The FCA has published a speech given by Clive Adamson (FCA Director of Supervision) at the Building Societies Association’s annual conference. The speech is entitled FCA one year on – effective regulation goes hand-in-hand with sustainable businesses.
The conduct agenda
In his speech, Mr Adamson notes that the FCA has seen a sea change in the attention being paid to the conduct agenda. A couple of years ago conduct was something that most firms thought of as a compliance issue and delegated it to the compliance function. However, now conduct is firmly on the agenda of executive management and boards and this is something the FCA welcomes.
Part of the reason for this, Mr Adamson states, is that firms have realised the cost of getting this wrong in terms of potential regulatory fines, redress costs and litigation costs. Also, firms are realising the benefit of good conduct performance in terms of building customer trust. This is more than the traditional focus on customer satisfaction but about building a positive reputation for fairness.
Mr Adamson also describes what the FCA means by outcome-focused. The FCA is fundamentally interested in what consumers actually experience as outcomes and then try to fix the causes of what is leading to outcomes that are not, or may in the future may not be, fair. This translates to a model where:
- first, the FCA looks at whole markets to see whether they are working in the interests of consumers and where market studies are the methodology to determine whether lack of competition is the driver of problems and where structural solutions may be needed;
- second, at sectors where the FCA uses thematic work to look at specific problems where the right outcomes may not be being achieved and where changes in firms’ behaviours may be needed; and
- third, at individual firms where the FCA is looking for key drivers of potentially poor conduct behaviour.
Mr Adamson explains that at the firm level, particularly for large firms, the FCA is looking at how the interests of the customer and market integrity are at the heart of how their business is run – this means that the FCA’s focus is on the firm’s business model, culture and front-line activities such as product governance and less on second-line controls. This focus on how the business is run, rather than how it is controlled, is a fundamental change and is directly linked to the FCA’s outcome-focused philosophy.
Fair treatment of customers
Mr Adamson mentions that the fair treatment of customers is not something that can be reduced to a risk to be managed. Mr Adamson argues that the fair treatment of customers is more a cultural and business model challenge rather than a “tick-box” compliance matter.
Mr Adamson warns that the FCA’s expectations are high and whilst it is not expecting the board to approve every product, it does think that boards should understand how and where the firm makes money, what the conduct implications of that are, how customer outcomes are tracked across the product life cycle as well as the more traditional oversight over control functions.
Issues facing building societies
At the end of his speech, Mr Adamson covers some of the big issues facing building societies. This includes exercising any changes to mortgage contract terms in a manner which is fair to borrowers. Mr Adamson reports that building on an earlier Dear CEO letter the FCA is opening up a debate on this topic through an upcoming Discussion Paper which will invite views on whether the FCA’s current regulatory framework ensures fairness to consumers, provides an appropriate degree of certainty to lenders and borrowers and allows the market to operate in a way that is sustainable for all participants.