This month we bring you the best bits from various regulators' speeches about the future regulatory model, improvements for standards in financial advice and what’s next for the FCA-Pensions Regulator joint strategy. Read on also for rumours of changes to the rules for unit-linked funds and new rules for non-UCITS retail schemes.

The human cost of a future recession

FCA Chairman Charles Randell gave a speech which outlined the effect on real people - not just on markets and institutions - that the next recession might have.

Randell explained that there are two ways in which the Bank of England looks at the financial system’s resilience during its annual stress tests of the major banks. It looks at whether the banking system has the capital and liquidity to provide credit to the economy through a recession, and whether any of the banks ought to strengthen their financial positions, the better to survive the downturn.

He called attention to another thing that regulators have to consider when thinking about a recession. He admitted that, although banks might be able to deal with losses during a financial downturn, millions of real people were going to be in real financial trouble.

Randell went on to describe the financial reality of life for many people in the UK.

• 26 million UK adults have unsecured debt, such as short-term loans, £10,000 each on average.
• Around 8.3 million people are ‘over-indebted.’
• There are more than 800,000 households in the UK that have mortgage debt of more than four times their incomes.
• Around one-third of British adults have less than £2,000 in cash savings. One in eight have no cash savings at all.

The scenario laid out in the Bank of England’s annual stress test uses a ‘severe but plausible’ set of circumstances to seriously test the banks and banking system. The conditions for this year's test are that unemployment rises to 9.2%, house prices fall by 33% and the stock market falls by 41%. Randell was keen to point out that this is not a prediction for the next recession, just a way of thinking about preparing for the future.

He used the theoretical circumstances of the stress test to illustrate what would happen to millions of consumers in the UK, particularly people in less financially resilient positions such as the ones we have listed above.

Randell then asked what policymakers and regulators should be doing about this. Among the suggestions, he noted the following.

• The FCA is right to continue looking at the market for signs of unsecured credit.
• In a recession, the regulator will have to work with other governmental authorities to look at various responses to the downturn in financial services, for example a jump in demand for debt advice,
• All creditors – including those who have not paid council tax, utility bills and mobile phone bills – will have to respond to the situation.
• The FCA should consider what support consumers would need if a recession caused falls in the values of their investments, the need to use pension savings for everyday living expenses and increasing gaps in new retirement saving.

In his speech, Randell said that the regulator would use the tools at its disposal to reduce the effect of a recession on people’s debt, savings and investments. Of course, he drew attention to the fact that the the regulator must consider these possibilities but cannot force various industries and authorities to take remedial steps; this lies far outside the FCA’s remit.

He also said that the FCA continued to expect firms to consider issues of affordability and arrears handling, guiding savers to the right options. The regulator has a low tolerance for firms that fall short of its standards in these areas.