New title, same story?
The last few years have not
been good for the financial services sector. Quite apart from the
outcry over the causes and impact of the banking crisis, public
confidence has been further shaken by a number of mis-selling
scandals, which have cost millions in compensation and significant
reputational damage.
In this climate, it is hardly surprising that the regulatory authorities have been very visibly flexing their muscles, ushering in a clear philosophy of even greater active enforcement, to bolster the much-criticised supervisory regime.
One of the flagship developments has been the creation of the Financial Conduct Authority (FCA), a new agency due to replace some of the functions of the Financial Services Authority (FSA), which will be fully operational by the end of 2012. "The name itself reflects a shift into a more stringent environment," comments James Lightfoot, Legal Manager at BDO. "The emphasis is now much more on changing behaviours by penalising misconduct and regulatory breach, and making examples of firms which fail to have robust regulatory compliance programmes in place. The watchdog will really bite."
That's not to say that the FSA has lacked teeth before now. "It is somewhat ironic," Lightfoot continues, "that while the banking crisis led to huge criticism of the FSA’s supervisory function, its Enforcement Division has slowly but surely upped its game, with some eye-catching enforcement actions, ever larger fines and a tougher 'zero tolerance' message, particularly in the area of financial crime."
Nevertheless, the FCA is explicitly promising to raise this diligence to a new level: in its own words, it will be "tougher, bolder and more engaged". (You can download a summary of its approach to regulation by clicking here.)
So what does this mean in practical terms? Lightfoot anticipates that the FCA will be even more aggressive in taking action against firms which don't meet its expectations, particularly over compliance failings in areas which have been the focus of recent thematic reviews such as data security, money laundering regulations, and anti-bribery systems and controls.
The activity of the FSA over the next 18 months will give a clear taste of things to come: "The FSA will expect much more proactivity and preplanning in the management of regulatory risk," he says. "There will be an even higher expectation for firms to get on the front foot through greater investment in compliance now, rather than retrospective remedial action following an enforcement action.
"Those which do not can expect an enforcement action to become the norm, rather than the exception; with more action taken against individual members of senior management, stripping them of authority to hold positions of responsibility and so on."
This has obvious implications for how firms need to respond to the new regime, as Lightfoot confirms: "Increased investment in compliance and regulatory risk functions will not just mean more staff or new and improved systems and controls. An often overlooked factor is the need for more intensive, role-specific training, and demonstrable skills amongst regulatory staff, focussed on particular aspects of the regulatory regime, from anti money laundering and sanctions to treating customers fairly.
"It's also important that the compliance function is seen to have real clout. Since it's not a direct profit centre, the compliance ramifications of a firm's business strategy can sometimes be an afterthought or seen as a barrier to growth – it may not be central to a firm's strategy. This will need to change as ever-larger fines and the risk of individual action pose a greater threat to the bottom line and the leadership of the business."
The precise reach and scope of the new agency is still to emerge, but whatever the upshot, the future enforcement climate is already clear and financial institutions need to respond, and do so without delay.
