Culture and Conduct
Culture and conduct continue to be high on the list of regulatory priorities. As a result, the onus will be on firms to take a proactive and business-specific approach to managing culture and Conduct Risk that is reflected in their governance structures and business models. A good starting point is a set of core values. The next, and much more challenging step, is to ensure that these values are put into practice. The final step is being able to evidence the change.
Training action point: The delivery of training that is relevant to employees in the context of their role and that is carried through into tangible and measurable behavioral change. The importance of escalation and whistleblowing are likely to feature in this context too.
Conflicts of Interest
At the heart of nearly all conduct failings is a conflict of interest. Inherently, most people want to ‘do the right thing’, though they may be dissuaded from doing so by incentives, personal circumstances or commercial pressures. In November, the FCA published a review of conflicts of interest in the wealth management and private banking sector which indicated that there is still room for improvement. Though this may not specifically apply to your sector or firm, it is clear that regulators recognize the importance of getting conflict management right.
Training action point: Crucially, training should encourage employees to exercise judgment and take personal responsibility for managing conflicts. Realistic and tailored scenarios are a useful approach.
Conflicts of interest are also highly relevant in the recent enforcement actions concerning market conduct. In the US and UK last year, we saw fines of $4.3 billion against a collection of global banks for forex-related failings. In response to this and the LIBOR scandal, the Bank of England, FCA, and UK Treasury are conducting a review into the fairness of the fixed income, forex, and commodity markets. Market integrity is firmly on the regulatory agenda. Employees must be able to identify, avoid, and challenge actions that may constitute questionable market conduct.
Training action point: New and specific training requirements must be met in relation to benchmarking. Beyond this, market conduct will remain a key training topic, especially in relation to conflicts and communication.
Order execution is back under the regulatory spotlight too. We have seen concerns about the operation of ‘dark pools’ and fears about high-frequency trading in this regard. In July, the FCA concluded a thematic review of best execution and payments for order flow which found that “most firms are not doing enough to deliver best execution” and that there was a need to improve firms’ own understanding of their best execution obligations.
Training action point: Now is a good time to provide tailored training reminders to those executing client orders. These can be effectively linked to conflicts, conduct risk and culture training messages.
The New Accountability Regime
It is no secret that regulators across the world are seeking greater individual accountability within financial services, especially for directors and senior managers. In the UK, the new accountability regime will make significant changes to the Approved Persons regime for banks and other firms falling within scope. There will be an understandable level of anxiety on the part of those employees facing increased levels of accountability under the new regime and those who will become directly accountable to the regulators for the first time.
Training action point: The training challenges are considerable, especially for larger firms. A phased approach encompassing (i) high level communication of the key changes, (ii) ‘what it means to me’ material and (iii) tailored training plans is a suggested approach. Crucially, the key challenge will be to deliver training that helps employees understand how they can live up to regulatory expectations in light of the new regime.
Fines against firms and individuals continue to increase, but it is important to remember that regulators are increasingly using the other disciplinary tools in their armory, such as suspension and prohibition, and are prepared to intervene at an early stage to prevent detriment to customers and markets.
Training action point: Current enforcement cases can be used as the basis of effective and powerful training materials.