The FCA has published a speech by Tracey McDermott, FCA director of supervision, investment, wholesale and specialists, given at the British Bankers’ Association Conference ‘Wholesale Markets and Risk: FEMR and beyond’.

In her speech Ms McDermott discussed the importance of conduct for businesses, treating conduct risk as seriously as any other risks and managing it accordingly.

Although ensuring good conduct is not a job for the regulators alone, they do have a role to play. Thus in her speech Ms McDermott discussed what the FCA believe its role is and what it expects from firms, and in so doing highlighted three areas:

  • how the FCA needs to work with the industry on solutions to rebuild reputation and embed cultural change. The FCA recognises that the way it has carried out business model analysis in the wholesale sector is resource intensive and thus its supervisors have been looking at how to get more ‘real-time’ quantitative analysis of the revenues of the sector, while streamlining the process. Ms McDermott mentioned that the supervisors have developed a monthly P&L scorecard across a number of major firms, which uses firms’ existing P&L reports, with the expectation that this will lead to more efficient, current, consistent and comparable data analysis of the largest firms in the sector;
  • how the FCA gets firms to ask themselves some hard questions about how they identify and manage conduct risks. Ms McDermott stated that there are five conduct questions that the FCA sees as a mechanism for helping firms ask themselves the hard questions that are needed, and to give them a sense of what good conduct looks like. The five questions being:
  • how do you identify the conduct risks inherent within your business?;
  • who is responsible for managing the conduct of your business?;
  • what support mechanisms do you have to enable people to improve the conduct of their business or function?;
  • how do the board and executive committees gain oversight of the conduct of the organisation?; and
  • do you have any perverse incentives or other activities that may undermine any strategies put in place to answer the first four questions?;
  • how the FCA create a system in which individuals, as well as firms, can be held accountable for their actions. Ms McDermott stated that it is increasingly evident that culture and conduct are two sides of the same coin. Good conduct relies on cultural change, and can’t happen without it. To this extent Ms McDermott mentions that the senior managers’ regime should hard-wire responsibility for good conduct into the firm’s governance. While the FCA has seen encouraging signs of senior managers espousing the correct culture and behaviours, and certainly lots of commitment, progress still needs to be made. The most progress needs to be made in the middle layer, as many of the middle-ranking individuals entered the industry in a different time, when the perception of what was acceptable may have been different. As expectations have now been raised, people have to adjust their behaviour accordingly.

View Wholesale Conduct Risk, 24 July 2015