Speech by Mark Steward, Director of Enforcement and Market Oversight at the FCA, delivered at the Banking Litigation & Regulation Forum 2018.
Speaker: Mark Steward, Director of Enforcement and Market Oversight
Location: Banking Litigation & Regulation Forum 2018, London
Delivered on: 14 June 2018
- Good enforcement requires robust, accurate and faithful processes for detecting misconduct in all its guises and acting quickly and effectively.
- Outcomes to our investigations may involve the use of enforcement, supervision, or competition powers, or a combination of some or all.
- We are seeking views on a number of questions about our approaches to Supervision and Enforcement. Please send us your comments by on 21 June 2018.
Note: this is the speech as drafted and may differ from delivered version.
Thank you for inviting me here this morning.
The financial crisis
I have been asked to make some observations ten years on from the start of the financial crisis. I am conscious that everyone’s experiences here are likely to be very different. My vantage point, in Hong Kong, was probably different from most of you in this room. I will resist parochial anecdote other than to relate one story.
The most dramatic consequence of the crisis in Hong Kong, following the failure of Lehman Bros, in September 2008, was the default of Lehman paper held by tens of thousands of retail investors who, in many cases, had invested their life savings in a complex credit-linked instrument known as a minibond. Many of these investors were what we called ‘golden-age’ customers, or retirees. We might today call them vulnerable customers.
The reaction, when these minibonds defaulted following the failure of Lehman Bros, was not only an economic and financial one, it was also a social one, given the large number of affected investors who had little or no idea their investments could be damaged by the failure of a US investment bank. The noise was explosive. The public anger and protest was directed not only at banks who had sold this paper in large volumes, but also at regulators and the financial system in general. Confidence and trust, as well as savings, were the first casualties.
Ultimately there was a good ending for these investors and their banks: that story can await another day. The point of the story for today is to ask whether the public anger that erupted ten years ago has entirely dissipated which brings me to today’s main question of whether we are now in a better position.
Our Mission and our Approach
Last year we published our Mission, which was directed at redefining how and why we prioritise, protect and intervene in financial markets. We said:
- our Mission is to serve the public interest through the objectives given to us by Parliament in the legislation that we administer
- we will focus on harm or potential harm to consumers, markets and firms as the springboard for regulatory intervention.
These are profoundly important statements that reflect and respond to the FCA’s collective experience of the financial crisis.
More recently we published a number of approach documents, which articulate the mission more specifically in the context of how we use the range of our powers and functions. This series includes our approach to Enforcement and Supervision. There is also an Approach to Authorisation, Consumers and Competition and we will shortly issue, for consultation, our Approach to Market Integrity.
The consultation periods in relation to the Approaches to Enforcement and Supervision close very soon (21 June 2018) and I urge you to read them and give us feedback if you haven’t already.
In the Approach to Enforcement, we set out for discussion some basic propositions:
- undetected misconduct causes loss of confidence and trust in our markets as well as financial loss. This means we should prioritise detection of serious misconduct.
- misconduct needs to be identified and dealt with quickly and fairly through legal processes
- the overriding principle is our commitment to achieve fair and just outcomes.
- we will use both deterrent and remedial powers to put things rights.
- we want to encourage firms to account for and redress misconduct on a voluntary basis where it is reasonable for them to do so - by imposing lower sanctions where firms have done this.
- The corollary is also true, in that firms that fail to redress harm arising from misconduct, in circumstances where they could and should have, we will impose more serious sanctions.
- We will be transparent by using the formal processes in FSMA to explain our decision-making so our actions also educate others.
Underlying these propositions is the prosaic fact that the incidence of misconduct can be reduced, but not wholly eradicated by better conduct and regulation: things will continue to go wrong and will need enforcement (and supervision). The prosaic fact means our ability to anticipate better, to detect and to manage what has gone wrong, especially our ability to detect suspected misconduct, as early as possible, needs to improve.
The Approach to Enforcement suggests, perhaps provocatively, that good enforcement is not achieved by higher fines if we don’t have robust, accurate and faithful processes for detecting misconduct in all its guises and acting quickly and effectively. This is not an argument for lower fines at all but an argument in favour of better detection and effective investigation in tandem with robust sanctions that should be as tough as they need to be.
Again, I would argue these propositions are ones born of the collective experience of the financial crisis.
We published our Approach to Enforcement for consultation on the same day as the Approach to Supervision. This was deliberate as Supervision and Enforcement are not isolated approaches with different objectives. For example, the aim of early detection and quick and effective action is only achievable if supervision and enforcement activities can operate together and in tandem, in a new, dynamic combination. It is self-evident, in this new dynamic, that outcomes may involve either the use of enforcement or supervision powers or, for that matter competition remedies, or a combination of some or all, reflecting a strategic combination of formal sanctions, remedies and interventions.
In arguing in favour of multiple regulatory treatments working in combination, John Brathwaite distinguishes ‘passive’ and ‘dynamic’ deterrence, where the former “…means setting the sanction at levels where the expected consequences of compliance are better than those of noncompliance so that actors, especially rational ones like corporations, will comply whereas dynamic deterrence “…draws more heavily on strategic studies….The idea is that generals win wars not by having bigger armies sitting in their barracks…but by moving forward toward the enemy, even burning bridges behind their army to signal strongly they will never retreat.” (J. Braithwaite (2016) ‘In Search of Donald Campbell’ ‘Criminology & Public Policy’ 15(2), 417-437).
There is much to be said for the effect of a mixture of regulatory interventions working strategically together, including enforcement, rather than a series of siloed responses.
This suggests a more multi-faceted approach to regulation which again reflects the collective response of hard won experience over the last ten years.
I am conscious there are a great many other post-crisis initiatives, including the Senior Managers & Certification Regime. I do not want to minimise the importance of these and other changes, all of which are beneficial. At the same time, the Mission and the Enforcement and Supervision Approaches, the latter of which, as I mentioned earlier, are open for consultation for another week, mark a step forward in the ongoing task of rebuilding confidence and trust in our markets. For these reasons, I think we are in a much stronger position because of what we have learned.
I also posed the question, a little rhetorically, whether the noise of the crisis has entirely dissipated. The minibond investors in Hong Kong received redress for their lost savings through an enforcement resolution that also addressed the loss of confidence and trust. Those responsible for the sale of these toxic products were seen to act responsibly in what was viewed as a fair outcome all round. However, I still hear the noise. The memory is not painful at all: for me, it is a good and helpful reminder of what is really at stake.
I know there is a great deal to discuss this morning so I will close on this point.