An edition of this article was first published by Thomson Reuters GRC. © Thomson Reuters
by Paul Scott, Director of Advisory Services at Huntswood
Two regulators, both alike in dignity, in fair London where we lay our scene: from ancient grudge of mis-selling scandals, where retail firms cause retail customers detriment. Shakespeare’s works and retail banking compliance may not often share the same stage, but with the writer’s death and birthday passing, perhaps the financial services could learn from his warnings. Here, we focus on the coming Financial Conduct Authority (FCA) which intends to concentrate its resources on high risk banks and insurers. In so doing, it will break its bond with a broader list of previously relationship managed, lower risk firms.
What does this mean for the small, medium or – in some cases – relatively large firm who has been privy to the bitter sweet relationship with the regulator until now? Is it time to relax and celebrate freedom? Or is there a chance that this freedom will result in a different kind of risk for customers? Will firms choose the route of proactive management of compliance risk, avoiding bad habits which will lead them straight back to the regulator’s arms? Or are the paths of regulated firms and the regulator simply star cross’d, destined to end in tragedy?
It’s not you it’s me
Given the failings of the past, the regulator has promised “a new approach to conduct regulation” with new staff and objectives leading the way. Through the regulator’s reorganisation, if you are no longer relationship managed it is because the FSA deems your firm lower risk; its priority is higher risk firms and its scarce resources are best used in a different way.
In the short term, lower risk firms will no longer have a specific point of contact at the regulator; instead engagement is more likely to follow through thematic and sector reviews. Essentially, you will be left to your own devices, which means that your interpretation of regulatory obligations will require closer scrutiny and more independent validation by trusted and informed experts. In essence, you will self-regulate according to the information you can source.
If your firm is within scope of the thematic reviews, confident provision of information that you use to run your business should be made available. This is the expectation in the regulator’s “show me” stance; proactive compliance is the name of the game.
Your firm has the opportunity to react in one of two ways: a) relax now and panic when the thematic reviews come along or b) slowly build good management information (MI), documentation and compliance risk management into all product areas now, enabling you to “show” the regulator as and when required. The latter will put you in good stead for a healthy, if arm’s length, relationship with the regulator post break up.
The greater your ability to demonstrate compliance and good customer outcomes, the more regulatory trust you will gain. When questions are asked, your CF10 should be able to confidently answer: “here is our MI, these are the risks and this is our risk mitigation plan. We understand our products, we have responsibly brought them to the market, we can demonstrate real senior management engagement and oversight. We have an effective and sustainable business model and our MI is robust, demonstrating positive customer outcomes.” This good news story may well promote an even more arm’s length relationship as the regulator seeks to devote resources to perceived risks in other firms.
Of course, the other reason the regulator might get in contact is if you use your new found freedom to let standards slide. Crystallised case work will let your firm feel the wrath of the new regulator through intense focus on the reasons you have treated your customers unfairly. Expect intrusive inspections, increased use of section 166 – reports by skilled persons with their unpredictable costs – and product intervention if things are going very wrong. Via MiFID II, the regulator will use its power to ban your products which puts a great deal of research and marketing time at risk of negation.
Not only is the regulator going to give you space and require you to hold your own; firms can expect, if they have not already experienced, a hands off approach which is to become wide spread. When asked by a firm to advise how to handle a recent issue, one FSA staff member responded by saying “you get on with it and I’ll tell you afterwards if I don’t like it”. The regulator is not responsible for firms treating customers unfairly, for customer detriment or mis-selling; this can only be down to the firm itself, its senior management and its governance and culture.
In this new world, the regulator is leaving your firm to take responsibility for interpretation of regulation and the action required to implement or remedy faults. Of course, the regulator will do its part by being open and transparent in engagement with the industry, but the firm must use its resources to bring itself up to scratch. As Clive Adamson, Director of Supervision, Conduct Business Unit, has stated, there is a “greater expectation that firms demonstrate they have resolved issues promptly (not FCA devoting resources to monitoring this)”. It is up to you how to go about your business.
Don’t look back
Many firms complain that the regulator does not understand them. Their business is different. The regulator will never comprehend the commercial context in which they function. For those lower risk firms with such feelings, this is an opportunity to lead a self-regulated, trouble free life without the threat of enforcement. As long as firms understand their regulatory obligations towards their customers and seek independent validation of these, they can use this opportunity to quietly shine, getting on with the job in hand.
The increase in horizontal sweeps of the market through thematic reviews will pick up those who would rather make a quick buck from their customers, with problematic business models relying on customer apathy. Poor conduct in retail business will simply mean that they and their senior management will end up back in the arms of the regulator, their mortal enemy. And we know how that ends in Shakespeare’s play.
Romeo and Juliet is not a perfect love story. They met, were pulled apart and though offered the chance to live free lives they opted for each other and a truly tragic end. The will of Parliament is that regulated firms and their regulators are bound together to ensure the fair treatment of the customer; only to this extent are firms’ and regulator’s paths star cross’d. Lower risk firms have the opportunity to proactively uphold the fair treatment of their customers, away from the intervention of the regulator. They can break free from the poor conduct of business which has helped to leave confidence in financial services at an all time low.
Some shall be pardon’d and some punished: for never was a story of more war, than this of the firm and its regulator.