Political Football

“Rumours of my death have been greatly exaggerated” – so said Mark Twain, and so might say the FCA, in spite of the Conservative Party’s Policy White Paper commitment to abolish the FCA should it take office.

The fact that the shape of the UK regulatory systems has become a political issue will not have escaped any regulated firm, and it should give rise to some thought by senior management.

The Conservative White Paper points to a twin peak approach to regulation, where banks, building societies and insurers are regulated by the Bank of England, and retail facing firms are regulated by a new Consumer Protection Agency.

Even allowing for the fact that this White Paper is a political manifesto addressed at the electorate, there is much left unsaid that will need to be fleshed out by the Conservatives.

Two points spring immediately to mind: are the Conservatives really suggesting that those firms who have no retail clients and who do not fall to be under the Bank’s wings are not to be regulated at all? Are they suggesting that retail banks will be regulated by both the Bank and the new CPA?

Senior management in regulated firms will not welcome the uncertainty that this engenders. Given the possibility of an “interregnum” between the two regimes, it will be important for firms to adhere during this period to whatever standards of best practice or trade body recommendation that are appropriate.

In the meantime, the FCA lives on, and will be keen to show that it remains in charge. This will be a difficult period for the FCA, as at one level staff face career uncertainty and at another level policy lacks direction.

This may lead to inconsistent decision making to the disadvantage of firms. (Adair Turner’s recent comments on taxation can be seen in this light).

Fulcrum Compliance are monitoring these developments and continue to advise clients as the situation evolves. Our relations with trade and professional bodies means that we are able to keep clients apprised of how best to position themselves in the light of any new regime.

Annual Update

As we move into quarter 4, firms will be considering the training they need to provide for their staff in order to meet in-house or external competency requirements.

2009 has seen what must have been some of the most significant regulatory developments in recent memory, and Fulcrum Compliance will be able to provide client staff with a summary of the key changes. Contact us for details.

Non-Executive Directors

Senior management in FCA regulated firms will be fully aware of FCA’s recent proposals relating to Non-Executive Directors and their role, and also of the wider Walker Report’s suggestions in this area.

We have covered this matter in prior editions of this Newsletter. The most detailed expression of FCA’s expectation of NEDs remains the eight points originally suggested in December 2008 as part of the Approved Persons review.

These have been subsumed into the 39 steps of the Walker Review, the first five of which relate directly to the NED role, and the second eight of which relate to the functioning of the Board.

Walker will publish a final report this Autumn, and the Financial Reporting Council will publish an update to the Combined Code after October. These will set the framework within which FCA will regulate NEDs.

Senior Management of non-listed FCA firms might be forgiven for breathing a sigh of relief that this debate has to date been focussed at what Walker calls the “BOFI” level (Banks and Other Financial Institutions, generally defined as insurance companies) and listed companies.

However it would be wrong to assume that smaller firms and their NEDs are immune from these developments. We are already aware of FCA supervisory staff asking firms questions clearly inspired by these developments, and expecting answers.

Indeed our expectation is that in the long term – irrespective of the outcome of the general election – whatever requirements are made of larger listed firms will become a best practice expectation for all. These need to be implemented in an appropriate and proportionate manner, taking into account the risks faced by the firm and the risk the firm represents to the financial system.

Fulcrum Compliance has been briefing client Senior Management and NEDs as to how they might now take these expectations into account. The more this is considered, the better balance to the solution found.

The Guide to Guidance

In mid-August FCA clarified the purpose – and scope – of guidance.

FCA confirmed that guidance does not set a minimum standard of conduct, nor is it binding. In the context of enforcement, guidance is used to “assess whether it could reasonably have been understood or predicted at the time that the conduct in question fell below the standards required…”.

This is not news, but it is noteworthy that FCA defines guidance as including “supporting material (such as case studies, examples of good and bad practice, and FCA speeches)”.

Fulcrum Compliance have consistently advised clients of the need to keep abreast of this ever-growing apocrypha. Whatever the future shape of UK regulation, it is likely that firms will still need to monitor this output.