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Can the FCA regulate for a lack of morals?

Simon Collins

The financial services world moves on apace, continually evolving and improving in terms of its reputation and value to customers.

Over the next 15 months or so we will see the implementation of two significant pieces of regulatory change: Mifid II and the senior managers and certification regime.

Whether these end up being contemporaneous in their implementation (both are set to go live in the first quarter of 2018) or phased, the impact across the market, from the largest global institution to the local investment specialist, will be significant.

But their success will be measured by how much firms embrace and develop the culture and behavioural changes that the Government and regulators are looking to secure.

Just as we began to wind down for the festive period in the final two weeks of last year, the FCA gave us a couple of stocking fillers to ruminate over.

Occasional papers 24 and 25 may have crept in under the radar but, given the importance the FCA attaches to the areas covered, getting under the skin of where it is coming from will assist greatly in ensuring the regulatory changes are applied with the spirit intended to fundamentally move the sector forward.

The two papers challenge incentives for compliance, decision-making, morality and rule-breaking against the backdrop of the volume of misselling over the past few years, and the causes of the financial crisis.

The important messages coming from these papers is that a framework can be put in place and regulators can use credible deterrents and exercise their enforcement powers.

However, unless there is a dogged desire to do the right thing, then no matter what framework is in place it will not be successful.

The FCA has already looked closely at decision-making for consumers but a lot of the behavioural biases that affect them can have similar influences in a professional capacity. The regulator is interested in how morality and culture can have a positive impact on decision-making in a compliance environment.

What the papers ultimately seem to be asking is how mature compliance is. Has it moved on from the tick-box approach that did nothing to ensure the outcomes were right?

The senior managers regime requires all senior managers and the next tier of certified staff (those requiring a qualification) to be deemed fit and proper by the firm. And that is interesting – because it is down to the firm, not the regulator.

This puts the onus on the firm to instil a culture driven by moral codes, where ethical considerations are relevant at the time of the decision making, meaning wrongdoing is far more difficult to rationalise.

This focus on the culture, collective responsibilities and personal accountability is very much front and centre for the regulator. It will no doubt be reflected in further thematic reviews and supervisory activity this year.

Simon Collins is managing director, regulatory, at Eversheds Consulting


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There are 22 comments at the moment, we would love to hear your opinion too.

  1. I would like to know how the FCA apply a moral framework to their operations or indeed if they do so?

  2. “Can the FCA regulate for a lack of morals?” I’m sure as long as they have a robust recruitment process, they’ll be fine.

  3. I always thought it was covered by TCF outcome one, where the fair treatment of customers was (supposed to be) central to the corporate culture. It’s not lack of framework it’s lack of application.

  4. It should be about doing the right thing rather than saying ‘show me the rule’. If you look at the culture of HBOS in the lead up to the financial crisis in the book ‘Hubris’ then compare this to the recent outcome of the ‘Reading Scandal’ and the behaviours being displayed. An arrogant culture has multiple consequences for poor outcomes.

  5. A good starting point might well be for the FCA to gather in the first place information which shows it just what undesirable activities are taking place and then focus its attention on them. Its GABRIEL system manifestly fails to accomplish this simple objective and is largely why such mountains of uninsured liabilities for bad advice are continually falling onto the rest of us by way of the FSCS.

    There really is no need to get side-tracked into trying to regulate morality.

  6. Providing Financial Advice has to be seen as a Vocation not a ‘job’.
    When you talk about ‘regulating morality’ I think the last few years have shown how difficult it is; Priests, MP’s, Media Celebrities, Police, Care Home Managers, Car Manufacturers, Scout Leaders, US Presidents, etc., etc.

  7. I agree with Julian. There is no real point int trying to regulate morality as there will always be crooks and there will always be people whose idea of morality falls short of the standard, even if they don’t think they’re crooks.
    The FCA should focus on introducing personal and corporate accountability and then on policing that accountability above all else. When they achieve that they should start thinking about telling us how to run our businesses but, before then, they should make sure that they are running their own business – the FCA – properly; the FCA is not succeeding at any level now.

    • Exactly. Why is the FCA unwilling to introduce a Senior Managers Regime for itself? When Hector Sants was asked (several times) by Andrew Tyrie back in March 2011 exactly which individuals were responsible for the then latest round of failures under scrutiny, he repeatedly stonewalled, insisting that all those failures were merely “collective”. This was, in effect, an admission that he himself didn’t know who was responsible for what within the organisation of which he was the CEO and nor was he even willing to try to find out. Either that or, as I rather suspect, he did know who the responsible parties were but wasn’t prepared to disclose any names. On just what basis is the FCA allowed to shield individuals within its own ranks from all and any accountability for their actions whilst at the same time insisting that individuals within the organisations that it purports to regulate must be held accountable?

  8. Anthony & Julian
    Correct – the FCA must know who the culprits are
    Why not sort them out?
    Decent advisers rightly despair

  9. Can the FCA regulate for a lack of morals? – One word answer here “No”

  10. Can the FCA regulate for a lack of morals? my answer comes in two parts.

    The industry itself in the main tries to provide clear solutions mainly applied with good intention. However, as there are no clear rules, continues changes with only very veg guidance it is difficult to steer any client through the labyrinth that has become financial services. You will only ever know if you got it correct in retrospect as no one knows what the future holds.

    The regular seeks to make senior officials more accountable, personally accountable, this I do believe will help, but will never stop the problem. Fraudsters do not care and the unethical always believe they will get away with it. It is however a shame that the same principles cannot be applied to the regulator. Their Diplomatic Immunity means they have nothing to lose, their guidance means they can sit on the fence and all to often their solutions are made using retrospect, which is why the circle continues. You only have to look at what’s happening with Pension Freedom’s to witness this.

  11. No, which is why where things can be regulated, they need to be tight and where they can’t, clients need to be empowered and informed so that they make the right choices.

  12. “However, unless there is a dogged desire to do the right thing, then no matter what framework is in place it will not be successful.”

    This works both ways. Where there is a dogged desire to do the right thing (as with 90% of advisers), thousands of pages of rules and guidance will have little or no effect on client outcomes. Indeed, it will almost certainly have a negative effect in terms of costs and inappropriate constraints on ‘good’ firms for marginal or no client benefit. Increasing rules and regulations will not stop the immoral, criminal or incompetent. It has not stopped scandals and it never will.

    The only way to do that is for the regulator to get its hand dirty and ACTIVELY root out the wrongdoers and criminals. Most IFAs could tell the FCA where to look. I’m sure some good souls could tell them where to look in other sectors too. But that takes grit, determination, a strong leadership, real knowledge and experience of what you’re looking at and taking responsibility. Unfortunately that’s difficult for a politicised organisation where looking good is more important than doing good.

    Here’s a thought. If you said to the senior management of the FCA that they would be directly and personally accountable for the next crisis involving retail clients (i.e. the next PPI scandal), what do you think the response would be? I don’t think it would be to write more rules…

    • Well put. Morals can be a chimera, somewhat like holding water in a sieve. Often it can be a matter of opinion or circumstance. Making moral judgements can sometimes be a licence to pick holes. Most decent people know the difference between right and wrong, but there are grey areas. Put the client first, but that could conflict with other responsibilities. The whole issue is a minefield and into which like any other minefield the regulator needs to step with utmost caution.

  13. Perhaps a more appropriate title for this article is: Can the FCA regulate?

    • Why? So you can spend all day moaning about Gabriel and the Statutory code for regulators over and over and over again?

      • Rather major issues don’t you think, about which nobody else seems to be making any effort to get anything done?

        Why are our FSCS levies going through the roof? Are you happy to pay more and more and more every year?

        Why are we subject to whatever the FCA dreams up, regardless of whether it’s something that actually warrants priority attention and with nothing in the way of a Cost:Benefits Analysis?

        What are your thoughts on these issues?

  14. A culture driven by whose moral codes? The regulators should forget all this impractical, nebulous, airy fairy stuff & focus on the many and known abuses. Their first attempt was to endeavour to increase educational standards. The net result being clever crooks surviving and a massive loss of mature (ethical) advisers unable to cope in the examination hall but whose clients loved them.

    This concept is akin to jurisprudence as applied to the entire bodies of law, ranging from contract, commercial to tort. So why does our quasi judicial regulator want to reinvent its own wheel. A better idea would be to allow advisers a right of appeal from FOS/FSA to the courts who have been doing this stuff for the last thousand years of common law. The courts can then apply there own interpretation of event but within the constraints of the English legal system based on ethics and morality .

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