Tough times, tough talk, tough regulator

21 September 2012

At the FSA’s final Enforcement Conference on Monday, Tracy McDermott, the acting director of the FSA’s Enforcement and Financial Crime Division, issued a scathing attack on the financial services industry and gave an indication as to the interventionist future planned for the FSA’s successor, the FCA.

McDermott stated that financial services “is no longer an industry that society respects, trusts or has confidence in” and, in dismissing suggestions that the FCA should not concern itself with product interventions, added that the industry, when left to its own devices, does not design products that meet the needs of consumers. Instead, “it sells products to the wrong people at the wrong time in the wrong way“.

McDermott was in fighting mood and gave every indication that the FSA would be signing off with a bang before it is replaced in early 2013 by the FCA. She made repeated reference to the penalty imposed on Barclays last week for misconduct in relation to its LIBOR submissions and added that, with a number of ongoing investigations, the LIBOR matter was far from over.

The future under the FCA

McDermott also outlined what regulation under the FCA will look like and again she was in combative mood. The FCA will adopt an increasingly interventionist approach in which it will not be afraid to intervene early – notwithstanding the fact that such pre-emptive action may make it necessarily more susceptible to challenge and defeat. Highlighting cases in which the FSA has been unsuccessful, McDermott bullishly added “a good enforcer cannot operate if it is not prepared to lose“.

With more than a nod to the FSA’s failings during and after the financial crisis, McDermott stated that the FCA will be paying particular attention to identifying and addressing systemic issues in the financial services industry. The FCA will also be keen to bring about a general raising of standards – coming down hard on repeat offenders and firms that fix immediate problems but that do not address underlying causes that may lead to similar issues in other areas. 

Interestingly, McDermott expounded what sounded like a strict-liability approach to consumer protection. Consumers, she said, suffer loss as a result of financial promoters’ ignorance, incompetence or lack of integrity, but ultimately “they care little about the cause – they are concerned about its effect.” McDermott did not offer up further elucidation on this point but left no doubt that, whatever the finer points of the FCA’s approach, one set of individuals will be firmly within its sights – senior management.

It is those at the top of the chain of command – those who fail to recognise and manage the risks their firm is running, who fail to control the way their products are sold, and who fail to ensure that the interests of consumers are prioritised – that the FCA will hold to account and against whom it will bring to bear the weapons in its armoury that it is seemingly so keen to use. Indeed it is hard to avoid the conclusion that despite set-backs in holding individuals to account (most notably the failed case against the CEO of UBS’ wealth management business, John Pottage, for systems and controls failures) the regulator is determined to make enforcement action personal. Whilst the FSA last year deferred the implementation of its new significant influence controlled functions (SIFs), pursuit of the ‘making it personal’ agenda is bound now to involve the introduction of the new SIF roles.  The FSA said it remained committed to all of the proposals in PS10/15 and would provide only two months’ notice of the new implementation date. With the bit firmly between its teeth it will be interesting to see how quickly the regulator will now bring these provisions into effect.

It remains to be seen whether the final pronouncements from the FSA are mere bluster but, if taken at their word, those that will be responsible for enforcement at the FCA are clearly hawkish about the future of financial regulation.

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