Focus on good culture and governance in financial services strengthened by senior management rules, says expert

Out-Law News | 05 Apr 2016 | 4:55 pm | 4 min. read

The importance of financial firms having a good culture and governance framework in place is increased by the fact that senior staff can now be more easily held to account for failings, a financial regulation expert has said.

Josie Day of Pinsent Masons, the law firm behind Out-Law.com, was commenting after the Financial Conduct Authority (FCA) published its business plan and risk outlook for 2016/17. The regulator said it wants to see "firms managed in a way that promotes appropriate culture and behaviours".

The FCA said it expects firms to have "effective governance arrangements in place to identify the risks they run in their business models and operations" and to have a strategy for managing and mitigating those risks so as "to deliver fair outcomes to customers, clients and market integrity".

Senior managers and the board have important roles to play in setting the culture, it said. Day said the FCA's emphasis in this respect was "not new" but that it had added meaning now the Senior Managers and Certification Regime and the Senior Insurance Managers Regime are in force.

"The FCA’s expectations are now bolstered by increased individual accountability under the various new senior management regimes," Day said. "These regimes should give firms and regulators clear information about the responsibilities of each senior manager and relevant firms can expect the responsibility maps and senior managers’ responsibility statements to be used in their on-going regulation." 

"It is important for firms and the individuals in question to keep this in mind – both in respect of their day-to-day business activities and in their interactions with FCA. Looking ahead, in light of Treasury’s plans to extend the Senior Managers and Certification Regime to all authorised firms under the Financial Services and Markets Act, FCA will begin developing its policy to do this – so senior management in general must take note," she said.

The FCA's business plan also highlighted its concerns about "poor practice in the treatment of existing customers". It said it plans to take action to improve the position in the retail banking, cash savings and life insurance markets.

"Existing consumers enjoy the benefits of increased competition and innovation by firms in products and services, particularly: firms give more information to customers on renewal in the relevant sectors, making pricing more transparent; there is greater product choice and availability; barriers to switching or exiting are removed; firms pay due regard to the interests of their existing customers and actively engage with them to give them a good service and improved outcomes; firms actively compete to retain customers rather than taking loyalty for granted," the FCA said.

However, financial regulation expert Chris Davidson of Pinsent Masons said that objective measurement of the FCA's initiatives would be difficult under the criteria the regulator has adopted to measure success.

The FCA has said it will measure the success of its initiatives to improve the way firms treat existing customers if there is an upward trend in existing customers' perception of choice of products, comparisons between products and service and the ease of switching.

"Will these measures show that the issue in cash savings markets has been addressed or would a more objective measure be something like ‘reduction in the difference between the rates of newly launched accounts and older savings accounts'?" Davidson said.

Davidson also examined the FCA's criticism that customers in the cash savings market are currently given little information about alternative products.

"Under the old Banking Code banks undertook to provide information about alternative savings accounts on an annual basis, and if customers were in an account where the interest rate had effectively been reduced banks gave customers information about alternative accounts," Davidson said. "When the Banking Conduct of Business Sourcebook (BCOBS) was introduced those undertakings were removed."

In its risk outlook the FCA said that inflation and interest rates are expected to remain low, and that demographics are changing as we are becoming an older society. Davidson said that those factors could present challenges to industry and regulators.

"There may be little point in switching if the perceived benefit is small, with an added issue that some people may be too busy to chase the small gain from switching and older people may not have access to online information," Davidson said. "It is not clear if the proposed remedies will help issues such as these."   

William Maycock of Pinsent Masons said the FCA's focus on wholesale financial markets will include consulting on changes to its Handbook rules to implement the EU's MiFID II framework. He said the consultations will focus primarily on conduct of business and organisational requirements. 

"One thing to keep in mind is the European Commission's proposed one year delay to the application date for MiFID II, from January 2017 to January 2018, and whether it will have any effect on this implementation process," Maycock said. "The fact that certain aspects of the Level 2 texts are still not finalised only adds to the uncertainty."

Maycock also highlighted action the FCA intends to take in relation to the operation of wholesale fixed income, currencies and commodities markets. The FCA said that it will be working closely with other international authorities "to improve conduct and how … markets at the global level are structured and operate". This includes working with the Bank of England and other central banks on proposals to develop a global FX code of conduct which is expected to be published in draft later this year by the Bank for International Settlements (BIS).

"This is a complex undertaking with serious challenges to consider and agree upon," Maycock said. "It still remains to be seen how mechanisms to ensure compliance with the proposed new code will be designed as it will not be binding in itself. In addition, banks still have much work to do on their internal controls in this area, particularly in relation to the potential for conflicts arising where banks act as both principal and agent."