An uneasy contrast for the FCA – balancing commercial drive with cultural reform

03 December 2014

Yesterday's speech delivered by Martin Wheatley has reinforced the FCA's increasingly more collaborative approach to its engagement with financial services firms.

Mr Wheatley's speech on "the commercial importance of culture to industry" at this year's FCA Enforcement Conference emphasised the FCA's recognition of the challenge for firms in balancing commercial activity with governance and culture.  However, given the FCA's increasing focus on the management of conduct and culture, this is hardly a surprising choice of theme.

The speech highlights the difficulties for financial services firms to restore public trust and confidence in the industry, by delivering strong corporate culture, whilst battling with their increasing regulatory demands. How can firms prove to regulators that lessons have been learnt from past "indiscretions", when reforms to the sector have come at such a fast pace?

In terms of competition Mr Wheatley highlighted the "important improvements (by both the PRA and FCA) in authorisations to reduce barriers to entry" in the past 18 months, whilst acknowledging that by providing for new market entrants, this increases the risk associated with misconduct.   Perhaps this is a nod to the principles set out in the Regulators' Code (on which my colleague Sam Bishop has recently commented) which highlights the importance of the regulators' responsibility to engage with those they regulate in a manner that will "give business greater confidence to invest and grow" .

As the market continues to face the challenge of building trust and confidence, culture and governance, in an increasingly competitive environment, the speech implies a greater acceptance by the FCA that past enforcement activity has been too ready to clamp down on businesses, to the overall detriment of the economy.   This may also be indicative of the influence asserted by the on-going review by the Treasury into enforcement decision-making at the FCA and the PRA.

The tone of the speech is supportive, commending UK financial sector leaders and their boards for being "wholly committed to achieving reform" with equal drive in business development, posing the question why conduct issues such as fixing FX remain prevalent and indicative that top-down communication and culture is lacking.  The answer suggested by the regulator is that while businesses address systemic issues, cultural issues take a back seat.    Interestingly, the regulator sees the brunt of the responsibility to achieve better top-down communication and culture as being placed on the "business leaders" within this environment – in other words a firm cannot offload the burden on to its compliance department and turn a blind eye. Senior leaders must engage, and that engagement must be proactive. In this regard, we at RPC have advised numerous clients on their governance responsibilities and are close to both the business and regulatory concerns raised when firms are trying to grow a business whilst engaging with the regulator through a period of stress.

Martin Wheatley identified 2 key priorities for future improvement:

1.  Regulatory responsibility to be focussed on the future rather than past "indiscretions"; and

2.  Industry leaders to be focussed on the best long-term interests of clients, not just whether a product/strategy is legal.

However, I note the FCA's explicit recognition of its responsibility to achieve change through "its dual both enforce and improve". The FCA's use of its regulatory tools is not intended to be a linear approach – rather the hard power of enforcement and soft power of supervision are intended to work together.  This echoes a recent speech by Clive Adamson which explained the FCA's move towards a "judgment-based" "pre-emptive" "pro-competitive" approach – what matters is "outcomes achieved" rather than strict adherence to the Rules.  The objective of enforcement and supervision is to achieve change by working together to tackle issues of misconduct at an earlier stage, focusing on the root causes of behaviour that lead to consumer detriment and poor market conduct.

Yesterday's speech essentially identifies the key challenge faced by financial services today: the balance between a commercial approach to drive the business forward, whilst ensuring a strong corporate culture is embedded throughout the business.  While this will not come as any great shock to the industry, the emphasis on the future rather than focussing on past misdemeanours is promising.  Let's hope this is indicative of a greater flexibility in the regulator's approach in light of an enhanced appreciation of the wider economic issues at play.

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