Marshall Bailey speaks at the International Association of Deposit Insurers’ (IADI) 20 year anniversary conference

'We are meeting today against, what for many of us is a backdrop of rising costs of living, increasing consumer harm and distrust in the financial marketplace and its regulators. The international financial environment is also changing rapidly with much innovation and new financial services products which far from all consumers understand.

These all present challenges for the financial services industry and may threaten financial stability. But I hope to outline how we can all be better prepared to weather the storm if we work together, to build trust and confidence in the financial ecosystem, with improved consumer awareness and financial education, higher standards and a better regulatory framework.

I’d like to share with you some insights from the perspective of the UK’s Financial Services Compensation Scheme, as in the UK, deposit insurance is just one part of an integrated compensation scheme. Some of my comments may refer to our specific circumstances, but I hope that they also resonate with all of you here in this international audience.

Protection offered by FSCS

An effective deposit insurance system is essential in a well-functioning economy. Its importance has become more apparent than ever, both globally and in individual countries including the UK. After decades of complacency, the 2008 global financial crash presented a stark warning about the need for protection for consumers and there is clear evidence that this protection builds confidence and trust in the system.

Before 2008, the FSCS was less well known. But we played a vital role protecting the 4m customers affected by the failure of five banks during the global banking crisis, when we were unfortunately required to pay out over £20 billion in compensation. This included seamlessly transferring 2.5m Bradford & Bingley savers to Santander and over the next few years, recovering £20bn for HM Treasury.

At the start of the crisis, concerns about the safety of bank deposits led to long queues outside many Northern Rock branches with large numbers of people standing to lose significant amounts of money if the bank failed. At the time, customers could only be compensated a maximum of £31,700. But the subsequent increase to the current £85,000 level now means that the vast majority of depositors with British banks have their savings fully protected by FSCS – a direct contribution to trust and confidence and ultimately a more stable financial system.

Today, industry leaders, regulators and government all recognise the key role FSCS plays in protecting consumers and helping to maintain trust and confidence in the financial sector. And although FSCS is perhaps best known as a deposit insurer, its protection extends wider than just deposit insurance. I’m immensely proud of the unparalleled and unrivalled range of financial products and services that benefit from our protection including insurance, self-invested personal pensions, pensions advice and most recently funeral plans. Research among those aware of FSCS shows that 85% thought that knowing that FSCS exists increased their trust in the financial services sector. And 72% said that they were likely to invest more of their money if their provider was FSCS protected.

Looking to the future

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 trust in the system and a confidence that financial products are suitable for them. This empowers them to take more personal responsibility when making financial decisions. And ultimately this leads to financial stability and better consumer outcomes.

FSCS exists to provide a safety net in the UK, but we’re passionate about preventing consumers turning into our customers. So, we’re doing all we can to increase awareness and understanding of the products we cover and the protection available when firms fail, so consumers can feel confident that their money will be safe if things go wrong.

There needs to be a concerted effort from FSCS, regulators and the industry to close the knowledge gap amongst consumers and ensure greater clarity and simplicity of financial services products. After all, deposit protection only protects people if they know what they are protected for!

The continued globalisation of finance, proliferation of some of the riskier digital assets like cryptocurrencies, and increased levels of cross-border transactions we are seeing today increases the importance of cross-border firms and the need for agility to secure against risks they present. Very helpfully, a speech on 29 August by Ravi Menon, Managing Director of the Monetary Authority of Singapore lays out, with immense clarity, the benefits of certain digital assets, and the risks of abuse with others. We must consider our legislation carefully, and coordinate it internationally. This is innovative stuff!

In a recent speech, former Deputy Governor of the Bank of England, Paul Tucker warned of the dangers and risks of the growing ‘shadow banking’ sector which has grown up outside traditional banking and now accounts for almost half of all global financial assets. He cautioned that allowing it to operate unchecked could easily cause a crisis of confidence and threaten financial stability.

FSCS, regulators, and the British Government are thinking about what consumer protections are appropriate and what supports the absorption of new types of financial products within a regulated system, especially in a fast-moving and changing market. This means thinking about how products like digital assets are covered.

And at the same time, we also need to be thinking about how we can root out harmful behaviour in the financial industry which threatens stability and applies upward pressure on the levy that funds us. Of tremendous importance, and often overlooked in these sorts of stability discussions, is the role of entity governance. We MUST demand that our bankers conduct themselves with the utmost integrity, and with an eye on their duty to consumers. We must use our powers of authorisation and supervision to keep the bad apples out, and allow the good bankers (who comprise the vast majority) to remain focused on good outcomes for their clients. Good governance matters, and effective governance is rewarding.

At FSCS, we are playing our part in helping to spot and address the root causes of harm to reduce the strain on those who fund us via our levy and better protect consumers in the long term. Our recent publication, the Balancing Act of Compensation directly addresses the issue of consumer harm. For example, we are running consumer awareness campaigns and working closely with the regulatory family to confront scams and other forms of bad practice.  Of course, these measures to address the root causes of consumer detriment 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 can be their life’s savings, and financial stability, and find the right combination of levers to pull, at the right time.

Innovation and new products can play an important part in a more dynamic market where UK financial services can make a significant contribution to growth. If the UK’s compensation framework is to continue to fulfil its important role of helping to enhance trust in UK financial services and drive a healthy and prosperous economy, we will need to be bold, encouraging innovation and challenging the status quo.

Perhaps we should also acknowledge the vital roles of global clearing houses, capital compression, and collateral, in providing stability and protection. I was formerly the Group Chairman of LCH, one of the world’s largest. 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 around the role of regulators and FSCS protection, but we will still need the same tools of high standards and culture and a clearer regulatory framework as that will help engender trust, confidence, and stability and drive out bad practice. Of course, our wide coverage makes us even more dependent on other stakeholders being good at what they do and regulators being effective with their enforcement. And we need to educate consumers in order that they take only the risks they want, and the risks they understand to be suitable for themselves. There is simply too much harm in the UK system. As we innovate, we simply must do a better job at holding people to account for safe products and purchases.

Deposit protection schemes and awareness that they exist will be particularly important during the challenging times many of the world’s economies are facing. When recession hits, it increases the need for trust and confidence in the system to maintain stability in the market.

So, to recap briefly; UK financial markets are uniquely well-placed to take advantage of the opportunities presented by technological change and disruption. But doing this also brings risks. Our shared goal must be to ensure that innovation works in the interests of consumers and that they have the confidence, skills and the safeguards of a strong regulatory regime to fully engage with this brave new world.'