Latest developments in financial services regulation Simon Morris & David Pygott CMS Cannon Place, London 20 October 2016 Latest developments in FS regulation | 20 October 2016
Agenda 1. The renewed focus on culture 2. The regulators’ growing expectations of individuals 3. What is getting firms into enforcement? 4. Competition as the new regulatory tool 5. Prudential and conduct drivers for 2016/2017 6. Brexit and the future 2 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
The renewed focus on culture − FCA decided in December 2015 not to proceed with a thematic review into culture in banking… − …is now under new management… − …as is the Treasury… − …but the focus on culture has not gone away − Firms’ culture and governance remains one of FCA’s stated priorities for 2016/2017 − Supervision • “ a central focus ”; “ will be used to drive our decisions about our thematic projects and market studies ” (extract from FCA Business Plan 2016/2017) • “ Our ambition is for the conduct element of culture: that mindsets and incentives will shift to make doing the right thing for consumers and the markets the objective that is always considered ” (Jonathan Davidson, Director of Supervision, July 2016) − Enforcement • Part of “ a game plan of strategic directions ” (Mark Steward, Director of Enforcement and Market Oversight, April 2016) • Poor culture and governance continued to be cited as a basis for regulatory action in Final Notices issued to firms in 2016 3 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
Culture impacts outcomes … I would observe that in the United Kingdom I don’t think we saw a major prudential failure of capital or liquidity which did not have a governance and management story at its heart … Good regulation … is also about creating the conditions for firms to do this right thing in the first place. Let me give three examples of what we are doing in this respect. • Remuneration & incentives • Senior management responsibilities • Supervising governance is inherently a matter of judgement based on evidence … ( Andrew Bailey, PRA Annual report 2015/16) 4 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
Culture is a catalyst The failure of HBOS can ultimately be explained by a combination of factors : − Its Board failed to instil a culture within the firm that balanced risk and return appropriately, and lacked sufficient experience and knowledge of banking. − The result was a flawed and unbalanced strategy and a business model with inherent vulnerabilities … − This approach permitted the firm’s executive management to pursue rapid and uncontrolled growth … The risks involved were either not identified or, where identified, not fully understood by the firm. − There was a failure by the Board and control functions to challenge effectively executive management in pursuing this course or to ensure adequate mitigating actions. … − An overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure . HBOS was one such bank. (Extracts from TSC: Review of the reports into the failure of HBOS, July 2016) 5 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
Culture is tangible and measurable We acknowledge … • We do not believe that there should be a one-size fits all culture that comes off the shelf … we are not going to prescribe the overall culture . • Changing culture is very difficult and we know it takes time … because culture comes from the past … culture is remarkably resilient in the face of attempts to change it ; it takes focus, consistency and time to effect change. But we want … • … we are making our assessment of culture by looking at the examples of behaviours that we come across in supervision and we are looking closely at what management is doing to shape culture and the direction implied in it … (Extracts from ‘Getting Culture and Conduct Right’, speech by Jonathan Davidson, Director of Supervision, July 2016) 6 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
The regulators look for four elements 1 . Tone from the top … and middle 2. Formal, tangible practices which … are the major determinants of tell people what they need to do to be culture an important and regular item successful and ensure that the right for board discussion? people are employed and rise to leadership roles But employees are more likely to be Recruitment, compensation and influenced by the top trader than the Board. If a colleague is successful promotion practices …by rewarding staff for performance achieved in line despite poor conduct practices it with firm values, remuneration and makes positive messages from the top hard to believe … incentives can reinforce and embed a firm’s desired culture … Middle management are critically important to the tone from the top … 7 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
3. Narratives that circulate in a 4. The organisation’s capabilities to learn a set of behaviours – to have a firm … the tone of strategies, conversation about the needs of business plans and mission customers requires an ability to relate statements. to a customer and problem solve a The most interesting and accurate are solution which is a different those referred to, repeated and passed competence from the persuasiveness on the most because they resonate needed to sell a specific product … with the culture of employees . Asking employees to deliver 10% more (Extracted from same speech by Jonathan YOY with 25% less headcount … Davidson, July 2016) If employees feel under pressure to deliver against tough targets conduct standards can fall. 8 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
And another way of looking at it … − How quickly does it take for problems to escalate to the right person or group of persons for effective decision making or action? − How many problems linger in the inbox or the draft box or the bottom drawer beyond their easily fixable date? − How difficult is it to fix things once they are detected? (Speech by Mark Steward: Culture and Governance, 11 November 2015) 9 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
Growing expectations of individuals (1) − Closely linked to the focus on culture − Senior managers regime: where are we now? • 7 March 2016: senior managers and certification regimes came into force (for banks, building societies, PRA-designated investment firms, UK branches of foreign banks); full senior insurance managers regime came into force (for insurers) 4 May 2016: Bank of England and Financial Services Act 2016 received Royal • Assent; made statutory provision for further extension of scope of senior managers regime (relevant provisions not yet in force) • 28 September 2016: FCA published ‘6 months on’ review of firms’ implementations; began further consultations on: − new guidance regarding enforcement of duty of responsibility − application of conduct rules to all NEDs in banks and insurers − overall responsibility and the Legal function 10 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
Growing expectations of individuals (2) − Growing expectations of Senior Managers (highlights) • Management responsibilities map • Individual statements of responsibility • Duty of responsibility • Code of Conduct − Growing expectations of Certification regime staff (highlights) • Code of Conduct • Fitness and propriety 11 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
Growing expectations of individuals (3) − FCA CP16/26: enforcement of the duty of responsibility clarified? − FSMA s66A: for a Senior Manager to be sanctioned for a breach of the duty of responsibility, FCA has to prove: • a contravention of a regulatory requirement by the firm • that the Senior Manager was responsible for the management of any activities in relation to which the contravention occurred • that the Senior Manager did not take such steps as a person in his/her position could reasonably be expected to take to avoid the contravention occurring or continuing − New guidance about factors to which FCA will have regard when assessing compliance with the duty of responsibility − Amendments to DEPP proposed 12 Latest developments in FS regulation | 20 October 2016 CMS Cameron McKenna LLP
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