Retail Conduct: 2014

Please note: The following information is designed for a UK audience only

The role of Compliance: Over the past ten or fifteen years, in the UK, the role of a compliance officer or a compliance department has changed significantly. Back at the turn of the Millennium, compliance was beginning to come into the financial services industry jargon with the rise of the newly created regulator, the FSA (Financial Services Authority). The role previously played by a company secretary, legal counsel and/ or active non-executive was amalgamated into an identifiable (and regulator approved) function that acted as a form of internal audit on the goings-on of the firm.. Not necessarily a Director-level role, but neither a part of the day-to-day administration, it was meant to be a checking mechanism to prevent rules being broken and for a firm to have some ‘line of defence’ to hold or prevent unsatisfactory work being commissioned.

In the mid-‘noughties’, where (pre-recession) there was an exuberance, in many circles, that there would be no stopping the seemingly un-stoppable growth story, the Compliance departments were viewed as a brake on the hurtling juggernaut of progress and were seen as acting as purely “tick-box” functions (which, in part, due to the regulatory culture coming from the FSA was not always untrue!) the compliance officer was side-lined or, at the least, given just as sufficient a nod as to allow business to be passed.

With the recession and subsequent aftermath, revelations about the practices that had been going on – uncovered as many institutions unravelled – and the industry revolutions that occurred, as some banks were part-nationalised and retail firms went out of business, the role of compliance and the regulator came to the fore again.

A ‘new’ Regulator – the FCA (Financial Conduct Authority) – for Retail and the PRA (Prudential Regulatory Authority) for Banks were born, Compliance departments have been strengthened (in part, out of fear of the fines levied with increasing rapidity and size) and the balance has swung, more or less, back to where it was a decade or more ago.

However, what all in the Industry must prepare for is the drum-beat of reduced regulation and freeing up of the markets that will inevitably come when the upturn has taken hold and markets are, once again, growing rapidly. How short will memories be of the chaos of 2007/ 2008 and its aftermath? In all probability, it will only take until the next generation to not learn from the mistakes of this era.                                                                                                    [6 January 2015]

• Regulating the Banks : The fines keep coming! Following an initial flurry of (rather belated) post-recession fines, imposed on UK (US and also global) banks, the fines for illegal and bad practice continue. Furthermore, it seems that conduct has continued even while banks were being investigated and fined for earlier events.

  In part, trying to build a case in defence of the banks, with the plethora of regulations combined with the size and scale of these institutions (to write in broad generalisations) it is clearly not possible to escape, entirely, from breaching regulations (or code of conduct) within the vast branches of these corporations. Therefore, it seems the culture has become one of resignation (not, ironically, by employees) to the fact that at some point the regulator(s) will impose a fine or fines and that a rule or rules will get broken. It has become built in to the way of doing business – taken as part of the ongoing running of the company.. Likewise, for the regulators, it is a game of ‘catch-up’ almost always one or two steps behind and regulating with the benefit of hindsight.

   

  Reducing the size of the banks may help to unwind this toxic phenomenon – as well as try to downsize the “too big to fail” creed – resulting in smaller scale and less unwieldy firms that can be managed more easily (both internally and externally).

  Ideally, at each level, there should be a management structure that can (a) become aware of malpractice and (b) have the authority to take internal action or be able to escalate upwards – having confidence action will occur at a higher level.

  Too frequently however, so far, the culture has been one of putting the business first (perhaps a legacy of the recession and the greater squeeze on business’ survival) – but, nevertheless, not an excuse for illegal or immoral actions.                                                                 [30 November 2014]

• Social Regulation: The UK Regulator, the FCA, has recently launched consultation on proposed guidance for the regulation of financial promotions in Social Media (Facebook, Twitter, etc). In a sense, this is a welcome step – coming as a fairly proactive measure (or proposal) to get in ‘ahead of the curve’ of where the Financial Industry is heading (ie. more services being provided and launched “online”, rather than via traditional methods of paper brochures, face-to-face advice and so on). Somewhat inevitably though it is after the fact – a number of firms have been using social media for ‘financial promotion’ for some time and the Regulator is following in the tail-winds of an already growing trend.  

  From a wider perspective, the general law on the internet/ social media is haphazard. Rulings (eg. the recent EU’s “right to be forgotten”) are setting case law on a country or continental basis – a global regulation of the internet is (some would say mercifully) a long way off.. The piecemeal system that is developing – such as in individual sectors, via the FCA and others – is starting to create a more substantial pattern of regulation but a coherent cross sector / across country consensus is a long way off.

  For the purposes of Retail Conduct, the best approach might be to act (as always) with a mind to a future regulatory stance on how and why one might be perceived to have acted – were the best interests of clients at the fore, were suitable safeguards put in place, can these be evidenced, etc – and awareness of the wide net that social media can now cast. Literally worldwide. [6 Oct 2014]