Introduction:
Gavin
Go back to the FSA have all been male. So, they will be completely legitimate question about whether it's time to have a woman as Chair for the first time. I do think it's one of those areas where there's scope for well-intended regulation to go badly wrong?
David
A lot of firms are currently working on an operational resilience. This is obviously coming into force that nobody can enforce and the timescale for upgrading operational resilience.
Gavin
Whistleblowing in the US is different from whistleblowing here, very, obviously writ large and I think there are kind of deeper questions in there, they're not direct parallels but about, you know, how much consumer data do you want and why and what do you use it for and what are the temptations?
David
Almost certainly most central bankers around the world are making noises about raising interest rates at this point, they are taking action.
Hi, and welcome to the Grant Thornton Risk and Regulation Unravelled podcasts. Today, you're joined by David Morrey and Gavin Stewart, say hi Gavin.
Gavin
Hi there.
David
And we're broadcasting from the office, partly as we run out of gas to heat our homes, partly because I personally am afraid the FCA might do a home visit but mostly actually because we've got new technology, we have a new microphone, looking at it waiting on the desk in front of me I can't help but feel we're going to be channelling our inner Mariah Carey or...
David
Yes, today we are going professional and like any professionals, we're going to be trying to address the big questions in regulation, so for those who haven't joined us before this is our monthly walkthrough of the headlines from the world of financial services regulation, we take a look back at what's happened over the last month or so and we try and take a look forward at what we expect to happen and what some of the major questions and challenges are facing regulators are. We try to ask the big questions and we try and answer them, figure out what the regulators are doing, what they might do in the future and what that might mean for all of us who work in the financial services industry, possibly retraining as an HGV driver might be one option. Anyway, with that as the overview of what we're going to cover, Gavin, when we sat together last month, we were talking about all the good things we expected, the interesting things we expected to come out of the regulators over the next month or so and I think we've been really disappointed in terms of the pace of activity so future regulation and the Treasury, regulatory initiatives grid from the SCA...
Gavin
They are big ones, aren’t they?
David
Yeah, and we're still waiting.
Gavin
Yes and I don't know whether I mean, the future regulatory framework proposals from the Treasury, it could be anything from Government timetabling to pressure with the Treasury or it could be that you know, they have been debating with the regulators particular points, I mean that's certainly part of what happened you know, in the run up to FISMA, 2012 so there might be some of that going on but it is late and I think the question now is whether it comes out as part of the budget announcement next week and what sort of consultation period there is, because if it's three months that then takes you beyond Christmas and you're in a slightly different legislative world and it's going to be a huge piece of legislation to go through anyway.
David
Okay, so we remain in waiting for that. Not to say that there hasn't been plenty of news emanating around regulators, particularly the FCA which has been garnering headlines around oh let me see staff bonuses being altered, changed, reduced depending on who you listen to, possible unionisation.
Gavin
I think gone actually, staff bonuses.
David
Ouch. Possible unionisation of the workforce? There are certainly other changes we are aware of from a sort of organisational structure, job, families, reduction or removal of certain legacy allowances, there is quite a lot of change going on that seems to be affecting the mood of the troops at the FCA, reading alongside that of staff shortages which is potentially not unrelated.
Gavin
Yeah, there's quite a lot to unpick. I mean, I think the first thing is that aside from closing the defined benefit scheme, the legacy one in 2011, I think it was, there's not really been much change to Terms and Conditions since the mid-2000s/2005/2006 something like that and some of the stuff like the manager allowance goes back to the start of the FSA in 1998 so, you know, I don't think there's an argument that it's not high time the whole thing was looked at, what I'm missing at the moment is what sort of organisation they want the FCA to be in the future, so when the FSA was created and then the FCA after that there was a pretty deliberate decision to pitch it somewhere between the public and private sector and to have a reasonable exchange of staff with the industry backwards and forwards and that was all quite deliberate and it's worked well at some times, less well at others but I don't see and obviously, the bonus performance pay was part of that and I don't really see what sort of organisation they want to come out at the end of this and post COVID and everything, there must be a bit of a risk that actually you haemorrhage a bit more than you want and the wrong sort of people.
David
Yes, yes, potentially I mean obviously we've spoken before about FCA transformation and the broad goals of that, I mean, Nikhil Rathiin his speech a couple of weeks ago and was reiterating a lot of those themes data driven, agile in some of the stuff around in being aggressive, that's my word rather than this but you know, pushing the boundaries of the legislative and regulatory framework in order to achieve faster outcomes, better outcomes. So, a lot of that tells you about, you know, his view on what the style of some of the key dynamics, it doesn't tell you anything about staff structures and...
Gavin
No and I think there are some quite big challenges most obviously pulling supervision and policy together, I mean, there's lots of different cultural things, there's lots of overlaps and underlaps and sorting all of that out would be a big deal. I mean, I think the other thing is I haven't got my head round where the resources to do all the things in the mansion house speech in the business plan and transformation and so on, where they all come from and from the outset it looks like there's quite a lot of double, even triple counting in places and you can improve efficiency but that typically means if were talking private sector that will be you know, doing things faster, putting things together, and you know, processing them quicker. In a regulatory world you don't get the P&L payback for that, what you do get is the risk of some small things slipping through the cracks and in the private sector that's offset by the gains. In a regulator, those things that come back to bite you and have you up in front, six months later, which we've seen plenty.
David
Yes, I mean I know everything I'm talking about obviously clients who are seeing a relatively or seem to be experiencing a relative slow down in responsiveness from the FCA and sort of the BAU interactions...
Gavin
It would be amazing if there wasn't.
David
No. Another thing I suppose the question is are there going to be more problems coming up before things get better? Assuming things get better? Are we in that stage of the transformation curve where things could deteriorate further before we start to see improvements? Only time will tell. Again, related FCA news, Charles Randall, the Chair of the FCA over the last few years has announced his retirement, stepping away, retiring from the role a year early. Now, you mentioned I think about six months ago that in some of his public pronouncements he was starting to sound a little bit past tense.
Gavin
Yeah, he made a speech back in April which I thought sounded quite valedictory and sort of, you know, talked in the past tense about the contribution he would be seen to have made and I think I wrote on Monday that he'd said an awful lot more in the TRC meeting before that speech than he did in the one the month after and he's made other important speeches since but I mean I'd be surprised if this hadn't been in the works for six months or so and hopefully the wheels at least informally are turning although it's obviously a public appointment so you would assume it needs to be properly advertised. I suppose my overriding thing is that it's just an awful lot of senior turnover again and the FSA and now the FCA has suffered I don't think is too strong a word, has suffered from that ever since it came into being you know, if you compare it to the bank there's far less stability at the top and that because you have a CEO and the Chair, you know, that you rarely get people together for more than two years and I think that means that if you're inside the organisation there's no continuity, there's no consistent strategy and you always feel like you're being thrown from pillar to post.
David
I mean, I think you're almost certainly right that this has not come out of the blue, I mean internally this must have been something that's been discussed for several months, and I think I'm accurate.
Gavin
Yes and I think unless the new Chair comes from the board, they will inherit a transformation programme that they've had nothing to do with, that and a series of kind of declared outcome measures that are inherently quite long term and hard to measure and they may well want something that's a bit more here and now, you know, tell me what the next thing is that could potentially go wrong so we can fix it and I'm less bothered about 18 months’ time. So, we'll see.
David
Yeah, at the very least it’s the uncertainty and as you say who they appoint and what their agenda for the role is and how that meshes with established strategy.
Gavin
It's probably also worth saying that all five of the previous Chairs, if you go back to the FSA have all been male so there will be completely legitimate question about whether it's time to have a woman whose Chair for the first time.
David
Yeah, I think that's probably not overdue I would suggest, that's fair enough. So, in that time period, over the last month we had the FCA Annual Public Meeting, anything come out of that was worth mentioning?
Gavin
Well, there was quite a lot, I mean a lot of it was sort of a retread of the business plan. I think it was slightly surprising that Megan Butler as the lead of the transformation programme only answered one question given the nature of the meeting. I mean these things are difficult to do on teams or zoom and so on, but I mean public meetings have always been difficult I think for the regulator and tend to get dominated by one or two relatively small things in the great scheme of things.
David
Yeah, and with the British Steel pension scheme members demonstrating outside as well was it...
Gavin
Well yes so that's an unhappy...
David
Yeah, when I get to the segue that we've been covering some of the things that the FCA have been in the news for but more proactively there are couple of things around pensions.
Yeah, one less exciting probably is a consultation now between it and sort of a joint approach between it and the Pensions Regulator around assessing value for money for defined contribution pension schemes which is a sort of step on from the defined benefit framework that already exists that illustrates the collaboration, the working together, the joint strategy, I think was three years ago between the TPO and the FCA. I say it shows it being put to the test by other things that are going on so the FCA wrote to several 100 British Steel pension scheme members advising them that because of the high risk of unsuitability around the advice they received they should get a letter of complaint into the Financial Ombudsman pronto.
Gavin
Yes, I'm quite sceptical about a sort of complaints led strategy, I kind of saw it 20 odd years ago and then obviously with PPI and the scale of those is much bigger in terms of its number of people and the start date, again, went back many years.
David
Yeah, yeah, decades.
Gavin
Yeah with the steel pensioners you're talking 2015/2016 so it is different but it's still putting an awful lot of responsibility on the consumer themselves to complain, an awful lot of responsibility on the FSCS and the Ombudsman and indeed people liquidating firms that have subsequently gone bust and you might well end up with uneven outcomes, it could take longer than you think, the FCA of course is on the hook for this particular problem whereas the other two it inherited.
David
That's true. Yeah, yes.
Gavin
So that's different, as well on the downside.
David
So, what do you make calls...?
Gavin
So, the alternative is to have something like the Pensions Review Division.
Davd
Exactly. And some people say to the FCA, you should sort this out.
Gavin
Yeah. I mean that was a real impact on the early FSA because it was, you know, 250 people as a kind of bubble inside the organisation who then had to be subsumed and actually I think that was positive in the end but it had its downsides which is why they went to the complaints, part of the reason they went to the kind of complaints led scheme, you know, none of this is perfect but it's, you know, because you've got the problem to start with and it's bigger than you'd like but I am nervous about the complaints lead approach.
David
Yes. Yeah, and none of them are perfect but I suppose does the FCAs historical experience around running its own redress operation essentially, meaning that it's never going to go down that route again. I guess time will tell. I do know the idea was the numbers of people that are impacted are much smaller although some of the amounts of money involved are very, very significant.
Gavin
I never say it's a big deal, it worked, you know, I think it is more important, I think then the mortgage endowment stuff is the kind to investment because you have fewer choices and it's potentially a bigger amount of money for you.
David
So, one of the things the FCA did in the last month is they tweaked their guidance around calculating redress for pension transfer advice to the way he treats his fees, financial advisor fees for future on the redress pot, anyway the net effect of that to go up potentially quite significantly.
Gavin
I think the other thing is that without fail these programmes have always lasted several years longer than originally stated and so I think this will be with us for a good while to come unfortunately.
David
Okay, what else did the FCA do, they wrote to firms about the remote working and their expectations for regulatory compliance in that environment and it raised the possibility of doing home visits which I joked about when I was doing my introduction.
Gavin
All options are on the table.
David
Exactly all options are on the table including doing home visits so if you're listening to this podcast and you get a knock on the door and my advice is to is to hide under the bed. I mean…
Gavin
I saw that as a kind of a holding response and I think what they'll do is they will look and see which firms are doing well and which don't and try and work out why and then build up good practice along the way because they have the enormous advantage of being able to do comparative analysis which no one else really has so they'll learn an awful lot from that probably quite quickly but I also think you'll see a kind of a default of which jobs really need to be done in the office and which ones is it reasonable for people to do at home without any great kind of compliance risk involved?
David
So, what do you think the realistic likelihood of anyone getting a home visit is?
Gavin
Oh, very high but a very small sample? Just to show that everything's on the table.
David
Oh, that’s good point.
Gavin
Yes. So, it will happen at some point.
David
Okay. Yes. Well in that case I'm definitely staying under the bed for the next month.
Gavin
Because if you don't use it, people won't know that's...
David
True, when I saw that response, I thought that's never going to happen.
Gavin
At some point that certainly will happen.
David
Let's rattle through the other bits of news in the month. NatWest pleaded guilty in a criminal case around AML failures.
Gavin
I think given the scale and profile of the case I wasn't surprised because I don't think the FCA would have taken it if that wasn't the likely outcome, so I think the issue now is what sort of discount did they get given the nature of it and then is it a one off or is it a new, more aggressive, more financial crime, aggressive regulator? and if the latter where did they get the resource from again?
David
Yes, because that's what I found myself thinking last night as I was sitting on my sofa hiding from the FCA, Twitter told me that the FCA piled it on with the other international regulators and are fining Credit Suisse for financial client failings basically in relation to lending to Mozambique. It sounds like a good case, apparently a couple of CS bankers took a $50 million kickback to make their loans and things like that, I haven't read all the detail, but it was ever again a reminder that I'm in the wrong job. So that's clearly you know, financial crime related, we've got the Pandora papers knocking around let your latest tranche of that so at the very least I'm sitting here thinking well we're going to see more rhetoric about financial crime from the regulator, not that he's ever gone away but you know, expect to have more. I think the big question is the one you raised; will we actually see a meaningful tilt in terms of...
Gavin
I just think to do it consistently you need probably a differently organised bigger and better kind of geared up enforcement function than the regulator has wanted to date. If you're going to start taking this sort of scale of case routinely because the alternative is that you stop a whole load of other things in order to do this well, yeah, yeah.
David
Yeah, it's hard to say, I mean, if the aspiration is to take on more legal risk as a regulator and then that seems to translate into potentially more enforcement investigations across the board. It's not to say that necessarily fits with a stronger focus on financial crime, obviously that'd be part of it, but it could also be a distraction.
Gavin
Yeah, and I think there's also questions about sort of due diligence of opening up London markets to more global companies which have, you know, has got the FSA and FCA in trouble in the past and you know, in that whole kind of due diligence around kind of governance and provenance of funds and so on and doing that, right.
David
On the flip side of financial crime and more stories this month and it is a new story last month when we spoke and there's been a bit more follow up this month about banks and other financial firms de risking their portfolios or their client base from an AML point of view but seem to have unintended consequences for potentially vulnerable customers who find themselves unable to answer the right questions or when to interact in the right ways and getting hoofed out of...
Gavin
Yeah, I mean, I think it's a classic unintended consequence and I think it also has potential for the vulnerable customers guidance, generally where it becomes onerous and costly to do things in a way that is compliant and so firms make a, let's call it a pragmatic decision not to de risk and in a different world you saw it a little bit with retail distribution review 10 years ago and the major high street banks withdrawing from offering advice.
David
Absolutely. Yeah, we completely abandoned it for a number of years.
Gavin
So, I think it's watch this space really but I do think it's one of those areas where there's scope for well-intended regulation to go badly wrong.
David
Other things happened in the month; Facebook went down not that that's business critical for a firm, but it was another example of a large outage across our quasi in IT infrastructure.
Gavin
It's quite interesting though, isn't it? I mean the scale of it, if that had been a high street bank there would been hell to pay wouldn't there.
David
So, I mean it's just worth reflecting, you know, a lot of firms currently working on their operational resilience, this is obviously coming into force that we can enforce and a timescale for upgrading, operational resilience, analysis and capability and yet something like this happening is kind of a reminder of...
Gavin
They did have a bad week at Facebook, didn't they?
David
Yes, because they had a whistle-blower didn’t, they?
Gavin
Yes, Francis Hogan, the whistle-blower gave testimony. I think he's over, must be next week he's over in the UK talking to a select committee, but I think again there's a reflection of, you know, whistleblowing in the US is different from whistleblowing here, very obviously writ large and I think there are kind of deeper questions in there, they’re not direct parallels but about, you know, how much consumer data do you want and why and what do you use it for and what are the temptations and how do you keep it properly ethical because we do have this kind of default that more information again, come back to the vulnerable customer thing, more information about the consumer is a good thing but actually it's not, you know there are things that could go wrong.
David
Yes. Yeah.
Gavin
I thought it was really interesting, all that stuff.
David
So, let's look forward to what we think we can expect over the next well, let's do the run up to Christmas since the mince pies are well and truly on the supermarket shelves. In fact, if I had to guess all the HGV drivers must be delivering mince pies at this point because there doesn't seem to be a shortage there. So well, we might get the future regulatory framework from the Treasury.
Gavin
We are, I think, obliged to get our regulatory initiatives because they have undertaken to publish them twice a year as last year they came out in May and September which is why we're kind of waiting a bit.
David
Do you think there's going to be any slippage, anything slipping on there, or I'm beginning to wonder?
Gavin
I mean, we're in a we're in a world of I mean at the best of times it's quite tempting for regulators to assume that they can get things out the door quicker than happens in practice, not least because you end up thinking all this resource we can use for my piece of work but actually, as you know, as we're saying earlier that can be double triple bid so there's that and then you throw in COVID and you throw in the transformation stuff and so on and you think the FCA in particular, I think is almost certainly will almost certainly end up pushing back anything that they can.
David
Yeah, no, I just I'm trying to kind of it's like reading mood music. I mean, you know, there was there was still speeches being made and CPs issued and LIBOR so you know, I think that will happen but then I think something like the investment firm Prudential seems to have gone a bit quiet in terms of I know, lots of lobbying asking for it to be delayed and I'm not seeing lots of clear cut statements coming back the other way saying no it's going to happen on 1 January so yeah, I don't know, we'll see. I think it's an important document actually it's very quickly becoming really useful.
Gavin
I think the second consumer duty CP is probably the one to watch so that was promised before Christmas but there's clearly been pushback from the industry for all the reasons we've discussed and I wouldn't be surprised if that., I mean f that goes back after Christmas I wouldn't be surprised and I also think it'd be quite indicative because they won't have wanted to let it slip.
David
So that was a landmark consultation, they're saying they're going to publish the second consultation paper so it's an evolved version of this consultation paper with a cost benefit analysis, as you say here's been quite a lot of challenge back, I guess, from various angles including, you know, does it really move the dial compared to what exists currently, a relative amount of work that might be required to show compliance with it. So, we are due the policy statement after a pretty short consultation period, on the streamlining of decision making, the RDC, the regulatory decision committee, and you talked about pushback mean that's absolutely, in particular in the legal profession have been absolute lightning rod in terms of negative, quite critical feedback on that consultation so for me...
Gavin
You can see why they would object to the diminution of sort of due process
David
Oh, absolutely, so we have what I expect to be almost universally negative feedback coming from the consulted parties, what does that mean, does the FCA just...
Gavin
There's a really interesting coming together of those two things where there's clearly been pushed back but the FCA has hung its hat on it on both of them and at the same time we've got the future regulatory framework proposals, a big part of which will be about enhanced accountability for regulators. So if on the one hand, you have a consultation process that is being disregarded, potentially because the FCA really wants to steam ahead with stuff and on the other you've got well, actually in the future, we're going to delegate more powers to regulators but actually we're going to have lots more accountability, but the current accountability some people might think isn't working terribly well then there is a potential for a bit of a car crash.
David
Yeah. Yeah, that's right, the more power you give the FCA or the regulators, arguably the stronger the argument of having some independent oversight,
Gavin
But then who does because it's not obvious to me that Parliament has the source or the time you know unless in some cases without the criticism the expertise because this stuff is very complex and specialised a lot of the time to do the accountability role properly without spending a lot of time on it.
David
So, in some ways I think those two, assuming they land before Christmas, they may not but the second consultation on consumer duty and the streamlining of decision making the RDC changes, they're a bit of a test aren’t they for how strongly the current FCA leadership want to stick to their guns?
Gavin
Yeah. I think you know, I think it's interesting you know, we've been a bit kind of more critical than normal this month I think and I think a lot of what they're trying to do is entirely right but my overriding thing is they are taking on an awful lot of stuff at the same time and trying to do it very quickly and that carries a lot of risk and I think if they were doing things at a slightly more measured pace and with a bit more genuine consultation, longer term consultation along the way, it would probably be better.
David
Also thinking about the run up to Christmas, Brexit is still causing ructions and rumbling along, obviously whether it's in Northern Ireland or elsewhere but just but for the FS industry. Certainly, for the investment firms that the trading houses the sort of the temporary equivalence of UK and indeed EU clearing houses to allow investment firms on both sides of the channel to continue to clear trades through clearing houses in both jurisdictions. I think actually, technically that one's still June, I think the temporary agreement on that from the EU but nevertheless in the run up to Christmas like mince pies and bad socks and sweaters and things we have to talk about Brexit, and I see the first rumblings of potentially an extended equivalence but not equivalence in that area. Another fudge, certainly the EU Competition Commission was talking yesterday about not wanting to have a cliff edge type situation occur, so we want more trades cleared in EU but equally we don't want a cliff edge. So, I think the uncertainty for the industry probably comes from the fact that if it's going to be fudged, it probably won't be fudged to the last possible moment, as usual.
Gavin
I think the other thing, I'm conscious we haven't talked much about the PRA. I think, you know, I think Sam Woods' speech was kind of carry on the same but I think the market stuff will be concerning them, partly with the bank hat on and so on so you've got, you know, potential rising inflation, potential rising interest rates, you've got all, you know, potential tapering by the FED, in terms of, you know, buying less QE and at some point to be some kind of market reversal with all the supply chain things and so on throw in Evergrande, etc, etc. It just feels a bit more nervous you know, the kind of noise around it is no bigger than I can remember for a long time.
David
Yeah. Obviously, flipping through, we're now expecting, you know, the order supply chain disruption will actually trigger recessionary pressures, almost certainly and now we see most of the central bankers around the world making noises about raising interest rates at this point aren’t they or taking action so we're the regulators are going to be contending with that knock on consequences in certain financial services.
Gavin
We haven't got the COVID either. There must be a record
David
Yeah, that's true. Well, it's been the longest period, I haven't been this close to you since the Christmas party in 2019 so hopefully we're both okay next to each other. Yeah, that's true so yes, if the Government's wheeled out its Plan B as I think it was called, then that could all be fun and games too. Okay, so we haven't even mentioned COP 26 have we so...
Gavin
Another two weeks it'll be up and running.
David
Lots of mood music, Sheldon Mills he wasn't talking about climate was he, but he was talking...Everyone has a climate section in their speech now. These macro themes around climate and then diversity, inclusion and culture which is the focus of Sheldon Mills. You are becoming ubiquitous.
Sheldon was talking about the importance of culture and purpose and talking about the importance of diversity and inclusion, again not from a prescriptive, you know, we're going to require you to do X and Y, recognising there will be different cultures, etc. but yeah, my take away from all that is that it seems like there's a standard set of questions that the regulators, I don't know, I don't think it's just the FCA will expect regulated firms to be able to answer about their culture, about their purpose, about what they're doing around diversity and inclusion, so, you know, a non-answer there is probably not something that's going to endear you to the regulator moving forward.
Gavin
I don't know I carry the scars from previous FSA attempts to do this, a little bit FCA as well at the start and I just think it's really hard to measure culture and I think there's a reasonable correlation with other signs of what's a kind of "good firm" as opposed to, you know, one that's likely to cause problems and not be compliant but I think it's pretty hard to prove causation to put it mildly and it's pretty hard to describe what good really looks like across the board so I'll watch with interest in sympathy but my personal sort of being annoying and contrary is.. all these surveys that get cited by Sheldon Mills inciting how firms with a certain type of purpose or culture to perform better, you know, all of these surveys are based on a sample of, for instance, Western of primarily American businesses.
David
So, you could argue there's not much correlation, I think proving the causative. Yeah, well, if one of the concerns is lack of diversity then there's probably not much diversity in the surveys from a global perspective, but anyway, we probably should bring things to a close there. Hopefully we'll have a lot more to talk about next month. I'd like to thank everyone who's joined us for the podcast today for listening in. There's a few resources on our website, the Grant Thornton website which you're more than welcome to make use of, we have our response to the FCA business plan, we have our regulatory handbook which basically deals with all of the forthcoming regulatory change across every sector and we also have a regulatory newsletter that is produced weekly that you can subscribe to on our website as you can subscribe to this podcast on Apple podcasts, Spotify, Google podcasts, Amazon and others, I believe. Thank you again, I look forward to joining you next month when Gavin and I will be talking again about what has happened in the wild and wacky world of regulation.
Thank you