Good morning all. It is a great pleasure to join you. And a privilege to be here as a guest of the Judge Business School.
I note you have a big topic and a particularly distinguished panel of speakers and contributors following me, so I arrive with the aim of providing a clear message to start your day.
I also arrive armed with what I believe is a positive one.
Given that regulators have been using speeches to dispense often hard and uncomfortable truths for the past eight years, this represents something of a change.
But before you over-anticipate what I have to say, I should stress that it is a change of aspiration at this stage, not yet a change of achievement.
My top line for today is that right now there has opened a favourable window of opportunity for the banking industry to make substantive headway in restoring public trust.
Part of this is due to the economic cycle, part is due to the political environment.
Part may be due to regulatory measures now being in place, part due to the sheer passage of time.
You do not need to agree the reason to seize the chance. Will the industry do so?
If so, what help do they need, especially from the regulator? Well, we have been busy, and many of the major reform programmes are now in train.
From the prudential angle, 'too big to fail' is being tackled by more capital, measures around ring fencing and resolution regimes.
On the conduct side of the house, we have the senior managers' regime, amended last week by the Government to remove the 'presumption of responsibility', measures around reward processes and, I would contend, a sense that conduct has been put firmly on the regulatory map as a result of the specific actions that the FCA has taken. These include the Forex and LIBOR cases, working through PPI and the question of a time limit on claiming, and interest rate hedging product redress.
All this had to be done.
Some have argued that we the regulators have exacerbated the trust issue by our interventions – well, maybe – although no one is arguing that that is a reason for not intervening as we did, or for a weaker regime going forward.
So much for the past.
As the Chancellor said in the summer at the Mansion House, going forward he wants the UK financial services to be the best regulated in the world with markets of unquestioned integrity and the highest standards of conduct.
The FCA accepts the first part of his challenge, it is for the industry to deliver on the second.
Importantly, both need to succeed for trust in banking to be rebuilt.
I shall say more about future regulation in due course but let me start with the industry.
There is no doubt that the leaders of our banks have made considerable efforts to change the way their businesses are run since the crash.
On the conduct side, there are tentative signs that progress has been made in outcomes, as well as in effort.
As I have said many times before, customers remember tone at the till long after they have forgotten tone from the top.
Complaints to FOS among consumers remain high, but have fallen by 35pc between 2014 and 2015 – almost entirely due to a drop in PPI numbers.[1]
Trust among the general public remains low, but has risen by a net 14pc, according to a survey conducted by EY last year[2].
And alongside this, customers are now more willing to recommend the financial products they use to others[3].
Tentative maybe, but the excellent paper, published today by the Centre for Compliance and Trust at CJBS, reminds us that trust comes 'by foot, but leaves by horse'.
Indeed - so we must learn to measure footsteps if we are to record early progress, especially at an inflection point, and I want to give credit where it is due.
More remains to be done.
It is not for the regulator to tell businesses how to run themselves, but I see three key priorities for them in the pursuit of the restoration of trust.
Top of my list is the linkage of trust to business purpose.
Much has been written about the long-term sustainability of firms being tied to customer satisfaction and therefore trust. The shorter term evidence in banking is more mixed, with customer loyalty remaining very high since the crash, when you might expect otherwise.
There are some important negative opinions on why this has been so; inertia, lack of choice, fear of a worse experience elsewhere, asymmetry of knowledge, being locked in by debt.
On the more positive side, it can be argued that customers have been content with their own service notwithstanding their views on the sector as a whole.
The fact remains that if a business model is put into effect, which is designed to work at the expense of, rather than for the mutual benefit of firm and customers, clashes with stakeholders and regulators charged with protecting the latter are certain to follow.
The banking industry is too important to the prosperity of the country, too essential a utility for its citizens, to be run other than for mutual benefit.
Shareholders, boards, management and employees need to be aligned on this point, and to stay aligned.
Second on the list is behaviour, or conduct.
I take care to make the distinction between conduct and culture.
Culture undoubtedly drives conduct, and is therefore a root cause of conduct, good or bad.
But successful enterprises in many industries and geographies have shown that there are different recipes for success.
It is for each firm to take responsibility for its own culture. The choice is to keep it or to change it.
As a regulator, I do not wish to promote any one management theory at the expense of another, provided that the outcome is a drive for good conduct.
Third, is an adequate system of control to seek to prevent, or at least detect when things are going wrong.
It will never be possible to detect every bad apple, to use the in vogue analogy, but we need to be sure to detect the bad barrels.
There may well be a trade-off between the type of culture a firm chooses to adopt and the extent of rules it needs to control it, and again responsibility for this must lie with each business. Either way, size or complexity of the overall business can be no excuse for failure to control conduct in each operation.
These three are necessary, but are they sufficient to win back trust in the financial services sector?
I don't know for sure.
Customers will decide, and we all know that public opinion shifts at its own pace and not to the drumbeat of the public relations department.
Optimistic I may be, but I believe we can get to a position where, even if not exactly loved, banking is acknowledged for the role it plays, and thereby allowed more freedom to play it well.
Which takes me back to the role of the regulators, and especially the FCA.
The priorities of the last three years, which I referred to at the outset, were largely centred around stopping bad things from happening, or clearing them up when they had.
I make no excuse for that; it needed to be done.
And it will always be an important aspect of the role of the regulator.
But I keep front of mind that our overriding objective is to ensure that markets work well, which is significantly more challenging than preventing them from working badly, which can be achieved by preventing them from working at all.
It remains a priority for us to move in step with the industry: if they can deliver on my three priorities for them, we can move on how we structure our interventions.
This is not in any way a sense of 'pendulum' regulation.
It is a recognition that IF the firms’ behaviour changes for the better, that should allow us to change our regulatory response.
Synchronisation is however key and that requires having a relationship of trust between regulator and regulatee.
Some of the more recent policy developments have laid the way for this to happen.
For example, the proper allocation of duties and the new certification procedures in the Senior Managers’ Regime leave firms the freedom to choose how to organise themselves and to take responsibility for annual assessments of the fitness and propriety of their staff.
At the same time, it should enable us to identify who to hold responsible for major failings, more readily than it proved in the past
The outcome of the Fair And Effective Markets review in the wholesale space is, in part, to get the industry to apply some self help in getting to better standards of behaviour without detailed rulemaking in fast moving technical spaces.
The upcoming Financial Advice Market Review will hopefully make further progress in unlocking help for consumers making difficult financial decisions, particularly around the new pension freedoms.
The single most important lesson we have learnt, as regulators, is that prevention is hugely preferable to cure, in terms of both cost and better outcomes.
Sometimes this has justified rule based interventions.
The undoubted role of remuneration policies in driving behaviour justified tighter rules on bonuses, deferral and clawback. In 2014, 19 firms applied ex-post risk adjustments to bonus pools, of which eight firms applied collective adjustments at group bonus pool level – totalling some £1.7bn.
Or 14% of the total 2014 bonus pool.
We saw individual adjustments applied to some 400 staff, with 100% reductions commonplace amongst those directly involved in misconduct.
As the chairman of one large bank commented, leaving the shareholders alone to bear the brunt of penalties is not a desirable or sustainable model.
The Government mandated us to fix a price cap for pay day lending in the light of a pressing need. This we have done.
Responsibility for consumer credit has been transferred to the FCA, bringing a more consistent approach to protecting those needing to borrow money in the same way as those fortunate enough to have some.
All of these initiatives have taken place in the short life of the FCA, all two and a half years of it.
We do however need to be careful, the knee jerk response to something going awry is always to make another rule. Something must be done!
The size of the rule book is testament to this pattern, but it has not, to date, prevented the next “bad thing”.
In the medium term, however I see one of our new regulatory responsibilities having a much greater impact on the rebuilding of trust than any number of specific measures. That is our competition objective.
We are purposefully embedding this into the DNA of our organisation, and its usefulness alongside rule-making supervision and enforcement in 'ensuring markets work well' is already established.
But its role over and above that- in helping to restore trust - is now increasingly becoming apparent.
In order for it to become a commercial imperative for banks to treat their customers well, and for this to sit at the heart of their business model, there must be the ability, willingness and motive for the customer to move supplier.
As you will all know the CMA is shortly to publish its findings on the personal current account market.
In the meanwhile we are gearing up our studies in the investment banking, credit card, mortgage provider and asset management spaces.
Combined with the rapid advances in technology and the progress on help, advice or guidance from FAMR, I expect the regulatory focus on competition to give more options to the customer. More options give more power, and more power necessitates an increase in customer trust – the subject for today.
If I am right, this will give more energy to the rebuilding of trust than even the mighty Cambridge Judge Business School and its followers here can give to the subject by debate.
Let me end here.
Much done, much more to do.
Building trust is a journey not a destination.
A journey on which customers, banks and regulators are now embarked, with aspirations suitably high, and expectations suitably realistic.
[1] Complaints figures are from the FOS and relate to 35pc between 2014/15. It is due to a fall in PPI complaints – I personally don’t think this needs to caveated. In total, they took 1,786,937 enquiries from consumers over the year. On the basis that these might not all be reasonable complaints, I’d ditch the 2 million a year figure. There was a big rise in pay day complaints.
[2] 2014 global banking survey by EY of 32,000 retail banking customers across 43 countries. 33pc reported gaining confidence. 19pc lost confidence. Compared to a 40pc drop in confidence the year before.
[3] This is from the annual report and is based on GfK’s financial research survey. It is the net promoter score