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As expected, one of the key cross-sector priorities is to continue delivering protection for consumers through a focus on culture, accountability and governance of firms. Over the years, the FCA has been working hard on these priorities, but where do matters presently stand and how is the FCA measuring success?
In terms of tackling culture, the FCA now realises that a fundamental change in firm and individual conduct cannot be delivered solely by rules alone, but through instilling a healthy workplace culture from the top down. The FCA will be embarking on a road show across the country to explore what a healthy culture looks like, develop ideas, promote its benefits and help firms take proactive steps to change ineffective cultures in their organisations.
The FCA will also be looking more deeply at the causal link between healthy cultures and business models and healthy outcomes for consumers, markets and firms. We'll find out more about this in March 2020, when the FCA will hold a second Transforming Culture conference to share and discuss the outputs from this work.
Turning to accountability and governance, the FCA's main tool is the Senior Managers & Certification Regime (SMCR). It's already been in place for a number of years for banks and in December this year, most FCA regulated firms will be subject to the SMCR which is not an insubstantial undertaking as this will include approximately 47,000 firms in total.
The SMCR aims to reduce harm to consumers and strengthen market integrity by raising the standards of conduct for everyone who works in financial services. Under the regime, firms must be able to clearly understand and demonstrate where responsibility lies, however, senior individuals themselves will be more responsible and accountable for their own conduct and competence, along with the actions of others for whom they are responsible.
The regime is casting the net wider by ensuring all staff (except ancillary staff) conform to a new set of high-level conduct rules. The SMCR is one of the biggest regulatory changes to take place since the financial crisis in 2008. It's not just about a new set of rules; it's about a cultural revolution in the UK financial markets.
If measuring the impact of the SMCR based upon FCA sanctions and financial penalties imposed, the current SMCR would potentially be showing signs of adding value, as there has been a significant decline in the number of FCA fines against banks subject to SMCR and related individuals. It may also be suggested that the SMCR is embedding a healthier workplace culture and encouraging individuals to stop and think about whether they are responsible and competent to do their job.
The FCA say that they are generally seeing firms taking their responsibilities more seriously. However, according to the Financial Advisor, in 2018 the FCA saw a 70% rise in lifetime bans in the industry compared to 2017. The number of FCA investigations concerning individuals generally is on the increase and the Financial Ombudsman Service has seen an unprecedented rise in the number of complaints it is handling. It may therefore be that due to the length of time taken by the FCA and PRA to investigate matters and the confidential nature of their investigations that the position has not really changed.
Furthermore, it was clear from the Feedback Statement recently published by the FCA regarding whether a duty of care is needed in financial services, that on the whole respondents felt more robust consumer protection was needed above and beyond the SMCR. Of course, the SMCR has only been in force for banks since 2016 and insurers since 2018, however banks and insurers continue to dominate the complaints data. So will the SMCR make any real difference to the 47,000 FCA regulated firms from this December?
In driving a culture change, the FCA is likely to persuade the regulated industry that the SMCR gets a gold star but the reality is that we are not yet far enough along the timeline of implementation for any independent view to be taken on its success.
In relation to individual accountability and related Enforcement sanction we are yet to see it have any more teeth than the Approved Persons Regime (APER) which will be replaced altogether by the SMCR. Similar to the APER, individuals who fail to meet the expected standard of conduct or who cease to be fit and proper will face penalties such as a prohibition, withdrawal of approval, fines or other disciplinary actions. However, under the SMCR, there are new measures seeking to increase individual accountability and strengthen the regulator's powers to tackle bad practice such as responsibilities maps and statements of responsibilities, but only time will tell if these measures will enable the FCA to fill the evidential gaps it previously fell foul of under APER.
Whilst controversial and potentially incongruous to natural justice, the Presumption of Responsibility stole the limelight back in 2015 when the SMCR was first consulted upon. It was intended to reverse the burden of proof so a senior manager would be presumed to be in breach of their duty of responsibility unless they were able to prove otherwise that they had taken all reasonable steps to prevent a breach from occurring and any failure to do so could result in sanction against that senior manager.
This was scrapped at the 11th hour, to the great relief of many, in favour of the regulators having to prove that the senior manager had failed to take reasonable steps (the Duty of Responsibility). Something which the FCA will inevitably continue to find difficult to prove to the required standard as many individuals will delegate or share their responsibilities given that understanding how each complex business function operates can be near-impossible for one individual.
The return of the Presumption of Responsibility would likely go a long way to combat this challenge, but the Presumption was scrapped for a multitude of reasons, including concerns over human rights, natural justice, recruitment and retention. The FCA also wanted to move away from a 'fear based' or 'compliance' culture to an 'ethical' culture in the hope that if senior individuals desired to see themselves a good people and feel genuinely more responsible and accountable, this is where the SMCR would really show its value. Whilst this must hold true to an extent, perhaps the regulators will re-think their approach to accountability and enforcement action against senior managers if they can’t provide any empirical evidence of the SMCR being more successful than its predecessor. This would accord with recent FCA rhetoric, including that of Jonathan Davidson, Director of Supervision at the FCA, who is quoted as saying he prefers to call the SMCR the 'Accountability Regime'.
For now, however, the FCA seems content with its current direction of travel of combining the SMCR with a variety of tools including the Duty of Responsibility, a new public Directory with broader reporting requirements and a possible new Duty of Care to protect consumers from harm. In fairness, the FCA has set out a stricter stance on individual accountability as outlined in its Approach to Supervision and Approach to Enforcement publications last month, providing the following insight: "Wrongdoers must be held to account and our rules and requirements must be obeyed”. Perhaps more time is needed to measure the level of success, or otherwise, of the SMCR.
The FCA's Business Plan states it will be monitoring change through complaint levels, supervision of individuals and firms and feedback from consumers and firms. Whilst the FCA recognises that there are challenges in both measuring culture objectively and in establishing the causal link between cultural change and consumer, market and business outcomes, these are key measures against which the FCA will be judged. Essentially the FCA recognises a cultural change will take time and there is still more to do, but if results are not evident and the FCA faces further pressure to illustrate success, could the return of a Presumption of Responsibility be on the horizon?
For now, if you're a solo-regulated firm, our advice would be to welcome the SMCR in December as an opportunity to review your management and governance structures and get the right people, documentation and culture in place. The FCA will undoubtedly come calling on a number of firms to ensure its objectives are being met.
16 May 2019
Insights 18 JULY 2022