Acting to stop harm: the FCA and Appointed Representatives
In an interview with Anne Bruce for LexisLibrary and Lexis PSL, Andreas White, employment partner, and Julie Matheson, regulatory and professional discipline partner, say that real efforts have been made to implement cultural change in the complex financial services sector, but a raft of new regulatory reforms now need to bed in.
Financial services is a heavily regulated sector, why do scandals involving mis-selling, rate fixing and so on happen time and time again?
With large sums at stake, there will always be some individuals who are tempted into wrongdoing. Despite recent reforms - including the introduction of the ‘bonus cap’, applicable in the UK to large and systemically important firms - the culture of the financial services sector continues to be driven by revenue and bonus targets. While bonus deferral and clawback rules now offer firms a means to recover previously awarded bonuses if and when wrongdoing emerges, they are unlikely to deter the minority of ‘bad apples’ who are prepared to bend or break the rules in the pursuit of profit. As the banks continue streamlining following the great financial crisis, we may also see greater pressure on earnings and bonuses, resulting in some individuals seeking ‘creative’ ways to bolster their profits and losses (and bonuses).
Following the financial crisis, there has been a lot of talk about image changes in the sector and a new and better banking sector, but has the culture in banks really fundamentally changed?
While you will never be able to guarantee another scandal will not emerge, there can be no question that real efforts have been made to implement cultural change. Embedding an understanding that compliance requirements are fundamental has been a business imperative for the banks. The introduction of cultural change from the top down has in any event been mandatory in light of the introduction of the Senior Managers and Certification regimes (SMCR), which have defined and delineated personal responsibility and accountability on the part of senior management.
Beyond the regulatory sphere, banks have increasingly been adopting soft human resources management policies - for example, to promote diversity and employee engagement, such as flexible working programmes.
Is the regulatory system as it is set up at the moment equipped to adequately deal with the financial services industry? Do they have the power and ability to act pre-emptively?
There has been significant change in recent months, with the introduction of the SMCR as mentioned above. The new rules represent a significant shift from exclusive Financial Conduct Authority/Prudential Regulation Authority regulation towards greater autonomy for banks and firms in assessing fitness and propriety - it remains to be seen how well this works in practice.
Plainly there is the risk of inconsistent rigour and standards being applied by different firms, while we may also see some firms taking a tougher line in cases involving underperforming staff, with potentially disastrous consequences for their careers, and enhanced litigation risk. Although the regulators do have powers to act pre-emptively, and can identify issues through their supervisory capabilities, it is not difficult for warning signs to be missed, especially in complex trading or large-scale operations.
Can you think of any rules/changes to current law and regulation that might help tackle the problems?
There is a whole raft of regulatory reform occurring, encompassing not only the SMCR, but also the new conduct rules, and new rules on whistleblowing and regulatory references. Another major milestone is approaching with the deadline for firms to issue certificates for individuals under the certification regime falling in March 2017. The new conduct rules will be extended to a much wider population of financial services industry employees at the same time. The issue of regulatory references is unresolved and is due shortly to be the subject of further consultation. The same is true of whether the senior managers regime applies to general counsel, despite all the serious concerns about the ramifications if it does. The priority at this stage should be to see how all these reforms bed in.
What are the trends in this area? Do you have any predictions for the future?
The major trends include greater emphasis on compliance and the allocation of clear lines of responsibility and accountability within firms, from the very top down. That said, despite the coming into force of the SMCR, there remains real uncertainty over the application of the new regime in practice. Financial services firms are currently grappling with the issues and adjusting their approach to their internal procedures, for example disciplinary procedures and annual appraisals.
There is widespread recognition of the need for consistency when it comes to fitness and propriety decisions, but this will not be easy to achieve in practice, either within large firms, or across the industry. With important responsibilities being allocated to firms, such as to certify their own employees and notify the regulator when disciplinary action relating to breach of the conduct rules is taken against a relevant employee, the scope for disputes is greater than ever.
This was first published in LexisLibrary and Lexis PSL on 21 June 2016, and is reproduced with their kind permission.
Should you have any questions about the issues raised in this article, please contact Andreas White, Julie Matheson or any member of our Employment team or Regulatory and Professional Discipline team.
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