The UK’s Financial Conduct Authority has highlighted the need for an international regulatory approach following the recent issues around liability driven investment (LDI).

In an evidence hearing with the Industry and Regulators Committee, FCA chief executive, Nikhil Rathi, explained that the watchdog and the Bank of England have been working “very intensively” with their international counterparts on the international regulatory reform of non-bank finance since 2018.

“We have been working very intensively to secure international agreement so that there is a cross-border strengthening of resilience here, through the Financial Stability Board and the G20,” he stated.

“That is hard going; it is taking time to get agreement and get it executed in all the different jurisdictions.

“These markets are so interconnected around the world, we need everyone — all the major jurisdictions — to move together as far as possible in order to move forward on this. On fund domicile, we in the UK are a pretty small part of the overall global pie.”

In particular, Rathi suggested that there “there is a huge amount of work we have to do on data reporting and data gathering”, explaining that data is currently received on a one-month lag.

Rathi also clarified that while ad-hoc data requests can be made, they can be quite burdensome on the industry.

“Our principles of fund supervision are principles of deference so, if we believe an overseas domicile is broadly equivalent, those funds can come into our market, unless the Treasury imposes additional rules on top," he continued.

“But we are now in a world in which we will want more data, on a consistent basis, but in a way that works appropriately for the industry."

“I do not want to suggest that data is the panacea,” he clarified, “but we as an international regulatory community have to get far better at least at tracking what is going on, so that we can understand better where these big concentrations of leverage and concentrated counterparty exposures are building up.”

When pressed by the committee as to whether the argument that the recent leverage issues being a global problem meant they were therefore “Not my problem, guv”, Rathi clarified that the regulator is taking the steps needed to address these issues within the UK framework.

“I am simply drawing your attention to the fact that some of the products in the non-bank space more generally are global products and are marketed across jurisdictions, and we do not decide whether they are allowed in the UK,” he explained. “We can explain and warn about risks, but we do not take that decision.”

Rathi also highlighted other areas where the regulator has taken “quite robust decisions”, such as the decision to prohibit crypto derivatives in the UK, arguing that such decisions require “parliamentary and political support” in light of the critique they can receive.

More broadly, Rathi also reiterated concerns around the regulation of investment consultants and the need for regulatory changes in the non-bank sector, suggesting that work on resolution regimes, alongside stress testing, should be extended "not just to pension funds but across the non-bank arena".

“There were clearly gaps in capability and competence in some of the investors, there were clearly gaps in the investment consultants, and we do think they should be regulated, which they are not at the moment," he continued.

"Some of the custodians were struggling through manual processing with the volume of transactions, so all of these are things we want to take forward for the future, while recognising that what happened in terms of the scale and speed was extraordinary."

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