A Very Peculiar Financial Services Situation… and How Training Can Help Firms to Keep on Top of It


A recent declaration from the FCA got me thinking about one aspect of financial services which seems to be unique to our industry.

No, it’s not the fact that it’s heavily regulated. There’s nothing unique about that at all.

It’s more to do with the fact that both the structure of regulation, and the way in which the regulators operate, have both been subject to a great deal of change recently; more so than perhaps for any other regulated industry.  For instance, how long has OFCOM been the telecommunications regulator for? Or the Advertising Standards Authority for advertisers?  

The case for the defence

On what basis am I saying this? Well, first of all, look at the change that’s just taken place at the FCA. In its most recent Regulation Round Up, it made reference to changing the current system of categorisation of firms, from the current system of grouping them into C1, C2, C3 and C4 firms, to a new system of Fixed and Flexible Portfolio firms, for conduct supervision.

What is significant though, is the fact that about 70 firms are apparently going to change from previously being a Fixed Portfolio firm to being a Flexible Portfolio firm and vice versa. Although, looking in particular at the associated document in which the FCA sets out the way in which it will regulate Flexible Portfolio Firms, the approach to those firms who currently sit in the C3 and C4 categorisations appears to have changed very little. For those circa 70 firms however, this will mean a move to being supervised directly at firm level for some, and for others, it will mean a move away from that approach.

Just one example

This is just one case in point around how the regulators are adapting and adjusting to the world that is changing around them. Or is it the case that changes in regulation are making financial services such a fast-moving industry?

Whatever your point of view, there are many more examples of where both the FCA and the PRA have been changing and evolving in their regulatory models. And as industry participants, the challenges are to make sure we keep up, and that we have the necessary skills and knowledge to respond accordingly.

Looking back to 2013

Regulation was first sent into this current state of flux back in 2013 with the creation of both the FCA and the PRA. At the time, both regulators declared themselves to be forward-looking and judgement-led in their approach to regulation; something designed to put clear water between themselves and the predecessor, the FSA.

A question of conduct

Since this has happened, the FCA has moved the subject of conduct risk to the front and centre of everything that it does. Treating Customers Fairly was the drum that the FCA used to bang heavily, particularly in its later years. But this has now become very much “business as usual” and the wider, more onerous subject of conduct risk has become a big issue for firms, in terms of meeting the FCA’s expectations. Especially as it’s very hard to pin down exactly what particular issues and developments need to fall under this definition. With TCF it was much easier – you had your 6 outcomes and the expectations from the FSA were clearly set out in terms of milestones for embedding TCF in each firm. This time it’s different, but you won’t find any occasions at the moment when the FCA fail take the opportunity to talk about conduct risk.

The subject of enforcement

Looking at the subject which everyone needs to be wary of, the FCA has seen fit to update the criteria that it uses when approaching possible enforcement actions, so now firms can see clearly the circumstances when the regulator will consider taking enforcement action, and when it’s less likely to do so.

Again, this is something that firms will need to be aware of. No one goes looking to be put into an enforcement position, but everyone needs to be aware of the circumstances when it could arise.

Over at the PRA…

Not to be outdone, the PRA has also set out its stall, not just in terms of the way that it approaches supervision for both banks and insurers, but on an ongoing basis too. Take Solvency II for instance. There has been a series of letters from directors at the PRA keeping firms informed about the regulatory expectations in the run up to the implementation next January. Also, regarding the Senior Insurance Managers’ Regime, which takes effect from next March, a letter has recently been issued from the PRA to firms reminding them of their obligations here.

The PRA also regularly updates its approach to supervision for insurers and banks. This was originally set out in 2013 and was updated again in June 2014. And if you think that this is just a simple refresh, take a look for example, at the Annex to the insurance document. Here, you’ll see references to the PRA’s Fundamental Rules, and also, how the PRA intends to use its powers to address cultural issues in firms, amongst other things.

What this means for firms

Very simply, it means that the knowledge and understanding throughout the firm of the changing working methods and approaches of regulators, has to be kept up to date.

In practice, this issue is likely to be most pronounced nearer the top of firms, in particular at board and senior management level. But those in control functions, namely compliance but not forgetting risk as well, really need to understand what’s going on.

One of the best ways of achieving and maintaining this knowledge is by attendance at external events, which can focus on specific topical issues that need to be discussed. Conduct risk is one that springs to mind. Complaint handling is another.

In any event, the benefit that intelligence and best practice gained from attending events where speakers from industry, law firms and even regulators themselves attend, cannot be underestimated. Often, it’s the stuff that you can’t get from the internet and the media that can make the difference to how your firm can respond to shifting regulatory expectations.

And the good news is that sourcing such events and receiving regular updates are two things that are just a few clicks away.    

Martyn Oughton    

By Martyn Oughton a Professional Member of the International Compliance Association (ICA).  Martyn now writes a regular blog for Industry Events Online focusing on the importance of training in all aspects of compliance. Read Martyn's other publications at Martyn's Writers' Residence website.

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