Speech by Tracey McDermott, director of enforcement and financial crime at the Financial Conduct Authority (FCA), delivered at the FCA’s Enforcement Conference, London. This is the text of the speech as drafted, which may differ from the delivered version.
A lot of the interaction I have with firms is on a one-to-one basis in the context of the FCA’s investigations. Not always the best environment for a discussion about regulatory philosophy or how we improve culture and conduct across the industry more widely. So it is a pleasure to have you here in the more relaxed setting at the FCA's first enforcement conference to continue the conversation on how we regulate.
In a recent speech to the BBA, Ross McEwan said that when he took the helm at RBS he had no illusions about the job he was taking on, but that he was fundamentally optimistic about the prospects for the firm and the industry.
Given my job – which is essentially to identify and investigate bad practice and put in place punishments to deter others – it would be easy to meet such optimism with scepticism.
In light of the recent FOREX investigation[2], which saw the FCA uncover failures by firms to correct their controls to prevent attempts to manipulate the market after the LIBOR failings had come to light, it certainly seems that we are still some way short of the corner that needs to be turned. Indeed one well-known City commentator wrote in a blog that the day of the FOREX fines was the saddest of his long career.
Faced with this misconduct, which is so similar to that of the recent past, people can say that lessons are not being learned. And there have been all too many examples – in both the retail and wholesale space – to reinforce that view.
These repeated failures undermine the reputations of both the regulated and regulator. In this, we are actually all in it together. But more important than our reputations is the reputation of the financial services industry as a whole.
How do we rebuild trust and confidence in a vitally important sector providing critical services across the economy? How do we get to a point where the conversation is about what the industry does to help people and businesses rather than the latest scandal?
We cannot rewrite the past but we can chart a different future. We will not, however, do that if we forget the past. The challenge, as Lyndon Johnson said, is that we must "learn lessons from the past but we can't live in it". The quote doesn’t need LBJ’s chequered legacy to give it added strength. It has to be clear to all of us that if we are to move on, we need to re-evaluate not just the actions of the past but the cultures that underpinned them and the controls that failed to identify or manage the risks they created.
Recently, I have reviewed some of the statements put out by firms that we had fined, looking particularly to some of those which had been regularly visited by the FCA’s enforcement team.
The themes were depressingly consistent. Indeed, some of the statements read a little like PR paint by numbers. They all told the same story:
- misconduct was described as being the work of a few individuals
- that these people had acted contrary to the standards of the firm
- that lessons had been learned and changes made
- that it wouldn't happen again
We are still told that misconduct is the work of a few errant individuals within large organisations. But there does seem to be a growing recognition that the issues are deeper and wider.
But of course it did happen again. Leaving aside FOREX, in another case from this year a trader even attempted to manipulate the gold fix on the day after his employer was fined over LIBOR.
Now the public statements may not have changed much, we are still told that misconduct is the work of a few errant individuals within large organisations. But there does seem to be a growing recognition that the issues are deeper and wider. That this is not simply a case of a few rogues spoiling it for the majority.
Put simply, while some individuals went too far they did not do so in a vacuum. The traders involved in these incidents knew what they were doing was wrong. In one LIBOR case a submitter wrote to his manager, "we are being dishonest by definition and are at risk of damaging our reputation in the market and with the regulators." But they did it anyway.
We are beginning to rebuild a culture within financial services that is more centred on consumer needs, with a regulator in place that has the right tools and approach, to uphold and encourage the standards the public has the right to expect.
In my view they did it because they operated in a culture in which they believed, at best, that poor behaviour would be excused by the results for the firm, and for them individually and, at worst, would be rewarded by the firm and their peers – in terms of both financial reward and status. And in some of the more extreme cases that was perhaps fuelled by what was described in one of our insider dealing cases as a sense of greed and belief in their own invincibility. In short, in the past perhaps they thought they could get away with it.
I do think lessons are being learned, albeit slowly and from the top down. As a result, together with the industry, we are beginning to rebuild a culture within financial services that is more centred on consumer needs, with a regulator in place that has the right tools and approach, to uphold and encourage the standards the public has the right to expect. And as you will hear today enforcement is part of that but it is far from the only tool we use.
Firms have already made strides in changing the way they do business. When industry leaders talk about the errors of the past I have no doubt that they are speaking genuinely; they truly want to create a better culture and are trying to instil one in their respective organisations. This is not driven solely by some high minded moral or ethical approach but because it is good business sense. Firms and their shareholders cannot afford, and will no longer tolerate, the financial and reputational costs of poor conduct.
But changing culture is not easy. It is not straightforward to change a way of thinking that has existed for years if not decades, and focussed on revenue over other considerations.
The trickle down from boardroom to trading desks and sales staff takes time. We have seen significant efforts including greater willingness by firms to admit to their historic mistakes and proactively put them right by setting up redress schemes, something that they are sometimes given too little credit for.
But ultimately unless this becomes part of the DNA of firms, unless the front line owns this change and buys into it, it won’t happen, no matter how many fine words there are from those at the top and no matter how many thousands of compliance staff you employ.
The cultural change we are looking for is perhaps analogous to the shift in attitudes to drink driving between my parents’ generation and my own. For my parents and their peers, reluctance to have a drink and get behind the wheel was mainly because they were scared of being caught. This was not seen as an ethical dilemma. Many will have treated it like perhaps we do speeding today – fine as long as you get away with it. So you slow down when you see a speed camera not because it makes you think speeding is wrong. The fear is in the fine. But this is not absolute – few of us would drive past a school at 3pm at 90mph. So somewhere we recognise the ethical /societal dimension as well as the legal one.
For my generation however drinking and driving was presented as a moral issue. We were made to think about whether it was right or wrong by forcing us to focus on the impact it could have on others’ lives.
So the interesting challenge is how do we move from being about speeding – about needing “a cop on every corner” to a world where people more often make the right decision instinctively because they believe that is what is valued by their peers, their colleagues and their firms and because they will be ostracised if they don’t.
I know that, at times for those in the industry who are encouraging the right direction of travel, there can be frustration. After all, despite their efforts to lead the change, we continue to fine firms for past bad practice. In the past eleven months over £1.4bn in fines has been issued, 40 individuals have been banned, and two convictions have been obtained.
I have heard some in the industry say that regulatory enforcement is like the Soviet tractor factory – that we are fulfilling some expectation that year on year more must be produced.
But there is no such expectation, there are no such targets.
We do not see Enforcement as an end in itself. It is simply one of the tools the FCA has at its disposal to encourage better behaviour. Yes, it is often the most newsworthy. Yes, it can be the most damaging to the reputation of a firm or individuals. Yes, it is unpopular with many within the industry.
But it is only one tool.
A blunt tool, perhaps, but a vital one in making plain to all the firms we regulate, and all those who work in our industry, the consequences for those who fail to meet our standards.
And it should also be a tool for you – in the industry – a way of learning from the experiences of your peers. Our notices and the root causes that underpin the failings should inform your approach to consideration of the risks you face. Disappointingly, as illustrated by FOREX and by wave on wave of historic mis-selling issues, this is not yet second nature. The review of lessons is still, at times, too narrow and too literal. I get the impression that people say “this does not concern me because I don’t sell UCIS or don’t submit to LIBOR” rather than looking at whether the same drivers of behaviour might read across to other areas.
But we cannot be uncritical of what we do – we have to continually assess whether the tools we use are working and whether they can be recalibrated. Given the frequency of our fines, and the frequency with which the names of some firms appear, some rightly ask how effective our action is. So, it is worth looking at some of the possible changes, some of the new approaches suggested to see where improvements are being made or could be made.
It is not the job of the regulator alone to weed out and punish wrongdoers. Firms need to think about where risks might arise and how to control them: the need to understand the culture of the subsets of their organisation, how they differ and what that means.
Bigger fine, more rules = better regulation?
For some, there is disquiet about the scale of fines. As the regulator we are used to being criticised by both sides, and the scale and effectiveness of fines is a case in point.
One the one hand you have those who say that the fines are too large and unfairly penalise shareholders. On the other, you have those who say that the fines are not large enough, that they don’t have sufficient impact on profitability.
I reject both these views.
In some instances, firms need to be held to account because the failings are corporate as well as individual. We have heard from firms and industry bodies that fines and the focus on conduct has helped them maintain momentum in strengthening the conduct risk frameworks they have in place. Clearly the publicity that enforcement action brings helps to focus minds, particularly at the top of firms.
And while it is true that individuals are responsible for actions they don’t operate in a vacuum, they operate in the culture and the values of the firms that employ them – and I mean the real culture and values not that expressed in the mission statement. And firms set the controls that identify or should the risks in their business and how to manage these. And while cultural change is ongoing firms have to ensure their controls are adequate. Until the rhetoric matches the reality relying on people just doing the right thing won’t get us there.
This is not, in any way to play down the importance of individual accountability. It is, however, to reiterate that it is not the job of the regulator alone to weed out and punish wrongdoers. Firms need to think about where risks might arise and how to control them: the need to understand the culture of the subsets of their organisation, how they differ and what that means. They also need to think about cross industry tribal loyalties and how to manage the risks those pose. And where they fall short, particularly where they fail to learn lessons from other action, they should pay the price.
It is sometimes said that the issue is a lack of clarity and that behaviour would be better if we legislated for each eventuality by expanding the rule book.
One PR firm recently put out a press release having printed out the entire rulebook and measured it at 6ft 3ins. And it is true that since the crisis, the number of rules has increased – often, it has to be said, as a result of new European directives rather than rules created here.
But even before that there had been a shift in the amount of regulation. Between 2005 and 2008 the amount of guidance issued to the industry by the FSA increased by some 27%. And yet it was this very period that was a breeding ground for many of the conduct cases we are still dealing with today.
Clearly the increase in guidance didn't cause the misconduct. But it happened in spite of it.
So what do we take from that? This is perhaps the hardest lesson for us all to learn - rules cannot simply be put in place that paper over cultural deficits; rules can actually encourage people to abdicate responsibility - if the rule book doesn't say it’s forbidden, it must be OK.
That is why the industry has heard so much about culture from the FCA and why Sir Richard Lambert's Banking Standards Review placed so great an emphasis on the broader theme of ethics.
Roger Steare in Ethicability argues that businesses needed to be freed from an uncomplicated obedience culture - one in which the rules are obeyed but little thought is given to the underlying ethics of an action. To move beyond playing the rules to considering the outcomes.
This is a laudable aim, which we support, but is not as easy an ambition to achieve as it first seems.
For me, the answer lies in making everyone involved in financial services better aware of their responsibilities - not just to their employer or to themselves, but of the wider impact their work has on individuals and societies. In an industry that is based on the intangibility of money, where trades can be done electronically with no human interaction whatsoever victims can be faceless, impossible to identify. As a result the impact of decisions - individual and collective - can be difficult to recognise and accept.
The think tank ResPublica put forward the eye-catching idea that bankers take an oath, and they have suggested some wording. Personally I don’t believe that imposing an oath on an industry from the top down is the right approach. Rather than an oath creating a culture, I believe it should be reflective of it. And for a culture to develop each individual needs to be, and to feel, responsible for their actions.
But it is worth looking at what those professions that do swear an oath promise to uphold. Whether it be the judiciary, the police or doctors, a common theme is a recognition of the impact of their work, and its importance to society. The fact that their work can affect the wider public means they have a responsibility to act competently, fairly and with good intent.
It is difficult to argue that the actions of those who work in the financial services do not have a similar breadth of impact. So, the creation of a shared ethos not unlike the ‘above all, do no harm’ that exists in medicine might help ensure those in our industry understand that they have a responsibility to each other, to their shared profession and, more importantly, to wider society.
We will use enforcement, where it is appropriate and proportionate and where the evidence merits it, when we find executives who fail to understand and live up to the standards they have signed up to.
Individual Accountability
The FCA and its predecessor have been heavily criticised for failing to hold individuals to account, and in some quarters for not putting people behind bars. Nor are we alone in being criticised - regulators the world over have found it tough to establish disciplinary liability in respect of some of the mistakes of the past.
That is not a challenge that will disappear, even taking into account the criminal sanction for recklessness in the Banking Reform Act and the presumption of responsibility for senior managers that Parliament has introduced.
But there is now an even greater determination at the FCA to make clear to those at the top of firms that by their accepting their jobs, and the rewards that come with them, they take on personal accountability. We expect them to account for the decisions they make, and as the recent case against former Swinton executives made clear, to take responsibility, for the culture they create, or allow to go unchecked, within the businesses they lead.
This is vital if we are to weed out the morally unacceptable. It may be a glib comparison but there is the story of dozens of people witnessing a murder and none of them phoning the police. Each knew others were seeing what they were seeing and so believed someone else would make the call.
The problem was one of diffuse decision making – there was no one person responsible and so no-one took responsibility.
This is the situation we are seeking to avoid. And we will use enforcement, where it is appropriate and proportionate and where the evidence merits it, when we find executives who fail to understand and live up to the standards they have signed up to.
In that effort, we are supported by work across the FCA. Our focus across all elements of our business is on ensuring individuals understand and take responsibility for their actions.
Importantly, the new senior managers regime for banks will require firms to certify their own staff – they will be forced to take responsibility for the fitness and propriety of those they employ, rather than expecting the regulator to do that for them.
Working together to learn the lessons
These changes will take some time to filter through and there will no doubt be uncomfortable moments until we get there, when further examples of poor behaviour are uncovered.
The vital point will be to make sure those difficult times are used as a lesson – not simply for the individuals and firms directly involved but for all in the industry. Enforcement cannot be allowed to be written off as if it were a visit to the headmaster’s or indeed mistress’s, office where you take your punishment and leave.
The indications are that this has been realised by industry, certainly those at the top of it. And, through our focus on personal accountability, we’ll reinforce the message that everyone in the financial services has a responsibility to act in the interests of their customers and to uphold the integrity of the market.
A recent survey has shown that London’s position as a pre-eminent financial centre is under threat. There can be little doubt that misconduct undermining trust is one of the reasons for that. So, it is vital that we, the regulator and the regulated, learn from the mistakes of the past. That is where I think enforcement action has its value; not just as a punishment but as a very public lesson from which all market participants can learn.
I look forward to hearing your views during the course of the day.