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Avoiding the ‘set and forget’ approach to systems and controls

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The regulatory landscape is constantly evolving as innovation in the financial markets means new risks to be managed regularly appear. One in particular is conduct risk and it is important we do not let this become an area about which we talk much and do little.

Firms will increasingly see the FCA  identifying instances of poor conduct and the risks that occur as a result.

Indeed, it is an area that has never been higher on the regulatory agenda and rightly so as poor conduct feeds into every part of the financial sector. It impacts on the firm and its clients, as well as the reputation of the industry as a whole both within the UK and as a global financial centre. And not only that: poor conduct and prudential issues often come hand in hand, so it is crucial firms get this right.

So how can firms manage conduct risk? Well, it is about maintaining a good culture that has an attitude of integrity and ethical behaviour, robust systems and controls, and appropriate incentives and tone from the top. However, as FCA director of enforcement and market oversight Mark Steward emphasises, establishing controls cannot be “set and forget” and management should not be lulled into a false sense of security by relying on systems that can become neglected or expose weaknesses. They should be regularly reviewed and checked that they continue to be appropriate in managing the right areas. The financial markets do not stand still and neither should your controls. It is a continual work in progress.

Competition is another key theme across the market. The FCA has acquired new powers in this regard and firms should be cognisant of this and be prepared for the challenge. Yes, this may be focused on larger firms but the encouragement of new approaches to the provision of services is a message to all firms in all sectors to sharpen the pencil.

Firms should also be aware, however, of the new and innovative challenger products that have appeared on the market and which promise a new kind of flexibility for consumers. Firms must demonstrate they can continue to provide good value and service or risk going out of business.

At times it might feel like there is a conflict between regulation and growth but it would be wrong to view it in that way. Regulation should complement sustainable and healthy growth, as well as restrain uncensored risk, which can cause huge swathes of damage. On that note, there is, of course, a significant amount of regulation coming down the tracks. This must be dealt with sensibly and applied proportionately given your firm’s size and complexity in order to achieve the balance between risk and reward.

In a recent speech at the BBA conference, FCA acting chief executive Tracey McDermott used an interesting analogy. She said: “Effective and proportionate regulation is a considerable strength of the UK economy… A good regulator should be like a good referee. Constantly on the pitch, keeping up with what is going on; respected, firm, consistent, fair and tough when required, but not interrupting the flow unnecessarily and being largely invisible to spectators most of the time.”

Achieving this “in the action” but not “the centre of attention” will be a sign of great success for all players in the financial markets.

Simon Collins is managing director, regulatory, at Eversheds Consulting



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