FCA outlines assertive supervisory plans for wealth management firms
Earlier this year, John Griffith Jones gave a speech on what makes good conduct regulation. Not only
Earlier this year, John Griffith Jones gave a speech on what makes good conduct regulation. Not only did he shed some light on the FCA’s views of what will shape regulation in the future, but also reiterates what the regulator expects firms to be doing to ensure they are also promoting good conduct throughout their organisation.
Prevention is better than cure for both the regulator and the regulated
In the speech, Mr Griffith Jones highlighted the balance the regulator is trying to strike between ex ante regulation; anticipating and addressing emerging risks before they lead to consumer detriment, and ex post regulation which seeks to address failings once they’ve occurred. There are clear benefits to ex ante regulation, not least that consumers receive better outcomes if issues are tackled at the earliest stage.
The same principle applies to regulated firms. The costs of implementing and maintaining robust compliance systems and processes far outweighs the financial and reputational costs of addressing consumer detriment once it has occurred, particularly on a large scale. Just as we’ve seen the FCA’s approach evolve to be more proactive and focussed on addressing emerging risks within the market, firms also need to maintain a clear internal focus on managing the conduct risks inherent within their business model and take necessary action to prevent them from crystallising or leading to customer detriment.
Culture: The Key to Good Conduct
A firm’s culture is made up of the beliefs, ethos and behaviours embedded within the organisation and, with culture high on the regulator’s agenda, attention is turning to a much deeper analysis of the cultural influences within a firm. Individual behaviour is one area receiving greater attention from the regulator as it has as much influence on culture as systems and processes do. The Senior Managers Regime is just one way that the FCA is increasing its focus on individuals’ behaviour, but this focus is likely to become more evident through the FCA’s overall supervisory approach. John Griffith Jones’ speech clearly illustrates that he regards the Senior Managers Regime as a cost effective supervisory approach (presumably due to it being primarily ex ante in nature). With a year passed since its implementation, the FCA has highlighted some of the positive improvements they are starting to see. This provides a clear direction of travel by the regulator into more individual accountability.
Much can be learnt from the FCA’s existing behavioural work, most notably Occasional Papers 24 and 25, which highlighted a number of behavioural issues that can impact individuals and compliance in an organisation. Firms need to consider whether issues such as behavioural biases, over optimism and negative social influences are taken into account when designing processes and that effective governance is in place to ensure they aren’t having a negative effect on compliance. The use of behavioural theories within compliance isn’t solely about mitigating negative behaviours however, it can also be used to incentivise it through the promotion of a consumer-focussed culture.
John Griffith Jones highlights the FCA’s desire for a regime where firms are almost able to ‘self-regulate’ and work towards the ideal of ‘good finance’. To reach this stage, firms need to act now to gain a thorough understanding of their culture, including any weaknesses, embrace individual accountability and put measures in place to strengthen it and ensure it is fully embedded in all levels of the organisation. An effective financial services culture doesn’t just deliver compliance benefits, it can also improve customer loyalty and long-term business sustainability by reducing the risk of issues within the back-book requiring investigation, remediation or regulatory investigation.