The Financial Conduct Authority (FCA), formerly the Financial Services Authority, holds an Enforcement Conference every two years. The latest one, last month, was the first one under the new FCA regime. The content of the conference was pretty much as expected, with sessions on:
- Explaining why and how enforcement is used
- Enforcement as an agent/catalyst for change
- How enforcement fits with the other regulatory tools at the FCA’s disposal
- The penalties framework and policy
In practice, the conference added little new to those “Kremlinologists” who follow the FCA’s announcements fairly closely, and reinforced a number of themes that have been emerging from the regulator. Interesting comments from attendees, whether in panel sessions or informal meetings, revealed the concerns of some members of the regulated community.
Change Seen as too Slow
It is becoming clear that there is a strong sense of frustration at the most senior levels of the FCA at the pace of culture change within financial services.
Martin Wheatley, whilst acknowledging the commitment of senior executives to corporate change, seemed genuinely frustrated at the pace of change. He expressed astonishment that emails attempting to “fix” a gold benchmark could be issued by a bank on the same afternoon that the LIBOR fines were announced. He quoted a “non-financial executive” who said that culture change takes 18 months for each layer of management you go through.
Similarly, Mr Wheatley quoted the recent New City Agenda/Cass report on retail banking that it might take a generation to effect cultural change. Mr Wheatley’s response is that he does “not think firms have the luxury of waiting a generation for that to happen.” (his emphasis).
His comments were not the only ones from the FCA that emphasised a need for urgent cultural change.
Too Complex for Speed?
Against this background of a regulatory imperative for cultural change, there is the real possibility that the regulator will confuse urgency for change with permanence of change. There seemed to be a lack of real understanding about the sheer size and complexity of some of the financial services firms.
Although many of the senior FCA leadership have effected change within organisations, these have tended to be relatively homogenous organisations—certainly when compared with banks, such as regulatory organisations or professional services firms—and it is possible that they seriously underestimate the time and management focus needed to effect sustainable change within very large, complex, organisations.
An alternative, “conspiracy-theorist” analysis would be that the regulator is well aware of the complexity, knows that it is unachievable, and that it will expose the larger banks as “too big to be managed effectively”.
Looking Ahead to 2015
Whatever the analysis, in 2015 all medium-sized to large organisations can expect:
- Greater focus by the regulator on senior decision-making. Approved Persons in particular can expect to be asked not, “was this decision legal or compliant”, but rather “was it right or ethical, and how did you arrive at that view?”
- Closer examination on the “tone from the top”. Are the actions and tone of the organisation’s leaders reflected in the actions and tone of employees throughout the organisation? If so, how? Sales and complaints processes, for example, are likely to be regarded as “cultural touchstones” for the regulator.
- Where behaviours are uncovered that are not “ethical”, what have the senior people done about it?
- More emphasis on individual decision-making and responsibility. Mr Wheatley specifically stated that people, “should not need a rule book to determine right from wrong”.
- Closer examination of business models. Mr Wheatley quoted the Archbishop of Canterbury – “Bad business models can corrupt good people”. The regulator is adopting an increasingly interventionist approach, as demonstrated by its regulation of “pay-day” lenders and firms offering consumer credit where it is fully prepared to drive unacceptable business models out of the market.