Nothing to fear from high standards

Speech by Martin Wheatley, Chief Executive of the FCA, delivered at Bloomberg. This is the text of the speech as drafted, which may differ from the delivered version.

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It’s a great pleasure to join everyone here and let me extend my special thanks to Bloomberg for hosting this event.

The FCA, as you know, has this morning published its feedback statement on accountability and related areas.

For firms, this is a significant step, in as much as it effectively looks to address core issues affecting the trust link between UK banks and society.

So, while we’ve seen regulators look to build confidence across a wide array of areas since 2008 – from capital to competition – public frustrations over lack of accountability remain perhaps the most damaging in terms of the sector’s ability to move things forward. 

Indeed, it’s become almost impossible to imagine how industry could achieve reputational ‘escape velocity’, if you like, without definitively addressing societal concerns here.

And this is one of the reasons why there’s now this general acceptance, I think, that professional accountability is a priority. And not just because it allows for the possibility to move on from difficult public debate. But also, importantly, because it makes commercial sense.

Industries characterised by weak accountability – or by individuals seeking to protect themselves on a ‘Murder on the Orient Express’ defence (it wasn’t me, it could have been anyone) – are almost invariably less financially stable, and more prone to misconduct.

Industries characterised by weak accountability – or by individuals seeking to protect themselves on a ‘Murder on the Orient Express’ defence (it wasn’t me, it could have been anyone) – are almost invariably less financially stable, and more prone to misconduct.

And certainly if you look at comparable debates here, including those ahead of the introduction of Sarbanes-Oxley in the US post-Enron and WorldCom, many of the warnings then over the potential impact of sharper accountability, are themselves being reassessed. Particularly across areas like recruitment; internal control testing; innovation; costs and so on and so forth.

In fact, there seems a far stronger correlation between accountability and commercial growth – than there is between accountability and commercial fragility.

So, the discussion here around personal responsibility is not a matter of public theatre. It’s a serious mechanism by which you create a more resilient and publicly trusted industry.

And that, effectively, is the context for today’s publications, and its focus on the Senior Managers Regime; Certification; Conduct Rules; the Presumption of Responsibility and Performance Management. Each of which I want to look at today, starting with that core debate around personal accountability and the Senior Managers Regime.

The shift to individual accountability

So, as everyone here will know, we’re now edging ever closer to implementation on the SMR and today’s paper sets out how that process will be managed over the coming year.

So, effectively, we will see final FCA and PRA rules on accountability being published by summer this year, at latest, with a deadline for firms to submit their grandfathering notifications by February: ahead of full launch on March 7 next year.

Now, for leaders, in business, as well as in government and regulation, this will represent the conclusion of a period that has profoundly changed the face of UK banking, in ways that few could possibly have predicted pre-crisis.

Indeed, if you look back to 2006 – before the markets unwound, before Libor, before FX, before Occupy, before PPI imploded – most national governments, along with the European Commission, had made large-scale commitments to significantly reduce regulatory intervention.

And, importantly, for global policy makers, this process of rationalisation had come to be seen not just an economic imperative but a social one as well. Deregulation during the 1980s and 90s, its impact on capital allocation, had been widely linked to both higher wages, as well as higher employment levels.

So pre-crisis, nothing was further from policy makers’ minds than new regimes around accountability. Market forces were understood to perform that function without the need for regulatory intervention.

Yet of course, as the crisis unwound, and we moved through a cycle of mis-conduct cases – all without anyone appearing to be held responsible – the political and public environment shifted very quickly. Not just in the UK but globally.

And frankly, the industry found itself confronting some very challenging questions over how you justify an environment where rewards appeared to be individualised, but responsibility and costs mutualised and publicly distributed.

So almost inevitably here, what followed was intense political scrutiny, and the publication two years ago of the Parliamentary Commission on Banking Standards’ report on professional standards and culture.

And that, of course, ultimately brings us to today’s publications and the approach of a regime that will fundamentally change the nature of accountability in UK banking.

So what you’ll have, effectively, is each firm building a ‘responsibilities map’ – a detailed organogram, if you like – that sets out its allocation of responsibilities across individuals, governance arrangements, reporting lines and so on and so forth.

The industry found itself confronting some very challenging questions over how you justify an environment where rewards appeared to be individualised, but responsibility and costs mutualised and publicly distributed.

And this, in turn, will be supported by the arrival of ‘Statements of Responsibility’ – setting out, in detail, the individual areas each senior leader will be accountable for – across all 17 management functions, including: exec directors; significant responsibility senior managers; money laundering reporting; compliance oversight and heads of internal audits.

Now, this of course, does away with the current emphasis on ‘influence’, which is a difficult concept to objectively define and therefore easier to avoid. And brings us towards a system where individual responsibility becomes both clearer and more immediate. There will be more existential pressure, if you like, on leaders.

It also, crucially, moves us away from this position where determining who is accountable for what, has required often enormous powers of regulatory decryption. Indeed, there are cases where it’s taken weeks, if not months, for the FCA to determine line management responsibilities in the face of corporate filibustering.

So, for regulators, as much as for Government, the public and firms, the SMR represents an enormously significant step forward. And it will be an imperative to successfully manage that transition across to the new regime.

The consultation period has supported that process and, in key respects, developed it. So, while the broad structure of today’s report is not materially different from July’s proposals, it does include some changes: technical amends in areas like allocation of responsibilities and so on and so forth.

And also, importantly, taking Non-Execs out of the new regime if they’re not performing specific roles, including chairing specific board sub-committees.

Now, this amendment reflected some industry concern, on the one hand, over the potential impact here on the role of generic non-execs, and the fear that they’d be required to assume quasi-executive functions under the new regime – in turn compromising their ability to provide effective challenge to the executive.

Presumption of responsibility

But it’s also, as set out last month, linked to wider questions around how NEDs would be captured by the new Presumption of Responsibility. And it’s worth noting here that the presumption does not require NEDs to take on executive responsibilities.

But, of course, more generally, it does lie at the centre of this industry debate around high standards of accountability, and how they ultimately affect the City.

So, the core ambition here is to make sure that where a firm contravenes a regulatory requirement,  in an area for which a senior manager is responsible, it will be up to that manager to satisfy regulators that they took reasonable steps to prevent the contravention happening.

That, clearly, differs to the system as we have it today, where it is for the regulators to establish what steps the senior manager took, which steps weren’t taken and whether they were reasonable in the circumstances

So, the broad political intention here is to rebalance responsibilities and avoid a now familiar scenario, where it becomes very difficult for regulators to definitely demonstrate whether X or Y individual, took reasonable steps to prevent their firm breaching a particular regulatory requirement in their business area.

Now, this all invariably opens up a number of important questions. Indeed, the challenge put back to regulators has been: will you apply the presumption proportionately and fairly? And what, actually, are the steps a senior manager has to take to rebut the presumption?

For lawyers, the slightly unsatisfactory answer here, but honest one, is that it’s very difficult for policy makers to be prescriptive about the steps that a particular individual is expected to take. Not least because that will clearly depend on the circumstances, including the size of the firm, what the senior manager knew and so on.

And actually, for senior managers, most of the steps you’d expect them to take appear common-sense, frankly. Behave with integrity; delegate appropriately; make sure you understand your business area; and comply with common law, existing rules and legal obligations.

Nonetheless, to help industry and clarify the position, we are consulting on further guidance in this area.

In the meantime, today’s paper goes into some technical detail around the relevance of the Decision Procedure and Penalties Manual, as well as the UK corporate governance code; conduct rules; the Companies Act and so on and so forth.

For the large majority then, the new regime should be entirely manageable and positive.

But it’s worth being clear here, given the scale of legal interest, that neither the Senior Managers Regime, nor the presumption of responsibility, correspond to a ‘heads on sticks’ strategy.

Indeed, as is the case now, and as it’s required to do, the FCA will apply the presumption proportionately, and in a way that’s fair to the subject of the investigation.

So, there’s absolutely no prospect of institutional scalp hunting.

In fact, the expectation is that heightened accountability should reduce the need for individual pursuits by regulators, on the basis, in theory at least, that misconduct becomes less frequent.

Good governance - certified persons

Time will tell, of course, just how true that is. But for boards and executive committees, the argument here is that a functioning accountability regime offers the prospect of employees becoming less prone to regulatory transgressions.

And on this point, it’s worth reflecting that I don’t think there is any real doubt that there’s now genuine desire at the highest levels of banking to reform corporate culture. In fact, boards are spending anything up to 80pc of their time debating regulatory issues and implications.

The challenge is one of practical implementation. It’s not straightforward, frankly, to manage the behaviour of many tens of thousands of individuals across complex, global organisations.

So, if you’re a bank that operates across multiple territories, is covered by multiple regulators, and distributes multiple products, governance is clearly going to be very complex.

And the issue that flows through from there, of course, is that as scale increases, it becomes correspondingly more complex for leaders to manage the specifics of service delivery as you move down the structure.

In other words, you begin to enter the territory here where you ask: ‘well, ok, the tone at the top has changed, but how do you create a more balanced picture across the organisational structure?’

And this, essentially, is where the certification regime comes in.

So, while the current, approved person regime, captures individuals at the top of the organisation, as well as those in some customer facing roles, there’s a blind spot here, in as much as middle management, and some material risk takers, are not subject to the same regulatory fit and proper standards.

For leaders, this becomes a problem because your accountability structures begin to resemble a bucket with some pretty significant holes. You might have junior advisory staff in banks approved. Senior commodities traders not.

The certification regime, in effect, places a much clearer expectation on firms to uphold standards of fitness and propriety of anyone in a ‘significant harm function’.

Now, for firms, this is all a significant change. And there’s industry concern, we know, around making fit and proper assessments on staff without regulatory intelligence. 

But it’s worth reflecting here, I think, that the number of cases where this would realistically apply – so where the FCA would have relevant information that was not available to firms – would be the exception.

And for me, it’s difficult to argue on the one hand that there’s an issue without, on the other, making an objective assessment of the risks of not moving towards a new system.

Is there really a case, say, in claiming regulators are better positioned to monitor the day-to-day competence, integrity and behaviour of a firm’s staff, than their line managers?

So, on paper at least, it seems far more likely to me that corporate risk will be reduced, not intensified, under the new system.

But it will clearly require a degree of structural underpinning, which is one of the reasons why you’ll have regulatory references to support intelligence sharing between firms.

In other words, regulatory transgressions will follow affected individuals, allowing firms to make their own assessments on recruitment. And we’re also looking here at whether there’s any further that regulators can go here within the current legislative framework.

Conduct rules

And this brings me on to my last point for this morning: the new set of conduct rules, which now capture all individuals involved in financial service activity in banks and, in turn, sit alongside both the senior managers and certified persons regime.

So, what you have here then, are a very high level, but significant suite of requirements that apply to a far larger percentage of employees than we’ve encountered before.

Indeed, the only individuals in banks who won’t be covered, will be ancillary staff performing jobs that don’t directly relate to the core financial service role of the organisation. So, reception staff, security, caterers, cleaners and so on.

For those to whom the Conduct Rules do apply, however, the new requirements will include: acting with integrity; professionalism; paying regard to the interests of consumers; treating them fairly; and being open and co-operative with regulators.

Now, this is not, I would argue, an impossible benchmark against which to measure employees.

And the expectation is that, in the vast majority of cases where staff ignore the rules, firms would take any corrective action themselves. Albeit within a framework that does allow the FCA to take enforcement action if needed.

So, what we have here – in effect – are Conduct Rules that provide a clear baseline for all staff. And should support key areas like performance management, career progression and the like. Partly by giving staff greater confidence to challenge colleagues if basic principles of customer fairness are abused.


And this, ultimately, is the core debate for today. Too often under the system as was, client and customer needs were detached from professional ones.

The new regime, worked on in tandem by both the PRA and FCA to ensure maximum efficiency and workability – operating across organisations through the senior manager regime, certified persons and the conduct code – immediately tightens that solution architecture.

While the protections afforded in areas like the presumption of responsibility and sound performance management, support the depth of this reform package.

For leaders, this is one of the great reforms of our professional lives. So will require a period of adaption, yes.

But a proper accountability regime does offer the long term prospect that you finally bridge that gap between a frustrated public and the UK’s banking industry.  

As financial services have proved time and again, there is nothing to fear from high standards.