gap, but the relative size and power of the sector in the UK is an important part of a story. Not of great cost, but of opportunity. But to realise opportunity, many pieces must come together. Some sit with government, some with industry. And some with the regulator. And we recognise we must get that regulatory infrastructure right.
Encouraging sustainable investment
So let me tell you about how we currently view our role and what you may expect going forward.
To retain our position as the leading green finance centre, we recognise it will be important to ensure a balance of proportionate regulations that provide guardrails and standards, while avoiding cumbersome regulatory divergence. This needs to be coupled with flexibility as the sustainable finance market evolves, working closely with international colleagues and engaging with the market to ensure practical challenges are taken into account.
Recent regulatory changes include the Sustainability Disclosure Requirements (SDR) and investment labels regime, our anti-greenwashing guidance, as well as facilitating an industry-led code of conduct for ESG data and ratings providers. In all of these, we’ve tried to take into account realities for firms and the market.
For example, the investment labels regime already recognised that funds will need to invest in transitioning assets that are on a credible path to net zero by 2050. We therefore introduced the Improvers label.
Meanwhile, our anti-greenwashing rule guidance provides examples not just of poor practice but also of best practice. This was to help firms understand our expectations.
We are also actively involved in numerous wider initiatives, from the Government’s recently published Transition Finance Market Review (TFMR) and its Transition Plan Taskforce (TPT).
It doesn’t mean we’re in a position to say ‘job done’, as UKSIF have pointed out in recent research. The Chancellor has already announced the intention for us to regulate ESG Ratings providers.
While a lot of progress has been made in regulation, firms want more clarity and we remain mindful that firms will need time to implement existing rules and requirements.
The SDR and investment labels are new regimes. As market practice evolves, we are also taking stock of our own processes to ensure firms have a smooth and consistent journey. As part of this we are engaging closely with firms and bodies like UKSIF, as well as updating our website to share examples of good practice.
Meanwhile, our Financial Lives 2022 survey showed that in May 2022, 79% of consumers were of the view that businesses have a wider social responsibility than simply to make a short-term profit.
Research by Boring Money shows that 86% of adults surveyed do not feel confident investing in current funds.
At its core, our policy programme is one that will build industry trust, reduce greenwashing, promote competition and strengthen wider market integrity. And each development is a key example of how we intend to conduct policymaking going forward, supporting green finance to scale with integrity.
We are encouraged to see companies set out their own plans for how they will shift to low carbon alternatives. This does, however, need to be supported by increased transition capital and sustainable investment products, which in turn could increase the size and liquidity of the UK market, creating opportunities for growth. This is where regulation comes into the picture, reflecting the varied needs of companies.
We will consult on strengthening expectations for listed companies’ transition plan disclosures, giving investors transparency on a business’ future alignment with net-zero goals.
We will support the global adoption of International Sustainability Standards Board (ISSB) standards, in collaboration with our colleagues at the International Organization of Securities Commissions (IOSCO).
We are monitoring the ISSB’s next 2-year work plan, which includes a new project on nature-related financial disclosure – called Biodiversity, Ecosystems and Ecosystems Services, or BEES. We were pleased to see this included, having recommended that the ISSB start work on a thematic standard based on the Taskforce on Nature-related Financial Disclosures.
Our approach recognises the advantages of a regulatory regime that maintains high, but proportionate standards. But when I say trust, I don’t mean that it’s risk-free. In this market, as with others, integrity means finding the right balance between risk and investor protection, ensuring there is an incentive to drive investment.
Trust and growth
In the last few years, we have set out to reform public markets.
This has involved changes to our listing rules, greater freedom in how asset managers pay for investment research and proposals for a public offer and admissions regime to replace the current prospectus regime. We have further plans to improve retail access to fixed income markets.
Opportunities that carry more risk could prove brilliant. As someone who worked in banking throughout the 2008 crisis, this is not something I say lightly.
Managing risk is a careful balance – our new secondary objective to advance international competitiveness and growth proves useful framing for this as we strive to get it right and keep markets competitive. In the summer, we published our first report on this objective, detailing our achievements, alongside metrics to hold us to account.
Consumer Duty
We recognise that we can do more, so we are listening to firms and actively looking to refine the rulebook.
When we introduced the Consumer Duty in 2022, it was a shift towards being outcomes focussed, with regulation that is proportionate, less reliant on granular rules and instilled with enough flexibility to be responsive to industry innovation.
We are currently reviewing 172 responses to our Call for Input on the Duty. When we feed back next year, the aim is to address areas of duplication, confusion or over-prescription which create unnecessary costs for business while at the same time demonstrating it is possible to pursue market growth through sustained consumer benefit.
We take a similar approach to post-Brexit rulemaking – making sure regulation meets the UK’s needs while avoiding costly divergence.
The Duty, alongside our work on sustainability policy and market reforms are examples of how we are furthering our primary objectives. All are timely and salient examples of how we want to lay the tracks and build the infrastructure in a way that furthers our secondary objective.
But this is not new – we have a track record of proportionate regulation to support growth.
This year, we also celebrated 10 years of Innovation Services – a function that has supported almost 1000 firms. Our regulatory sandboxes were the first in the world, with 95 regulators introducing similar models.
This continues with our recently launched AI Lab to help firms overcome challenges in building and implementing AI solutions, while ensuring we support the government’s work on safe and responsible AI development.
When I joined, I established Early and High Growth Oversight to nudge nascent firms into the right behaviours early and support their growth. This was so firms wouldn’t fall off a cliff-edge after authorisation. We continue to make improvements to ensure a smooth and pacey customer journey for firms applying for authorisation, while maintaining the high standards for which the UK is known.
As we finalise our strategy for 2025 onwards, we are looking to build on this, and find new opportunities for success.
Building attractive cultures
Growth goes hand in hand with forging a corporate culture that will continue to attract and retain the world’s top talent.
Employment in the sector grew by 12.5% between 2010 and 2020. In 2023, it stood at 2.3 million. Around two thirds of which is outside of London. The demand for highly skilled talent in financial services, which currently sits at 73% of roles went up from 52% 20 years ago, continues to grow.
Much as I’m a fan of the London Underground, it’s certainly important that we continue to look beyond London to discover that talent.
For us, that has meant looking to Leeds and expanding our presence in Edinburgh, with 500 colleagues across both offices based in these locations – equivalent to 10% of our workforce. This has allowed us to tap into skills in other markets, and better reflect the demographic of firms nationwide. For example, 2 in 3 firms in Early and High Growth Oversight are based outside of London.
It also helps us to better reflect the demographic of consumers, whose outcomes we see as inextricably linked with those of firms.
The Financial Services Skills Commission has highlighted behaviours such as empathy as important in supporting consumer needs, and it is prioritised in its Future Skills Framework.
But talent must be enabled to thrive. To do that, it’s important to foster a culture that values diversity of thought and enables people to speak up.
As you leave, and maybe head to the Underground, I want you to take a look at the statue outside this building. The man this statue is dedicated to was born at the end of the 18th century. At 14 years old, he became an apprentice bookbinder, using his training as an opportunity to read. Michael Faraday then became one of our greatest scientists.
Amongst other things, he invented an early version of what was to become the Bunsen burner. You probably used one at school, and it’s still used by science labs across the world. His story is an example of the great achievements of an autodidact from a humble background.
It highlights how great talent can be found in unexpected places. The most obvious people may not have the best ideas. We must look beyond ourselves.
His discoveries are also an example of the UK’s leading role in scientific and economic advancement, with the best known ones in the field of electricity and magnetism.
These are discoveries that underpin technologies which, if powered sustainably, can help us reach net zero, such as the electrified public transport – of which the London Underground is a prime example. Faraday demonstrated that electricity was not an imponderable fluid, but a force.
I’m hoping that with the infrastructure built, financial services will be a growth-powering force which also sees us achieve net zero.
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