Industry Poll indicated confidence on conduct, fear on Senior Managers Regime

By Jane WalsheJane Walshe

On 9th February I joined Philip Allen of the BBA to deliver a webinar (click here to access the recording) entitled ‘‘Enforcement Update: What the Regulator wants and expects in 2017”. A summary of the webinar can be read in Webinar Blog; this piece focuses on the polling that occurred during the hour, which provides an interesting snapshot into current industry sentiment around conduct risk and individual accountability – themes which are as prevalent as ever across the financial services industry.

During the webinar, the 260 attendees were asked to vote on three questions..

1. Use of tools to identify conduct risk

The first question posed was as follows:

On a scale of 1 – 5 (1 being not confident at all – 5 being highly confident) how confident are you that your firm has the right regulatory intelligence to identify, manage and mitigate the conduct risks it faces?

a. 1 1%
b. 2 10%
c. 3 24%
d. 4 51%
e. 5 14%

Given the intangible nature of concepts like culture and conduct risk it is perhaps not surprising that only 14% of respondents feel highly confident that that they have the right regulatory intelligence and management information to identify, manage and mitigate the conduct risks they face. More encouraging is the 50% of respondents who feel reasonably confident they have what they need. Only 11% of voters are not confident at all or only marginally confident. So, the results suggest that that industry is making strides towards getting the tools it needs to help it comply with regulatory obligations around culture and conduct risk, since 89% of respondents were in the middle or above with their assessment (with ‘c’ being ‘neither confident or unconfident’).

2. Individual accountability risks

The second question focused on when the first cases under the new Senior Managers’ Regime will start to be brought by the regulators.

When do you think the first case against a senior manager under SMR will happen?
a. over the next 6 months 16%
b. over the next 12 months 52%
c. over the next 18 months 20%
d. within 2 years 12%

68% of respondents were of the view that the FCA and/or the PRA will bring their first case against a senior manger under the new regime within the next 6-12 months. 12 months from now will mark just under 2 years of the regime coming into force. This is not much time for misconduct to be identified, investigated and proven. Retrospective cases cannot be brought so although issues may have been in existence pre-SMR, the failure to take ‘reasonable steps’ can only run from 7 March 2016. The regulator will face knotty legal issues if or when it brings cases against individuals that seek to straddle both the old APER regime, and the SMR. It’s my view that it may seek to mitigate the risk of an unsuccessful case as far as it can, and so will stick to post-7 March 2016 facts (or hypothesis), thus avoiding additional legal and evidential complexity.

Two years to identify problems, investigate them and then bring a case is a tight timeframe indeed.

Further, although the regulators do not need to make a finding against a firm before making a finding against a senior manager, it will be far easier for them to succeed in a case against a manager where a firm has already settled the issue (or the firm has lost at Tribunal if settlement was not forthcoming). Again the timeframe is very tight if the poll result is proven to be correct.

Whether or not one agrees with the result of this poll, what it illustrates is that the industry holds the view that the Regulators will seek to take action against senior managers as soon as they realistically can. This sentiment shows that regulator messaging around individual accountability, and the intention to hold people to account, has been heard loud and clear by those in banks. This is borne out by conversations I have had with bankers and those who support them: people are worried.

3. Senior Manager cases – which type of firm will be hit first

The third and final question asked in the poll was perhaps the most instructive. The results were as follows:

How likely is it that the first SMR case will be brought against an individual in a small to medium size firm, rather than a large firm?
Very likely 26%
Likely 42%
Unsure 16%
Unlikely 16%

66% of voters believe that the first SMR case is likely to be against a small or medium sized firm, rather than a large firm. The inconvenient truth, both for the industry and regulators, is that it is undoubtedly far easier for a case to be successfully brought against an individual in a less complex organisation than it is to make a case stick against someone in a global firm with thousands of staff (unless it’s a lowly trader who has been engaged in borderline criminal activity – in which case they are fairly easy to pick off – although their desk heads and senior managers still slip through the net).

The figures on cases against individuals under the Approved Persons Regime also bear this out. An intention of the new SMR is to address this imbalance. Whether the regulator succeeds in this remains to be seen. There may be a tension in the Enforcement division of the FCA, between a desire to execute Parliament’s intention in creating the new regime and to hold senior people in big firms to account, on the one hand, and on the other a motivation to bring a couple of speedy cases (quick wins) against managers in smaller firms to rapidly promulgate messages around individual accountability.

What is clear from what Mark Steward has been saying recently is that the FCA expects to have more contested cases on it’s hands. Far from being a quite year for Enforcement, 2017 may yet turn out to be one of the most significant in recent times – a period when post-crisis legislation around conduct and behaviour will be put to the test.


FCA Enforcement Head says firms must continue to up their game

By Jane WalsheJane Walshe
firms must continue to up their game

At a conference (Practising Law Institute Sixteenth Annual Institute of Securities Regulation in Europe) today Mark Steward, FCA Director of Enforcement and Financial Crime, made a number of comments on fines, conduct of financial services firms and the need for senior managers to take responsibility for their actions, and to exercise meaningful oversight of what goes on in their firms.

Mr Steward made the point that there is no policy intention towards fewer large fines. He said that financial penalties and sanctions need to fit the crime, taking into account all mitigating factors.

He also went on to say that what happens in the future in terms of enforcement activity and related fines, depends on what happens in the market rather than any fad or change in approach by FCA. The FCA will use the full range of it’s powers where misconduct is found.

Mr Steward also pointed out that the penalty must fit the crime, and that the measure of enforcement is not the aggregate level of fines. He said that enforcement is in public interest and there are number of elements to this: detecting misconduct as early as possible, investigating fairly, and in ensuring justice for those affected by consequences of misconduct.

Mr Steward said that the only protection against high fines is good conduct and the avoidance of misconduct that would otherwise justify those sanctions.

He concluded by saying that firms must continue to up their game, find ways to overcome the inherent reluctance to accept responsibly. Senior managers need observable evidence that they are thoughtful, apprehend consequences of their actions, have a sense of duty and possess insight into what should be done, and have compulsion to set about doing that right thing.


The Bank of England Stress Tests show Misconduct has biggest negative Balance Sheet impact

By The Enforcd TeamThe Enforcd Team
Bank of England Stress Tests

The Bank of England has published the results of it’s stringent 2016 stress tests, which incorporated a synchronised UK and global recession with associated shocks to financial market prices, and an independent stress of misconduct costs.

The Report made for sobering reading, and extracts on misconduct follow.

“The 2016 stress test also incorporates stressed projections, generated by Bank staff, for potential misconduct costs, beyond those paid or provided for by the end of 2015. These stressed misconduct cost projections are not a central forecast of such costs. They are a simultaneous, but unrelated, stress alongside the macroeconomic stress and traded risk scenario incorporated in the 2016 test. There is a very high degree of uncertainty around any approach to quantifying misconduct cost risks facing UK banks. The stressed projections relate to known past misconduct issues, such as mis-selling of payment protection insurance and misconduct in wholesale markets. They have been calibrated by Bank staff to have a low likelihood of being exceeded. They are therefore, by design, much larger than the amounts that had already been provided for by banks at end-2015. However, partly because they relate only to known issues, they cannot be considered a ‘worst case’ scenario.’

The Bank found that in relation to misconduct:

“Stressed projections for misconduct costs beyond those already provided for at the end of 2015. Around £30 billion of these additional misconduct costs are projected to be realised by the end of 2017, reducing the aggregate CET1 ratio by 1.6 percentage points. This compares to an aggregate of around £40 billion paid and another £18 billion provided for by banks, but not yet used, over the period 2011–15.”

They also spoke about their qualitative review, and about Banks’ failure to develop new models:

“Qualitative review An important objective of the concurrent stress-testing framework is to support a continued improvement in banks’ own risk management and capital planning capabilities. On that basis, as in previous concurrent tests, the Bank also undertook a qualitative review of banks’ stress-testing capabilities. The PRA Board judged that banks in aggregate have made progress this year, but was disappointed that the rate of improvement has been slower and more uneven than expected. As set out in the Bank of England’s ‘Approach to stress testing the UK banking system’, the qualitative review will be considered in the Bank’s broader assessment of banks’ risk management and governance arrangements for the purpose of setting the PRA buffers and will continue to influence the intensity of supervision of individual banks. In order to raise standards in model development and management, the Bank plans to publish expectations against which banks’ modelling frameworks will be assessed. The Bank, through the Basel Committee’s Working Group on Stress Testing, is also collaborating with other regulators in the review of bank and supervisory stress-testing programmes and, as needed, will be developing further guidance to enhance these programmes.”

There have been a number of developments since the launch of the 2016 stress test. As well as news around fines relating to the mis-selling of US residential mortgage-backed securities, the Financial Conduct Authority announced in August that its proposed PPI time-bar will be delayed until end-June 2019. During the first three quarters of 2016 the major UK banks made around £6 billion of additional provisions for misconduct costs and fines. Bank staff have taken these developments and other news into account in calibrating the stressed projections for misconduct costs and fines included in this test.

Development of new models: The Bank expects banks to continue to enhance their ability to model the impact of the stress over time. The 2016 review found that development of new models and approaches had slowed in more established areas of risk modelling such as credit risk. Beyond these traditional disciplines, banks are yet to make significant progress in developing their modelling capability. For example, banks continue to rely largely on judgement-based approaches when projecting their revenues and costs. In order to raise standards in model development and management, the Bank plans to publish expectations against which banks’ modelling frameworks will be assessed. The Bank, through the Basel Committee’s Working Group on Stress Testing, is also collaborating with other regulators in the review of bank and supervisory stress-testing programmes and, as needed, will be developing further guidance to enhance these programmes.”

The following chart illustrates with clarity how misconduct and related fines and remediation has the capacity to have the greatest negative impact on a bank’s capital reserve – outweighing even a severe UK macroeconomic downturn.

Bank of England Stress Chart


Enforcd mentioned by Bank of England’s COO in Speech

By The Enforcd TeamThe Enforcd Team
Bank of England's COO

In a speech at Web Summit in Lisbon the Bank of England’s COO, Charlotte Hogg, gave an update on the work of the Bank’s FinTech Accelerator since its launch in June. Charlotte detailed the current work underway and the firms the Bank is engaging with, and made reference to Enforcd’s ‘proof of concepts’ during the speech.

She also announced that the window for applications for the next round is now open.

The FinTech Accelerator deploys innovative technologies on issues that matter to the Bank’s mission and operations. Working in partnership with FinTech firms the Bank is seeking to develop new approaches, build its understanding of these new technologies and in some way support development of the sector.

Commenting on the progress of the FinTech Accelerator since its launch in June and the completed proof of concepts, Charlotte said:

“We set up the Bank’s FinTech Accelerator in the Bank, launched in June this year, precisely to develop our practical experience of FinTech.  In the Accelerator, we seek to engage with a large number of FinTech firms and technologies, and to run a series of targeted, rapid proof of concepts (POCs) with a number of them.  All POCs are work on problems or challenges that are important to us, and the firms are carefully chosen through an open process based on our published criteria…Recent POCs have covered three main areas – data analytics, information security, and some work exploring distributed ledgers.”

Charlotte then announced the current POCs and the start-ups the Bank is working with:

“A recent addition to the FinTech Accelerator is a POC with BMLL Technologies that uses a machine learning platform, applied to historic limit order book data, to spot anomalies and facilitate the use of new tools in our analytical capabilities.  A second new POC, with Enforcd, uses an analytic platform designed specifically to share public information on regulatory enforcement action.

“We have also partnered with two firms – Anomali and ThreatConnect – that provide innovative technologies to collect, correlate, categorise and integrate cyber security intelligence data.”

Charlotte concluded by announcing that the window for the next round of applications is now open:

“New technologies present opportunities and risks and we need to assess both…as part of our mission to promote the public good.  Today, we’ve opened our next call for applications as we seek to further our research and work, continuing to bridge the gap between institution and innovation.”