In October 2015 we published Shifting Sands: The Impact and Consequences of the FCA’s new Regulatory Regime. This analysis identified core regulatory developments that have come to define the post-crisis era – prohibitively high financial penalties, increasing focus on individual accountability, pressures on banks to ‘self-police’ and preventative action by the FCA if they didn’t. It concluded that such developments only added pressure to financial institutions already operating under a state of regulatory fatigue.
Despite this, the fast-paced and ever-changing nature of the UK’s financial regulatory regime means that a lot has changed in the past three months, leading many commentators to hail the end of the so-called era of ‘banker bashing’. A change in approach by the FCA, the UK’s regulator of financial services firms, has been evidenced by three major changes in structure and policy; the resignation and departure of former CEO Martin Wheatley, changes made to the Senior Managers Regime (SMR), and the recent shelving of a planned inquiry into banking culture.
After being informed that his contract would not be renewed by the Treasury, the unexpected departure of Martin Wheatley in September signalled for many that the regulatory outlook was changing. Initially appointed in for his hard line on the industry, Wheatley led the FCA from its inception by pledging to “shoot first and ask questions later” when it came to banking misconduct and consumer detriment. The global search for Wheatley’s successor has been underway for the past six months, and appears to be no closer to completion with interim CEO Tracy McDermott, hotly tipped to take the role permanently, withdrawing her candidacy stating that she “did not want the job”.
Despite ‘unfinished business’ at the regulator, a recognised success of the Wheatley era was the introduction of the Senior Managers Regime, which comes into force in March. Replacing the discredited Approved Persons Regime, this framework ensures greater accountability for individual actions by more clearly defining the roles and responsibilities of those in senior functions. A mechanism for achieving this was embedded in the reverse burden of proof – the idea that when regulatory misconduct is discovered, the senior manager in charge is guilty unless proven otherwise. However, this was scrapped a month after Wheatley’s departure after major intervention by the industry and replaced with a ‘duty of responsibility’. Although it remains a statutory requirement for senior managers to take reasonable steps to prevent regulatory breaches, the burden has now been placed back on the regulator to prove that the senior manager failed to do this, bringing the SMR back in line with core tenants of the Approved Persons Regime.
Finally, New Year’s Eve saw the quiet admission by the FCA (well the FT) that it was scrapping its review into UK banking culture. Intended to determine whether change programmes were “driving the right behaviour”, the review was dropped in favour of the FCA engaging individually with banks to improve their culture, and is perhaps the largest indication that policy-makers are softening their stance towards the sector. Alongside the culture review, it has emerged in the past week that the FCA has also dropped two other studies on retail investment advice and the misuse of personal data, and Monday saw the announcement that the ‘deep dive’ investigation into HSBC’s Swiss banking arm had also been abandoned. After much political debate, and admission of Treasury Select Committee head Andrew Tyrie that the decision to halt the inquiry was “odd”, FCA chairman John Griffith-Jones and acting CEO Tracey McDermott have finally been summoned to appear before the Committee on 20th January.
So does this mean that the era of banker bashing is coming to an end? Well, maybe. The FCA has levied record fines on the industry since it has come into existence, the key question remaining as for how long the intensity and volume of this regulatory activity is sustainable. One can also not ignore the political landscape, with HSBC due to decide at the end of this month whether to relocate its global headquarters out of London and the fact that the government needs favourable conditions to sell its enormous stake in RBS. The definitive answer to this question will only come when they announce Wheatley’s replacement, until then the search continues…