He also explained that despite the current consultation into its mission it may take some time for the FCA to achieve its most effective role as regulator.
Speaking at the Cambridge Judge Business School last night, John Griffith-Jones highlighted that gaining a greater understanding of behavioural psychology was vital for the regulator to perform well.
He noted that biases and irrationality were “alive and well” among consumers while some firms abused their knowledge and market power to take advantage.
“We need to understand psychology as much as being financial analysts,” Griffith-Jones said.
“Behavioural economists have shed light on the way that real people behave, and it is not necessarily in line with econometric models. Human bias, over optimism, herding, hindsight and, dare I say it, apparent irrationality are alive and well in some consumers. So, unfortunately, are the asymmetry of knowledge, market power, and regrettably the temptation to cheat in some firms.”
When considering how technology was shaping the state of the financial services sector, Griffith-Jones noted that learning from other sectors could be key steps for the regulator.
“There is no silver bullet for this state of affairs, it is for a good regulator to keep up and cope with change,” he said.
“The financial sector may have something to learn here from other regulators – telecoms and pharmaceuticals come to mind. The FCA is seeking to embrace technical developments through its Project Innovate and Sandbox initiatives.
“We have come to realise that the more detailed regulation that we have the greater the challenge of keeping it all current,” he added.
The FCA chairman also warned that sometimes it was better for the regulator not to intervene than do something which could have detrimental effects because it needed to consider its actions from a large and small scale approach.
“It is a sobering fact that bad regulation can be more damaging to the economy than no regulation,” he said.
“Because financial conduct is as much about behaviour as it is about processes there is a high degree of subjectivity in what we do, and a corresponding risk therefore that we choose or execute poorly. At a macro level, effective deterrence lies at the heart of operational excellence.
“At the micro level, there is no electronically shrink wrapped manual that can tell a conduct regulator how to deal with each situation, the exercise of good judgement can be aided by technology, but not supplanted,” he added.
However, he added that the PPI scandal which has now hit £25bn showed it was cheaper and better to act preventatively than as a cure or remedial action following the event.
The FCA chairman concluded by admitting that it may take some time for the regulator to be formed and function in the best way possible.
“Regulators need no reminding that we are only as good as our weakest link. Rome may not have been built in a day, but built it was. We should be ambitious for our future, if a little patient with our rate of progress,” Griffith-Jones concluded.