On 9th February 2017, I joined Philip Allen of the BBA to deliver a webinar entitled ‘‘Enforcement Update: What the Regulator wants and expects in 2017”.
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 focused on how well equipped firms feel they are to identify conduct risk.
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 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 the 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.
2. Individual accountability risks
The second question focused on when the first cases under the new Senior Managers’ and Certification Regime will start to be brought by the regulators.
68% of respondents were of the view that the FCA and/or the PRA will bring their first case against a senior manager 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-SMCR, 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 SMCR.
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 survey, 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:
66% of voters believe that the first SMCR 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 SMCR 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 its hands. Far from being a quiet 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.