Culture, integrity and individual accountability

Peter Manning, an independent consultant on risk management and regulation, reflects on a culture change

change-culture integrity and individual accoutability1920

At a recent City dinner, the after dinner speech was given by Robert Swannell, Chairman of Marks & Spencer, who reflected on a near 50-year business career, most of which had been spent in the City.

Robert recounted how dramatically the financial services industry had changed in that time. When he joined merchant bank Schroders in 1977, its total annual fee income was less than £900,000 and its market cap was significantly less than the cost of a modest house in Holland Park today. Robert was a ‘trusted advisor’ in a banking system still built on the Victorian principles of honesty and integrity.
Exponential growth in investment banking and compensation saw a corresponding deterioration in culture and integrity

The rest, as they say, is history. The capital of investment banks is now measured in billions of dollars and their assets in trillions. But, as Robert pointed out, this exponential growth in investment banking and compensation saw a corresponding deterioration in culture and integrity, which led to the crisis of 2008. Robert said in his speech that “on culture, one thing is certain: if money is the prime ingredient in the shaping of culture, it’s a recipe for disaster. A business like banking, which defines itself by trust and confidence, has to have integrity, core values and a core purpose at its heart … If an incentive were necessary, the huge cost of hostile regulation is painfully evident”. And it’s about to get a lot tougher!

Since 2008, regulators have increasingly looked to place the burden of responsibility for failure firmly on to financial institutions and individuals, with penalties to match, to avoid a repeat of the criticism they faced. The FCA’s 2015/16 Business Plan emphasised the point, saying: “We must ensure that senior individuals in positions of responsibility are held personally accountable for how their firm operates, and for the consequences of misconduct.”

This has been a constant theme in regulatory speeches this year, and was expanded upon by the FCA’s Tracey McDermott at the ICMA Public Sector Issuers Forum in June, when she touched on the seeming constant among all the examples of misconduct: a lack of individual accountability. In particular, she focused on the behaviour of traders.

The Parliamentary Commission on Banking Standards had reported on the crisis in 2012 and made a number of recommendations for changes to the banking system, including increasing individual accountability. But, as McDermott recounted, “a couple of years later we were back there again. Announcements of huge penalties for the manipulation of the foreign exchange market were accompanied by those dismayingly familiar trader messages’ displaying cavalier disregard for the interests of their clients, their employers and the wider market”.
“If you didn’t know, you should have – you were either colluding or incompetent”The Fair and Effective Markets Review commissioned to look into the fixed income, currency and commodity markets (FICC) had found that firms had placed too much reliance on compliance staff and lawyers to get the right outcomes. Responsibility was not resting where it should have been – with staff in the front line and with senior managers responsible for controlling their businesses and managing their staff.

It was no surprise, therefore, when the FCA published its consultation paper in July (CP15/22), proposing to extend the new Certification Regime to all individuals involved in wholesale activity, including trading, who can pose ‘significant harm’ to a firm or its clients. Subject to Parliamentary approval, it also proposed that both the Senior Managers Regime and the Certification Regime would be extended to all financial services firms regulated by the FCA by 2018.

Participants in FICC markets will be impacted both by the creation of the new FICC Markets Standards Board and by the extension of the Senior Managers and Certification Regime. Individual accountability will take on much greater importance in the lives of senior management, not least because traders in wholesale markets will fall under the Certification Regime. How many senior managers can truly attest to what their front line staff is doing in their name? At a recent PRA seminar on the new regimes, the message to senior managers was: “If you didn’t know, you should have – you were either colluding or incompetent.” And one only has to look at the recent Volkswagen revelations as an example of what can go wrong.

While the PRA has, at least, recently replaced the ‘presumption of responsibility’ with ‘the duty of responsibility’, this only changes the mechanism of enforcement, not the substance of the requirement on senior managers to take reasonable steps to prevent regulatory breaches from occurring. The PRA expects the new regime to be put into effect in the spirit with which it is intended, and away from firms finding ways to circumvent the rules.

Individual accountability and the potential personal liability arising from it are set to become topics of increasing focus for senior management as it is only too clear that, in future, the regulators are looking to lay accountability at the door of senior individuals and to make examples of them to restore public confidence in the financial system. In a recent interview with Bloomberg TV, the Governor of the Bank of England, Mark Carney, reinforced the point, warning: “If the people the senior managers supervise don’t behave, then it’s not just the responsibility of that trader, but their boss and their boss’s boss" for not having put the proper checks and controls in place. The new regulations will have teeth and the regulators intend to use them.

Read the November issue of Change – the CISI's regulatory magazine, providing comprehensive coverage and analysis of the latest key UK, EU, US and global developments across financial regulation.


Published: 15 Dec 2015
  • Compliance, Regulation & Risk
  • Integrity & Ethics
  • The Review
  • Change

No Comments

Sign in to leave a comment

Leave a comment

Further Information