We are now six months into the new regulatory regime. We think the transition has gone smoothly and that we, and our stakeholders, are all adjusting well to the new reality.
The name change, switching an ‘S’ to a ‘C’, may not appear that significant, but the advent of the FCA has heralded a marked change in our approach to regulation.
We are determined to create a culture of good conduct at every level of the industry – to make markets work well and to produce a fair deal for consumers – through a more proactive, more interventionist, more creative and more judgment-based approach.
The characteristics of that new approach should be becoming apparent. From our early ‘call to action’ on interest only mortgages, to our agreement with the banks on direct debit retries, to our exploration of how we can use behavioural economics and our efforts to increase transparency, to the redress schemes on Card Protection Plan Limited (CPP) and IRS, and to the market studies we have announced further to our competition objective. We have a wide variety of tools – some formal, some not – and as the long list above highlights we are willing to use them in different ways based on our understanding of the problem and a willingness to be creative about how we tackle issues.
There is much more which could be said about this. But I only have 25 minutes today, and it is an enforcement seminar, so I will focus on what we have been doing in enforcement since April and what you can expect to see going forward.
As you would expect, in developing the FCA, we have been keen not only to learn the lessons of the past but also to build on areas of strength. So in enforcement, which has a strong reputation – hard won on the back of dedicated work by my staff over many years – the changes are more incremental and the overall philosophy remains to pursue credible deterrence. And, as should be apparent from the last few months, and especially the last few weeks, there will be no let up from the FCA in this.
If anything, our recent cases have underlined that we are more committed than ever to showing firms and individuals that they must play by the rules; because if they don’t, robust sanctions are a matter of course.
Yet those cases also illustrate the scale of the challenge in front of us. Across the financial services sector, in both retail and wholesale markets, serious issues remain. Perceptions of what is acceptable behaviour have become distorted.
It is a real concern that we continue to see dramatic, and disappointing, failures from an industry that professes to have learned lessons, that claims to have been humbled and chastened by the experience of the past several years, that seeks to get us to believe there is a new dawn is just around the corner.
For example, our review into payment protection insurance (PPI) complaints handling, which we published recently, found that two thirds of the firms visited were still failing to deal properly with complaints.
Financial Ombudsman Service (FOS) uphold rates remain too high – with vast differences between the best and the worst firms – whether you include PPI or not.
The recent JP Morgan investigation revealed that, as late as 2012, the culture of greed and perceived invincibility that contributed to the crisis was alive and kicking within financial services firms. So why is this? And what will change it?
Looking at some recent examples first:
I recently read an article which focused on a retail mis-selling case – the £7m fine for Swinton for mis-selling add on insurance - and in which a senior member of the insurance industry asked, rhetorically, ‘How [did] we get to the stage where we can sell someone a product and they are not even aware they have bought it?’
A good question. You may wonder the same. As do I. And it is not just about sales of products that people don’t know they have bought, but about some of the product sales we have seen in other cases – insurance cover for non-existent risks, investment products patently unsuited to the customer to whom they are sold – and so on.
In many such cases, priorities appear to have become skewed, resulting in business strategies that pursue profit with little regard for customers.
But that doesn’t quite explain how perceptions have adjusted to such an extent that, within parts of the financial services industry, a culture developed whereby the interests of customers – and the supply of products that actually met their needs – seems to have become an afterthought.
That raises all sorts of wider philosophical questions, some of which may be beyond the grasp of mere regulators. But influencing industry perceptions of what is acceptable is one of the regulator’s key responsibilities.
The Clydesdale case is a good example of this. The firm miscalculated mortgage repayments – so many customers underpaid. When the firm realised this, its reaction to its own mistake was to pass the buck to its customers. It put its own commercial interests ahead of the regulatory requirement to treat its customers fairly. Our penalty, and the redress package, should make it clear to others that this is not acceptable. If financial services is to thrive and to win back the respect it has lost firms must put the interests of consumers at the heart of the businesses.
At the end of August, we announced that agreement had been reached with CPP, and 13 high street banks and credit card issuers, to enable redress to be paid to customers who were mis-sold CPP’s card and identity protection products.
This is a hugely important agreement – 7m customers will be contacted, and the redress could be over £1b – and it of course follows an earlier £10.5m fine for CPP in respect of their misconduct.
These are significant measures, but let’s remind ourselves of what the misconduct involved. CPP had a product which may have been valuable to some customers but its sale practices meant that it focused on insurance element and misled its customers into buying or keeping cover that either wasn’t needed, or was intended to insure against greatly exaggerated risks of fraud.
CPP encouraged its sales agents to persist in persuading customers that they should buy this cover, even in circumstances where those customers had made very clear that they did not want it. Many customers would not even have realised they were dealing with CPP – having called simply to activate their cards – issued by many household name banks.
And for those customers who contacted CPP with the express intention of cancelling their policies, they were faced with agents who were incentivised to dissuade them from doing so.
That a redress scheme of this scale has been agreed with CPP and the banks that introduced customers to these products, without resorting to litigation, is a positive sign. It may indicate that firms are beginning to heed our messages, and re-assess their priorities as far as customers are concerned.
Our role is to keep up that pressure and you should have no doubt that we will continue to do so – as you have seen over the summer with a succession of mis-selling cases such as Swinton, Sesame and Axa. We will use all of the regulatory tools at our disposal, including enforcement, to ensure that consumers are placed front and centre of firms’ agendas. It is a simple instruction, but one that we will continue to issue until we see real change.
And alongside the mis-selling cases which have been publicised over the last few months, we are also continuing to pursue outcomes in other priority areas.
That is why, for example, we recently fined Aberdeen Asset Management, £7m for failings in respect of their handling of client money. Since Lehman, we have repeatedly communicated to firms the importance of adhering to the client money rules. This case is just the latest in a long line of enforcement actions in this sphere and you will continue to see the FCA focus here.
We also continue to focus on financial crime. The level of AML compliance among financial services firms remains a matter of concern, and, you will continue to see both further thematic and enforcement work in this area.
The recent case against Guaranty Trust Bank for anti-money laundering (AML) failings underlines our determination to ensure that the UK is a hostile place for would-be money-launderers.
Another of our priority areas, where we have been especially busy in recent weeks, is wholesale conduct – addressing the culture, systems and controls that govern wholesale relationships. We have spoken a lot in recent years about market abuse and insider dealing – our work on that remains a key priority with seven people currently awaiting trial and 13 convictions (including five guilty pleas) last year. Today, however, I want to focus on the wider wholesale conduct agenda.
The JP Morgan fine - £138m - is our second largest penalty to date.
The fine reflects the seriousness of the firm’s failure to ensure that fundamental controls were applied to the trading of its Chief Investment Office. The consequences of not applying those controls were perilous – the losses that resulted were around $6b. It also reflects what followed thereafter – which serves as a lesson in how not to do crisis management.
The 62 pages of our final notice set out an all too familiar story, traders – and local desk management – choosing to mark their positions to flatter their own book. Initially, this may just have been ‘optimistic’ but as losses increased, the tactics adopted became increasingly desperate – more aggressive mismarking to conceal increasing losses from senior management, adjustments of risk limits and substantial trading in the market, motivated at least in part by a desire to ‘limit the damage’ to the book.
During this period, red flags were raised a number of times – internally and externally. The reaction to these was instructive (at least in terms of what it said about the firm’s approach): where risk limits were breached they were changed; where the numbers didn’t add up there was an assumption that the system was wrong; and when market gossip identified a problem, the firm assumed it knew better. Describing this as a ‘tempest in a teapot’ may go down, perhaps alongside ‘the time for remorse is over’, as one of the most regretted phrases in recent financial services history.
When senior management did engage with the problems in the Synthetic Credit Portfolio (SCP), they ordered the traders to cease trading. However, the true scale of losses remained obscured by mis-marking, which was itself undetected as a result of poor procedures and policies adopted by the Chief Investment Office’s (CIO’s) Valuation Control Group.
As the situation deteriorated further, increasing losses and collateral disputes with trading counter-parties caused the firm to examine the SCP’s valuations more closely. But that review again failed to uncover the true extent of the issues in the SCP – yet was nevertheless relied upon in the firm’s quarterly filing to the US Securities and Exchange Commission (SEC) – which subsequently had to be restated once the firm had a grip on the reality of the situation.
As the valuation issues evolved, and we engaged with the firm, being very clear about the candour that we expected and the risks we were concerned about, JP Morgan failed to be open and co-operative, even on one occasion deliberately misleading us.
So that is the unhappy tale – one of long-standing control issues, complicity between traders and managers to conceal losses, repeated failures by senior management, in the face of clear warning signals, to get to grips with what was happening below them, a willingness to dismiss the views of others – believing the firm knew best, and a failure to be frank with the regulator. And this was not in some dim and distant pre-crisis past when people believed they had conquered risk. This was in 2011 and 2012 – with lessons from the crisis seemingly ignored.
Hot on the heels of JP Morgan came ICAP. This is the fourth fine we have imposed for LIBOR-related misconduct. And our investigations against others continue.
If your senses have been dulled by the pall that LIBOR has cast over the industry, you may nevertheless find the conduct described in the Final Notice – of the self-styled Lord Libor, and others in this case – to display a breath-taking disregard for the interests of the market.
But how does the conduct that we have seen in the ICAP and JP Morgan cases come to pass in the first place? Why did the individual wrongdoing occur? And why did others not challenge it?
The financial services industry is just a microcosm of wider society – the people within it are no better or worse, no more predisposed to misbehaviour – than in most other walks of life.
But within cultures that place profits over ethics, misconduct will flourish. That is why firms must grasp the nettle and embed cultural values that champion positive behaviour and make clear that there is no room for misconduct. Only then will we arrive at a place where people do not regard the behaviour we have seen in these cases as acceptable.
Indeed, I think some of the most telling quotes in all of our recent notices are in the ICAP notice – not in the messages and emails about Ferraris and bottles of bubbly – but in some of the comments made to us by the brokers we interviewed. Very clearly, they perceived a commercial imperative which prevailed over any sense of ‘doing the right thing’. In fact, it’s difficult to gauge any sense of ‘doing the right thing’ whatsoever.
As one broker put it, when asked why he hadn’t reported his trader client’s efforts to influence LIBOR submissions, ‘I don’t see any benefit, other than the fact we’d lose a line’ and ‘It’s not up to me. I’m not a regulator… I think if brokers brought everything to [regulators] then the brokers would end up having no clients…’.
And clearly the LIBOR situation isn’t unique – in July we published final notices against two individuals, one of them a compliance officer, for their failure to prevent their firm’s client from manipulating the London Stock Exchange’s (LSE’s) closing auction.
It is, I think, shocking that even all these years after the start of the crisis, the reaction of certain individuals is to say, ‘not my job guv – we aren’t regulators’. As long as that attitude prevails on the trading floors and elsewhere at the frontline, as long as the industry believes the problems are created by the regulator or are there to be fixed by the regulator, then nothing will change.
I read in the press recently that, post the London Whale incident, JP Morgan plans to spend $1.5b and recruit 5,000 extra staff to bolster its risk and compliance functions.
But even 5,000 extra staff will not be enough if the culture on the frontline doesn’t change. Relying only on people’s fear of being caught – whether by compliance or the regulator – is not enough. Individuals need to recognise their obligations to the markets and their clients and customers, and sharpen and heed their sense of moral responsibility.
I remember my daughter, when she was around 4 years old, used to react to a telling off by pleading, ‘I don’t know how to be good’.
I had little sympathy for it from a 4 year old, and I have even less when it comes from our financial services professionals. They know what needs to be done – and should recognise it is ultimately in their interests to do it.
So how do we ensure that individuals accept their responsibilities and effect the change that is required? The FCA has made it very clear that responsibility for the overall culture of firms sits at the top. We need leaders and senior managers within the industry to set the tone for how their staff behave. It is therefore imperative that those individuals are held to account where they share responsibility for conduct failings.
I have described before, including at some length in my evidence to the Parliamentary Commission on Banking Standards, the difficulties inherent in bringing action against senior management.
That is not to say we haven’t had some successes, and in 2012-13, we took action against 55 individuals, imposing in the process £5m in fines and 43 prohibitions, and obtaining 13 criminal convictions. That is more action than we took against firms.
But these investigations are challenging, not least because industry professionals have a lot to lose if enforcement action is successful.
There will, in due course, potentially be legislative changes which impact on how senior individuals [in banks] are expected to discharge their responsibilities. But, in the meantime, we are not standing still. We have been taking steps – across the FCA – to improve the prospects of holding senior management to account – whether through more focus at the approval stage, through increased supervisory attention including attestations or through our increased emphasis on individuals at the investigation stage.
You will no doubt all be aware of the increasing number of interviews we are routinely conducting of senior people in our investigations. You will also see us refusing to settle cases where firms try to make a clean sheet for individuals as part of the deal.
Changing culture will take time but we are clear about the priority we place on this.
And what else are we doing at the FCA to tackle wrongdoing? Early intervention is a new plank in the FCA’s approach. You will of course still see us conducting full enforcement investigations as we have done in the past but we are also refining and changing our approach to take action earlier. So what do I mean by this?
You will see enforcement teams engaged much earlier with issues whether through formal action or through working directly with FCA supervisors as we seek to understand issues as they arise at firms and formulate our response.
This means enforcement is doing work in areas that you will not see in the public domain – many of these ‘early interventions’ will be about intervening before things go very wrong and stopping detriment before it happens. This work will not produce the same public enforcement outcomes that you are used to seeing although we are looking at ways we can quantify and report on the number and type of interventions we do.
And we continue to focus on many other Enforcement areas I have not had time to talk about today – including unauthorised business, which remains a priority, and our preparation to take on consumer credit regulation. Perhaps we will speak about these another day.
But in conclusion, I should acknowledge that notwithstanding the work of the past few years – by the regulator and the industry – we are only at the start of our journey to change behaviour in the industry. It is of course heartening that, in the CPP case, the firms shared responsibility and agreed a redress package for customers.
And equally, it is pleasing (not only for the compliance industry) to read about JP Morgan investing so significantly to try to prevent a recurrence of the recent misconduct. But there is a very long way to go if we are to rebuild public trust, and that was reinforced by some of the coverage of the CPP settlement.
Patrick Jenkins of the FT greeted news of the CPP agreement by saying, ‘Another week, another mis-selling scandal, another example of banks behaving like brutal muggers until they are frogmarched back to confront their victims and give them a bit of first aid.’
That news of a mis-selling scandal is greeted with ennui; that our banks are regarded as ‘behaving like brutal muggers’ towards their ‘victim’ customers; that the FCA is seen as having to ‘frogmarch’ institutions into providing redress is telling.
These perceptions, if perhaps not the imagery, are by no means unusual. But they are incredibly unhealthy, and it is addressing this sentiment – society’s lack of trust in the industry – that represents the greatest challenge, both to the industry and its regulator.
And the industry should be in no doubt that, if change does not occur, it will ultimately suffer. If trust is not rebuilt in financial services then all of those who work in the industry – whether earning multi-million pound bonuses or serving customers on the high street – will lose out. Customers will switch off, businesses will go elsewhere and the industry will wither – and it will have no-one to blame but itself.
Unless we see an extended period of firms walking the walk as well as talking the talk, trust will not be regained, and we will all – industry, regulators and most importantly consumers – be worse off as a result. That is the challenge ahead of us, but rest assured, it is one that we are committed to meeting.
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