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The FCA is not so slack when it comes to individuals

By Jasper Cox
06 Aug 2019

The UK’s Financial Conduct Authority (FCA) is being accused of negligence and a laissez-fair attitude in relation to the collapse of several funds. The irony is that in a different but less well-publicised area it is far from lax: it has undoubtedly tightened the screws on bankers gone bad.

The FCA is reliving the experience of its predecessor the Financial Services Authority (FSA), which was perceived as sloppy during the financial crisis. It is under scrutiny for what is seen to be slipshod handling of troubled funds like Woodford, London Capital & Finance and Lendy, facing a barrage of criticism from investors and politicians over not intervening until it was too late.

To illustrate a few of the attacks, twenty-six MPs from various parties supported a motion calling on FCA chief executive Andrew Bailey to resign in the wake of the London Capital and Finance collapse, “for presiding over the biggest financial scandal of recent years”. And former investment executive and government minister Paul Myers has criticised the FCA over Woodford in variousmedia outlets over the last few months.

This has given the regulator an awful image. But if it wants to portray itself as tougher and meaner in the eyes of the public, all it has to do is draw more attention towards its approach to culture and conduct among bankers.

This would come across well. Bankers behaving badly is a favourite trope of post-crisis tabloid reporting. There has been plenty to report on, from rogue traders to benchmark riggers and money laundering enablers — even train fare dodgers.

The FCA’s attempt to delineate clearer accountability for professionals through the Senior Managers and Certification Regime (SM&CR) has had a major impact.

It is true that culture often changes slowly. And there is a quasi-sociological debate about the extent to which it can be imposed from the top rather than let flourish from below. Some have tried to improve conduct through private sector solutions, whether focusing on one segment of the market, like the FICC Markets Standard Board (FMSB), or one topic, like the Transparency Taskforce.

But it is increasingly clear that the FCA has extended its reach well into the HR departments of banks, looking at how employees are hired and how they behave, beyond simply pontificating and publishing essays about behaviour.

Culture and relationships at private institutions are not issues traditionally considered within the remit of a financial regulator. But the FCA reckons that when the atmosphere is bad, failings are more likely to occur relating to those issues that are.

This attitude is exemplified in its approach towards whistleblowing allegations.

Since the beginning of last year, the FCA has opened 64 whistleblowing cases where the whistle-blower works at an investment bank, according to data recently obtained by GlobalCapital through a freedom of investigation request.

The most common subjects among these cases were not to do with scamming customers or clients, being cavalier with data or helping dodgy characters move money around.

Instead, the most frequent topic was fitness and propriety, with 21 cases, followed by culture of organisation, with 18 cases.

Meanwhile, the scale of the FCA’s investigative work is large. Back in February, it disclosed that it had 580 enforcement investigations open (not restricted to investment banks), and 360 of them were into individuals.

“The numbers themselves are pretty staggering; that’s a huge caseload,” said Polly James, a partner at Bryan Cave Leighton Paisner, who specialises in enforcement actions and other regulatory issues.

Employers ‘spilling the beans’

Elsewhere, the effect of the SM&CR is seeping through the system.

One example is the regulatory reference. If someone is moving between banks or insurance companies, the new employer has to request information from their old one about their fitness and propriety, if they are to be a senior manager or in a job that could cause significant harm to the firm and customers (so-called certification staff). The old employer must provide any relevant information.

If the hire left their old employer before an investigation involving them concluded, that company must make a decision about whether to disclose unconfirmed allegations. In this case oversharing may pose less risk that undersharing, as if the ex-employee causes problems in their new job, the regulator might want to check the reference.

“Firms tend to be erring on the side of caution and spilling the beans on people and then inadvertedly causing people to become unemployable because the firms taking up the references and giving out the jobs understandably have low risk tolerance to anything like that in today’s regulatory environment,” said James.

The risk of a blameless employee losing out is an illogical and unfair quirk of the incentives created by the rules, but it is not the effect of a soft regulatory regime.

The reference rules originally applied just to banks, before insurance firms were added. But another class of company, including asset managers, will fall under their purview from December.

“As it rolls out across the different types of firms, the number of requests that firms get is going up and up,” said James.

This is understood to be influencing some job decisions, and it means bankers leaving their industry are not necessarily out of the SM&CR’s reach.

The FCA is under a bombardment of condemnation over its approach to fund management. But in the area of personal accountability, its story to tell is one of much more stringent regulation.

By Jasper Cox
06 Aug 2019