Personal accountability

Speech by Tracey McDermott, Acting Chief Executive, FCA, delivered at the City & Financial conference on Personal Accountability in the Financial Services Industry, 2 December 2015, London. This is the text of the speech as drafted, which may differ from the delivered version.

Good morning and thank you. It is a pleasure to be here today.

Today’s conference is geared to providing practical answers to practical questions around SMR implementation.

But, in answering those practical questions, it is critical that we all bear in mind the background to the creation of the new regime and what it is trying to achieve. Without that focus on delivery of the intent, and the spirit of the new regime, it will not succeed.

So, to set the day off, and to put the practical challenges into context, I want to begin with a few broad reflections on how we got here.

The senior managers regime has emerged from a very troubled period for the FS industry. The past eight years have been turbulent ones and the industry has seen its reputation rocked by a series of events.  

From the run on Northern Rock, through to the unfolding of the crisis; the bailing out of banks here and overseas; Libor; FX; and failures in money laundering controls, financial services have been in the headlines for all the wrong reasons.

But it is important to recognise that the problems did not start in 2007. On the conduct side, issues such as PPI; endowments; splits and pensions have a long and sorry history.

And the roots of the crisis were set in the good times when the focus seemed to have moved off effective risk management and serving customers to be replaced by too much focus on revenue generation.

All of the various issues have different proximate causes. And these can be analysed and studied so lessons can be learned. Last month’s report on HBoS was another example of detailed, forensic analysis which adds to the understanding and knowledge of what went wrong in the lead up to the crisis – in firms, in the regulator, and in the wider establishment. And we will all do well to learn the lessons from this.

But although the proximate causes of each issue may be different there is a common thread – a common theme – which is that finance too often became disconnected from the world in which it operated and the people it was supposed to serve. That the culture had become one of short termism. In some cases this was compounded by greed and a sense of impunity. And in many different ways, that led to the issues that have occurred, and which seemed to keep on occurring.

And this is a tragedy not just for the reputation of the industry, but for the hundreds of thousands of financial services employees who are seeking every day to do the best for their customers but who see that hard work sullied by the actions of others. And also for society that needs financial services to work effectively more now than ever.

The ultimate ambition we all have must be for industry to serve its clients in a way that is innovative, vibrant, competitive and clean. Not just today but for the long term. So the SMR was created against the backdrop of a clear – and shared - understanding that culture needed to change and a culture of personal responsibility had to be embedded.

And the question for all of us now is how we deliver this and how we reset the siren voices telling us delivering this is too difficult or has already been done and this is a step too far. If we heed those voices we will find ourselves back where we were. To this end, I have spent much of the last few months in conversation with firms about the importance of moving towards a sustainable model of regulation.

In practical terms, this means leaving behind the ‘regulate; de-regulate; repeat’ cycle that has, over my time in regulation, seen us swing from one extreme of approach to another. Normally, and often unhelpfully, in step with economic cycles. 

The first responsibility therefore falls on regulators and policy makers to approach the sector differently in the future, with fewer pendulum swings in activity.

We make no apology for the work done post-crisis to make the system safer and to improve conduct. That must be embedded. But, if that has worked, we can now start to look to the future and what we want financial services to look like in that future. To that end at the FCA alongside our traditional diet of supervision, enforcement and authorisation we are also focussed on promoting competition; smarter use of market-wide analysis and encouraging innovation to provide new services, disrupt old models and ensure markets work well for those who use them.

But the key point to make here is that regulators cannot, ourselves, deliver an outcome whereby industry serves its clients in a way that society deserves and expects.

Only the industry can do that. And nowhere is this more true than in the implementation of the Senior Managers Regime.

Spirit of the rules

There are two major priorities here.

  • The first is that there is a clear focus from firms on meeting the spirit of the new rules, rather than approaching this with a narrow focus on what the letter of the law requires.
  • The second, linked task, is that firms must take ownership of the regime and embrace the opportunities it presents for their business.

So the first task for the industry in rebuilding the trust of the public is thinking about the outcome we are trying to achieve, not trying to define whether conduct falls strictly within or outside some precise rule.

On the former, it does appear that the closer we’ve come to implementation, the louder the lobbying has become. SMR was recently described as the ‘draconian’ by partners from one legal firm, who painted a picture of financiers flocking from the City in pursuit of less regulated economies. Really? Is it such a shocking thought that you should understand who is responsible for what in your business.

Now, that is not to say, particularly given my legal background that I do not understand some of the underlying drivers behind such comments.

There is no doubt there is practical complexity in the detailed implementation of the SMR. That is because many of these firms affected have complex businesses.

But to be clear, ahead of your discussions today, that the most important conversation firms need to be having is around how that complex, practical implementation can support the principles of the new regime.

One of the things that has contributed to the general disillusionment with financial services over the last few years has been the sense that some players, some firms, some individuals, always took the fewest steps necessary to comply. They paid lip service to what they were asked to do rather than seeking to deliver the best outcome. We cannot let SMR be the same.

So the first task for the industry in rebuilding the trust of the public is thinking about the outcome we are trying to achieve, not trying to define whether conduct falls strictly within or outside some precise rule.

The challenge for policy makers is that rules are generally easier to work around than principles. But the question for boards must be whether the value of a loophole is worth pushing the boundaries of acceptable behaviour. 

Implementation of the SMR will be a massive test here – if embraced and embedded as an exemplar of good business – not as a compliance task – it has the capacity to lead to a sea change in how UK financial services is seen by all parties.

Why? Not because of how it affects ex-post enforcement. Important as this is. But because it should drive better, clearer ex-ante decisions fostered by a sense of real responsibility and clear accountability. And thus less problems in the future.

And I would suggest this is not as complex a task as some have argued. Like catching a ball, doing the right thing is something most of us can instinctively accomplish. It is only when we attempt to explain it with reference to the geometry of motion that it suddenly becomes very difficult.

Firms need to build this from the top down – leading by example and setting the right incentives. Incentives which will work in their firm, and their culture, to deliver the right outcomes. To focus their staff on the simple task of catching the ball. Not from the ground up, starting with detailed rules then expecting the big picture to emerge from them.

Implementation of the SMR will be a massive test here – if embraced and embedded as an exemplar of good business – not as a compliance task – it has the capacity to lead to a sea change in how UK financial services is seen by all parties.

Taking ownership of the regime

And this links to my second priority, the need for firms to take ownership of the regime.

The reality which I recognise may feel slightly unsatisfactory for those seeking definitive answers from the FCA, PRA and Westminster to all questions, is that we do not have them all.

It is a regime, as we all know, that is role specific. But we have not prescribed all responsibilities. Nor have we prescribed how they should be allocated. Nor the governance arrangements firms should have in place. Nor how firms and individuals should make decisions.

So ultimately the responsibility here falls to firms and the individuals running them to work out issues for themselves in a way which is consistent with their business.

We are listening of course, and providing support. Indeed, there’s been unprecedented engagement with industry on SMR over the last three years, with teams across both the PRA and FCA meeting firms and trade associations regularly.

More conversations are ongoing, including around the draft rules for foreign branches.

But I would urge firms to take ownership of the new regime. Most people are not in regulators because they are great entrepreneurs. The management of firms should be better equipped to run a successful businesses than we are.  And there are many different cultures and business approaches as there are different firms.

So rather than taking an overly prescriptive approach, firms are being given considerable latitude to design and implement the regime as they see fit.

And in my conversations with firms, I know many are really embracing this. Using the new regime as a chance to streamline their structures, to reinforce values they have always espoused and to empower and inspire their staff. That is the approach we want to see – but it is not universal yet.

Of course, whether you see this flexibility as a good thing or not will very much depend on your perspective. One of our prominent dilemmas is that firms often prefer the certainty of rules to broader principles. But at the same time, they want a more flexible regulatory environment. The big question is how we resolve those two positions.


The Senior Managers and certification regimes are classic illustrations of this conundrum. For example, on certification, we know there’s industry concern around making fit and proper assessments on staff without regulatory intelligence.

But the number of cases where this actually applies – so where the FCA has relevant information that is not available to firms – is very limited. Not least because firms have often quietly let people go without taking action of informing regulators. But, we do recognise the challenge and our proposed rules on regulatory references are intended to help plug that gap.

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 to say that regulators are better positioned to monitor the day-to-day competence, integrity and behaviour of a firm’s staff, than their line managers?

It seems to me that firms should already know who their key staff are that can cause them or their customers damage.  And these people should already be acting appropriately.  Certification builds on this concept – it doesn’t, or certainly shouldn’t, invent it. And there is no reason why firms can’t work together to ensure that proper references are given.

So, it seems to me that, if implemented fully and embraced properly by firms, it is far more likely that corporate risk will be reduced, not intensified, under the new system.

And this is one of the reasons why we are moving from that regulator run gateway to a firm based assessment of fitness and competence. 

Get ready for March

More broadly, I would encourage firms to ensure they have taken all practical steps to ready themselves for implementation. This is one of the reasons why today’s event is important. It is also why, as most here will know, we set out key steps to take in this year’s policy statement.

Martin Wheatley outlined a few of the most important at this conference in July, and they bear repeating.

Most important, firms – even complex groups – need to allocate senior management responsibilities clearly. For a group, this starts with working out which of your entities are caught and how they are linked together.

Next, it involves thinking about what the different entities actually do – what activities they carry out and how significant they are.

From here, firms need to identify the individuals that hold Senior Management Functions; the ‘Senior Managers’ and the likes of the chief executive, executive directors and so on. Responsibilities then need to be allocated to these people.  Most of which are already well understood, such as responsibilities for countering financial crime and training senior staff.

Importantly, firms also need to continue thinking about any gaps – is there anything missing? Or anyone?

Senior managers who have overall responsibility for a whole area or activity in a firm need to be added to the list, regardless of job title. The regime is not designed to re-invent the way that firms organise themselves – but to reflect – and ensure clarity about how this operates in practice.

Finally, firms must then record the resulting allocation of who is doing what – in the form of short statements for each individual, and an overall map for the firm or group as a whole.

And I should also say that, in the spirit of tasting our own medicine, we are in the process of applying the SMR to ourselves.


To conclude, it is critical that, at this point in the cycle, we do not lose momentum but instead see a renewed push, across the industry, to drive up standards and to tackle problems – without needing the regulator or the Government to do it for them.

The Banking Standards Board and the FICC Markets Standards Board are good examples of this. And we will continue to work with these bodies and the wider industry.

And then, to step back again, after all this, how will we know if we have succeeded? The measure should not be ‘no misconduct’. I think this would be unrealistic. Things will go wrong and in financial services, as in any other industry, there will always be rogues.

But what I would hope to see is more cases where misconduct is spotted by firms rather than by the regulator. And where it is spotted, it is identified sooner and acted on robustly.

And I would want more of this to be identified not by firms’ legal and compliance departments, but by those working on the front line. That people do not turn a blind eye to these, pushing the boundaries.

Ultimately we will know we have succeeded when the carrot is doing more work than the stick. When individuals within firms are motivated to do the right thing as a matter of course and consistently.

The prize for all of us in that will be a vibrant and innovative financial services sector, underpinned by a strong sense of accountability, that aims to build and maintain the trust and confidence of society, and is thus able to meet society’s needs.

That is, I think, a prize worth fighting for.

Thank you.