Regulators and compliance – be bold!
Preparing for the Financial Conduct Authority’s new style of supervision in the UK
As a parent, I know the challenge of supervising teenagers, it can be a little intimidating, particularly when you are outnumbered. In the case of the newly emerging Financial Conduct Authority (FCA), the regulator’s supervisory responsibilities also look a little daunting.
The FCA will become the conduct supervisor for 26,000 firms and the prudential supervisor of 23,000 firms (that is, those companies not supervised by the Prudential Regulatory Authority, see ‘What is the FCA?’ opposite) at a time when the entire financial services landscape is under the microscope.
The conventional wisdom for parenting is to set expectations, allow as much independence as possible, listen to concerns and follow through with consequences for misconduct. This approach came to mind when reading Journey to the FCA – in which the Chief Executive designate for the FCA, Martin Wheatley (the former Chief Executive of the Securities and Futures Commission in Hong Kong), has set out a ‘new style of supervision’ which includes the following:
• Fair and reasonable expectations. The focus will be on standards of behaviour with an expectation of personal integrity and honesty. The new regime will also focus on consumer protection. By way of an example, the FCA will expect firms to provide customers with financial services and products which are suitable for their personal circumstances, with no misleading promotions and no hidden charges. Interestingly, the FCA may also assume responsibility for credit regulation from the Office of Fair Trading.
• Responsibility. The paper confirms that senior management have responsibility for setting a firm’s culture and treating customers fairly. Under a ‘Firm Systematic Framework’, the FCA will leave firms to do their own monitoring, selftesting and follow-up to address less important points identified by the FCA’s preventative risk assessments. It seems that firms will be required to do more self-attesting. This is a contrast to the ‘Arrow’ regime which involved extensive regulatory followup of most points after a visit.
• Consultations and representations. The FCA has requested views on its new supervisory approach and will digest comments triggered by consultation papers. Current papers include the draft FCA policy concerning temporary product intervention rules, draft guidance concerning ‘super-complaints’ and the consultation paper concerning the draft Prudential Regulatory Authority (PRA) and FCA regimes for approved persons. In addition to consultations and open discussions with the regulator, firms will be able to make representations to the FCA if they believe the regulator is making a wrong decision when exercising its powers.
• Intervention/ enforcement. The Journey to the FCA document refers to ‘judgement-based supervision’. This means the regulator will intervene at an early stage if risks to customers are believed to be unacceptably high. There are also plans for the FCA to have the power to ban misleading promotions immediately from the market and publish the reasons for doing so. The FCA will be committed to greater transparency, bringing more enforcement cases and will press for tough penalties. Although the supervisory approach in the UK will change, the themes are still the same with the regulators placing emphasis on the effectiveness of control systems, management structures and accountability. Notwithstanding these familiar issues, many senior executives feel nervous about their regulatory responsibilities. This is understandable, particularly as conduct at the very top of firms will be the focal point for the FCA. It is clear the regulator will hold members of senior management accountable for their actions.
So how do compliance professionals respond? Part of the answer is to ensure key risk areas (for example, product selection, training, recruitment, remuneration policies and outcomes from monitoring reviews) receive sufficient air time at the board level. Nervousness normally arises when there is some uncertainty. Part of the solution is to ease tensions by jumping on any uncertainties regarding responsibilities, ensure everyone is prepared for their role and provide training if required.
There is also a need to help embed the right behaviours and attitudes by adopting an assertive approach. Martin Wheatley has said the FCA will encourage their staff to be ‘more confident in making bold, firm and predictable decisions’. Compliance officers would do well to adopt the same approach when providing advice, escalating issues or making recommendations. But as with a parent, take care when walking that fine line between authority figure and ally!
Mark Taylor, FCIS FCS Director
Boxall Barton Ltd
HKICS members may remember Mark Taylor as a highly active member of the Institute back in the 1990s during his tenure as Deputy Company Secretary and subsequently Senior Manager Compliance at HSBC Hong Kong. He moved to the UK in 2003 and can be contacted at: firstname.lastname@example.org.
SIDEBAR: What is the FCA?
The Financial Conduct Authority (FCA) is a new body created by the latest restructuring of the UK’s financial regulatory framework. In June 2010 the UK government announced plans to abolish its single financial services regulator, the Financial Services Authority, and divide its duties between two different bodies:
1. the Financial Conduct Authority will regulate financial firms providing services to consumers and maintain the integrity of the UK’s financial markets, and
2. the Prudential Regulatory Authority, a subsidiary of the Bank of England, will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.
To complicate matters somewhat, the FCA will also have responsibility for the prudential regulation of firms that do not fall under the Prudential Regulatory Authority’s scope. All other responsibilities will be assumed by the Bank of England.
The ‘Journey to the FCA’ is available on the Financial Services Authority website: www.fsa.gov.uk.