• Neil Herbert, Director at HRComply


• 11.06.2015 01:00 am
Compliance

Since its introduction, the Retail Distribution Review (RDR) has placed a heavier burden on the compliance and regulatory obligations of many retail firms, increasing the compliance costs. The consequences have included profit warnings, consolidation and exits by smaller IFA firms across the industry. This pattern has continued unabated.

‘Compliance creep’

Nevertheless, ‘compliance creep’ eventually affects all sectors of the financial services industry. For example, in recent months there has been extensive press coverage of the FCA’s criticism of the funds industry, specifically at its failure to impose and manage adequate market abuse controls. This was the result of a recent FCA thematic review across a pretty broad sample group within the sector. The move reflects the FCA’s intention to apply its standards across the wholesale, investment banking and fund management sectors.

Increasing sanctions

In 2013/14 the FCA took action against 28 individuals, imposing over £3.6m in fines, 26 prohibitions, and obtaining five criminal convictions. The regulator held 16 Significant Influence Functions (SIFs) holders to account, imposing penalties and prohibitions.

The ever increasing compliance burden and the need for vigilance, monitoring and control of market abuse has fuelled demand for Compliance staff – which in turn has driven salaries upwards in this once unfashionable area of financial services. Other outcomes are increased tracking and monitoring of previously designated low-risk staff and growing investment in technology to monitor electronic and voice messaging and communications.

Many investment banks are retreating from proprietary trading, particularly in Europe. This has been driven by further regulatory clampdowns and political and public hostility, together with the increased risk of enforcement and fines.

Market abuse and a compliance culture

The FCA continues to advocate the embedding of a compliance culture – not just in the Compliance department but also across the whole firm. Yet in the wholesale sector in particular, this is even less defined than in other areas. By its very nature, the primary risk is conduct risk and this almost entirely means market abuse of some kind.

Market abuse is a cultural problem, requiring the HR and Compliance teams to work together. Types of conduct constituting market abuse are set out in section 118 of the Financial Services and Markets Act 2000 and in the Market Abuse Directive; yet how effectively are these restraints being communicated to the front office? And what constitutes the limits of ‘acceptability’ for those who are being trained to spot or avoid market abuse?

Senior Managers Regime

The new Senior Managers Regime in particular will worry the big banks. The consequences for those on whose watch market abuse or scandals occur will become very dire indeed.

The FCA assesses culture through factors such as how firms respond to, and deal with, regulatory issues; what customers are actually experiencing when they buy a product or service from front-line staff; how a firm designs products and the considerations around this; the manner in which decisions are made or escalated; the way in which claims or complaints are handled; the behaviour of that firm in certain markets; and the remuneration structures and how a firm’s board engages in those issues and satisfies itself that the firm is operating as the regulator expects.

An FCA speaker at a recent industry conference owned up to the fact that the FCA deliberately did not have a master definition of conduct risk and that conduct risk profiles would be unique to every firm – making a one-size-fits-all approach impossible. Instead she said that the FCA has made it clear that having the right ‘culture’ is an important component of conduct risk. No specific definition of the kind of culture required has been offered.

Conclusion

In a ‘good culture’, everyone has a responsibility for compliance. A focus on conduct, quality and suitability of advice, know your customer and general customer and market outcomes must then drive outputs in terms of behaviours.

The problem requires real-time monitoring of trades, but is this practical or even desirable? Throwing more Compliance staff at the issue certainly won’t make it go away. The effective deployment of automated training and competence (T&C) technology and process–based decisions will help free up the already overburdened Compliance team to work alongside HR and concentrate on the cultural change required to reduce market abuse. Furthermore, clear rules or benchmarks on how firms can ensure that they are meeting the expectations of the regulator will be necessary.