18 November 2015 - Post by:
Mark Steward, the new Director of Enforcement and Market Oversight at the FCA, gave a speech last week titled ‘Culture and Governance’. He talked about the following three things that, in his view, senior managers could do to ensure that they set the right tone for culture at their firms.
#1: Understand your business
Mr Steward said that senior managers must have a detailed understanding of the nature of their business. He gave the example of a bank’s board signing off on the marketing of a new complicated financial product based on a back-of-a-postage-stamp profit-and-loss calculation rather than on the basis of a proper risk assessment. This shouldn’t have happened then, he said, and it shouldn’t happen now. Not many would disagree.
#2: Put in place effective systems and controls
The nature of financial institutions these days, Mr Steward pointed out, is that they are complex. A small group of men and women cannot run them without the help of effective systems and controls to make sure that things are being done properly and in accordance with how they are supposed to be done. So put these in place, make sure people are trained to follow them and update them regularly.
#3: Be realistic
Mr Steward warned against complacency. Although he phrased it slightly differently, in essence he made it clear that the FCA has had enough of the-dog-ate-my-homework excuses. It’s not an ideal world out there, so be realistic about how things and people work and take action on that basis.
In theory, Mr Steward’s ideas certainly have the benefit of simplicity. They are clear and appear consistent with common-sense.
However, in practice implementing his ideas could prove more complicated.
It’s not clear, for instance, how exactly senior managers can make sure that they get a detailed understanding of the more niche aspects of their business: after all, as previous enforcement cases have warned us, identifying unknown unknowns is not always easy and employees aren’t always completely open with their bosses about exactly what they’re up to. However, what is clear is that senior managers will need to make progress in this area to satisfy the regulator’s expectations. Actually identifying and reviewing those businesses that have so far avoided the glare of the regulatory spotlight may be a good start.
In terms of making sure that effective systems and controls are in place, senior managers will always need to rely, at least in part, on a layer of middle management to check that things are working like they’re supposed to. No matter what’s done, in a sense the age-old problem will remain unchanged: who will guard the guards themselves? There is no simple solution to this dilemma, but a firm’s systems and controls, and the checks and balances they include, should take this risk into account.
Finally, it’s not necessarily easy for people to tell what’s realistic and what’s not anymore. Certainly some of the stories coming out of the Libor and Forex scandals have been stranger than fiction. History suggests that people learn the lessons of the past but don’t always apply them adequately to the future. The challenge for the industry is to prove that Mr Steward is not being overly optimistic to think that this time it will be otherwise.