Evolving Regulatory Expectations – How to Embed Positive Conduct in Your Firm

It often seems that we are constantly just trying to keep up with events. Whether that be re-adapting to children spending the day with schoolmates instead of the PS5, or trying to convince our bosses we are working, not playing all day on the newly liberated PS5.

It looks as though some at the FCA have discovered that they have some time on their hands and have started to indicate a return to ‘normality’. Although there is no doubt that there are real strains in certain aspects of interaction with the regulator, they have, just like in the olden days, started to flag the areas where they will be focusing attention. We can’t say we haven’t been warned.

The 21/22 business plan may have been delayed until the summer, but the indications are already out there for some of the headlines. In April, Mark Steward, the Executive Director of Enforcement and Market Oversight, spoke to a (virtual) group at New York University Law School. Although this was for an American audience, it does underline at least one of the themes we should be aware of to avoid a (virtual) knock at the door.

The Senior Manager and Certification Regime – Review Your Controls

Mr Steward explained that the duty of responsibility arising from the Senior Managers Regime has forced firms to build controls into their systems to avoid compliance failings. This has not been done through explicit rules covering every eventuality but as a result of the ‘self-interest’ of senior managers. The stick of personal liability has been used as a driver towards conformity and away from, in his words, ‘the bear pit of compliance’.

In expanding on this point, he made it clear that firms are expected to build explicit steps into their processes that will avoid a compliance gap. It is expected that a vulnerability leading towards a failure in internal systems should be identified through proactive assessment, but where this is not the case, it is a foul-up by the senior manager. As has been mentioned many times before, there must be evidence that each senior manager is reviewing the controls in their area and doing so regularly.

 ‘Conduct’ in the FCA – Check Your Responsibility Map

Conduct is quite literally at the centre of the Financial Conduct Authority. Over the past few years, there has been an acknowledgement that there still needs to be a principles-based approach for the gaps in a (relatively) comprehensive Handbook, and the need for senior managers to manage suitable behaviours that protect their customers.

The past eighteen months or so of operating in the COVID-19 world have shown that financial services firms can cope in very unusual circumstances with a remarkable degree of resilience.  It is almost certain that some issues will only come to light in the future, particularly around default, bad debt and repossessions, although temporary FCA guidance has been put in place to protect customers in the short term (particularly around forbearance tools).

Part of the success of the financial system (so far), has been the ability to rely on firms ‘doing the right thing’, and it is this that the FCA has been promoting recently.

As reported annually by the FCA, the ‘5 Conduct Questions’ have been used to give a benchmark of progress within regulated firms towards taking ownership of embedding an appropriate business culture, the foundation of the Senior Manager Regime.

Interestingly, the speech at NYU indicated that a sixth question will be added to the list, albeit one that in previous reports the FCA indicated was already working reasonably well and was seen to be improving. The formal introduction of a ‘diversity’ question can now be expected, one where organisations must consider their corporate attitude to the diverse culture in which they operate. Firms will be expected to ensure that this is reflected either in the make-up of the organisation or at the very least, appropriate behaviour is an integral part of the culture.

Firms may wish to look to their responsibility maps to make sure someone has this responsibility and the power to introduce/enforce a culture that does this.

The Tone from the Top, Above and Within – Driving Cultural Change

Looking at the 5 Conduct Questions reporting over the years, it was pointed out that there was a steady move in organisations towards changing their underlying culture. The original ‘Tone from the Top’, where senior managers were driving cultural change is now shifting to a more inclusive model. The inclusion of middle management (Tone from Above) is facilitating this and as staff get more engaged, the ‘Tone from Within’ is starting to truly embed FCA cultural expectations in the staff as a whole.

Although promoted as a positive step, there does seem to be an implicit concern in the FCA that the Tone for the Top should still an essential part of the process, and that the Senior Managers need to ensure that they don’t delegate aware a core responsibility. Relying only on the operational staff to propel a positive culture leads to as many views as there are staff. This is where the Tone from the Top needs to be maintained.

In Conclusion

‘Following the rules’ is an approach that is taken as a given by the FCA, and a breach of regulation will be punished. Having an appropriate culture is central to how a firm is viewed by the regulator as well.  As the pandemic continues, it will become more vital than ever to demonstrate that everyone is on board with the fair treatment of customers, with solid direction from their senior management.

One major step to achieve this is to ensure employees are fully trained and equipped to support customers, and act with the appropriate duty of care and due diligence in alignment with the principles oand objectives of the FCA. Find out more about our Access Learning Solutions for Financial Services, with training catalogues including Compliance Fundamentals, Conduct and Senior Managers and Certification Regime, available in our Governance, Risk and Compliance eLearning suite.