A Regulatory Review of 2015

year-in-review

This year has been full of ups and downs at the Financial Conduct Authority (FCA). Fundamentally, it has become a year of change. In this article, I look back at the FCA’s more significant successes and challenges of 2015. I then make some predictions for the year ahead.

A Year of “Ups”

 “If the first year has seen the concept of good conduct go to the top of the agenda in boardrooms across the City, in our second year we must push for this culture change to feed through from trading floors to high street bank branches – all firms must continue to put the best interests of their consumers at the heart of their business models.” – Martin Wheatley, FCA Business Plan 2014/15

Supervision

There can be no doubt that the concept of conduct risk is now part of the financial landscape. It is discussed in the boardroom and in the financial press, and is gaining traction with overseas regulators. Senior managers are regularly considering the impact of the firm’s actions upon customers with a view to ensuring customers are kept at the heart of the business. Some firms have even hired or promoted “conduct risk” champions.

Although there is a more to do before conduct risk becomes truly embedded, there is no doubt that the FCA has had much success in encouraging firms to tackle conduct risk and to embark upon a journey of cultural change.

Enforcement

The FCA’s Enforcement Division continues to drive cultural change through its policy of credible deterrence. At the start of December, the FCA’s website stated that the total amount of fines for 2015 exceeded £899,160,574. This is almost double its total 2013 figure (which was a mere £474,263,738), although it is unlikely to top the staggering £1,471,431,800 total fine figure levied last year.

The FCA’s website stated that the total amount of fines for 2015 exceeded £899,160,574.

The year’s most significant fines were linked to cases connected with the financial crisis and its aftermath. The FCA issued its largest-ever fine of £284,432,000 for system and control failures connected with a bank’s foreign exchange (FX) business. The failures spanned a period of 5 years, from 2008 to 2013.

The FCA also issued another fine of £227 million, the largest ever for LIBOR and EURIBOR related misconduct. Again the failings spanned a period of 5 years, from 2005 to 2010, and joined previous enforcement action against firms for failings connected with LIBOR. Both of these actions involved close co-operation with overseas regulators.

Other significant action included the FCA’s largest-ever retail fine of £117 million, which stemmed from a different legacy issue, payment protection insurance (PPI). The FCA concluded that having been mis-sold PPI, customers were treated unfairly a second time and denied appropriate redress.

The final significant fine concerned a failure to protect client assets. Client money protection has remained important to the FCA since Lehman’s insolvency. The firm’s failure to comply with the client money rules warranted a fine of £126 million.

A Year of “Downs”

I am disappointed to be moving on and I do with a sense of unfinished business. – Martin Wheatley

The FCA’s media briefing in March 2014, which proposed supervisory work on the fair treatment of longstanding customers in life insurance, and wiped billions of pounds off the value of insurance company shares, continued to cast a long shadow into 2015. In November 2014, the Davis Report examined the handling of the FCA’s media briefing and made several criticisms and recommendations of the FCA. In response, the FCA docked the annual bonus of four FCA officials, including Mr. Wheatley.

The year’s most significant fines were linked to cases connected with the financial crisis and its aftermath.

In March this year, the Treasury Select Committee considered the wider implications of the FCA’s media briefing and the Davis Report. The Treasury Select Committee’s report was critical of the FCA’s actions, with Chairman Andrew Tyrie MP, stating:

The FCA made a serious error in March last year. By breaching its own listing rules, it created a false market in life insurance shares. In doing so it put its own statutory objectives at risk.

The Treasury Select Committee’s Report also directed some criticism at Mr Wheatley:

The events of 27 and 28 March, and the findings of [the Davis Report], revealed multiple flaws in the FCA’s processes and practices. These failings went right to the top of the organisation, including the Chairman and Chief Executive

In July, in an unprecedented move, the Chancellor of the Exchequer, George Osborne, decided to not renew Mr Wheatley’s 5-year term (which was due to expire in March 2016). Mr Wheatley stepped down as Chief Executive in September and Tracy McDermott, Head of Supervision and former Head of Enforcement, took over on a temporary basis. The search has now begun for a new Chief Executive for the FCA.

A Year of “Change”

Our financial services industry in Britain has, in recent years, been seen as part of the problem – now it must become part of the solution. – George Osborne

People

At the start of the year, the FCA conducted some internal restructuring and made some interim appointments. It appointed a Chief Operating Officer and, in October, Mark Steward was announced as the new Head of Enforcement. Mr Steward was formerly the Head of Enforcement at the Securities and Futures Commission in Hong Kong.

Penalties

In his speech Mr Osborne also drew attention to the enforcement process, stating:

But simply ratcheting up ever-larger fines that just penalise shareholders, erode capital reserves and diminish the lending potential of the economy is not, in the end, a long term answer.

In an effort to make the enforcement process more transparent, the FCA published updated criteria on the enforcement referral process in July.  This followed a review by HM Treasury, published in December 2014, about the enforcement decision-making process.

In November the enforcement process also came under scrutiny from an industry body. The British Bankers’ Association and Oliver Wyman published a report examining the competitiveness of the UK as a centre for international banking. They advised taking the FCA’s enforcement powers and transferring them to a new independent body. Sir Hector Sants, former Chief Executive of the FSA, is currently partner and Vice-Chairman of Oliver Wyman, and as such, the report’s recommendations will likely carry some weight.

Policy

A significant change was made to the FCA’s Senior Managers and Certification Regime. The original proposals, which envisaged reversing the burden of proof, prompted concern that senior individuals would leave the financial sector over concern of the onerous nature of the regime. The change now means that the “presumption of responsibility” for senior managers is to be replaced with a “duty of responsibility”.

Powers

Finally, on 1 April 2015, the FCA acquired concurrent competition powers, under which it has the ability to enforce against infringements of competition law, conduct market studies and refer markets to the Competition and Markets Authority (CMA) for in-depth investigation with regard to financial services. The CMA can also exercise these powers.

The new powers sit well with the FCA’s objective of promoting effective competition. Upon the announcement, Christopher Woolard, Director of Strategy and Competition at the FCA, said:

The FCA’s concurrent powers are an important part of our toolkit. They benefit all consumers of financial services by encouraging competition amongst firms and deterring and punishing any anti-competitive behaviour.

The FCA has already acted. In May, the FCA announced a market study to explore competition for investment banking and corporate banking services. It recently announced a market study into asset management services.

The Year Ahead

The following three issues are likely to be significant priorities for the FCA in 2016:

Personal Accountability

Personal accountability will be the watchword of 2016, not least because of the Senior Managers and Certification Regime, which will commence on 7 March 2016, but also due to legacy of the HBOS Report. The HBOS Report makes a series of findings which includes a recommendation the FCA consider action against 10 former HBOS executives. The FCA will be looking to establish a difference between it and its predecessor, the FSA, which was criticised on the HBOS report as “deficient”.

If the FCA is able to successfully take enforcement action against some or all of the former executives, it will have sent a strong signal to the financial sector that misconduct will not go unpunished and personal accountability and responsibility cannot be avoided.

Pensions and Asset Management

The pensions and retirement income market is undergoing significant change. Recent changes introduced by the government and the FCA have enhanced flexibility, but the long-term impact of these changes has not yet been felt.

Questions are now being asked about the asset management sector and performance of various funds and asset managers. The FCA has commenced a market study into the asset management sector with interim findings due to be published next summer.

Digitalisation and Technological Advances

Technology has already revolutionised the financial sector. Crowdfunding and peer-2-peer firms have mushroomed from small niche providers to global game changers. Digital wallets and contactless payment points are now commonplace, whilst robo-advisors look set to change wealth management.

Crowdfunding and peer-2-peer firms have mushroomed from small niche providers to global game changers.

These financial innovators are also disruptors and some have managed to flourish with little regulatory oversight, the view being that regulatory oversight stifles innovation and slows the process. Last year, the FCA announced its Project Innovate, to foster innovation and competition within financial services.

This year it announced plans for its “regulatory sandbox”, to allow businesses to test out new and innovative financial models or services without incurring normal regulatory requirements and thereby curbing innovation.

There are welcomed initiatives and demonstrate that the FCA wants to encourage financial innovation. We should expect to see more from the FCA in 2016 around the impact of FinTech innovation.

 

About Mary O'Connor

Mary O’ Connor is Willis Towers Watson's, Head of Client, Industry and Business Development for Willis Towers Wat…
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