The coming year sees a number of regulatory changes on the horizon, from the implementation of the new Senior Managers Regime to the FCA's review of its policy on penalties. In order to understand what will change from a regulatory perspective, it is perhaps necessary to understand why. One of the best guides to that is the text of the speeches made by Martin Wheatley and Tracey McDermott at the FCA's enforcement conference at the end of 2014. Both speakers used the opportunity to highlight the conference's key themes of culture and governance. In doing so, they touched on many of the issues which are at the heart of the public debate in relation to banks and their regulation, and which will continue to be topical into the forthcoming year.

In this update we consider some of the messages to be taken from what two of the FCA's most senior members have to say about cultural change within regulated firms.

Time needed for cultural change to take effect

Both Martin Wheatley and Tracey McDermott referred to positive signs of change at the tops of regulated firms, noting the increased role of compliance staff in product design and intervention in the running of the business. However, a notable point in both speeches was the disappointment felt that well-publicised scandals and fines of the past (LIBOR was mentioned by both) had not prevented the equally well-publicised scandals and fines of the present (foreign exchange at the forefront of the list). The impression conveyed was that the seeds of change appeared to have been sown, but the crop was still looking rather thin.

This is attributed by both to a failure to date to make cultural change felt within organisations below the top level. Martin Wheatley noted that firms had probably prioritised systemic changes over cultural ones in the wake of the financial crisis. While there was a clear message that the time for change had come (arguably some time ago), the discussion in relation to the difficulties of instituting it was somewhat more nuanced and without definite answers. The risk posed by poor culture is not, as Martin Wheatley noted, capable of measurement by formulae and metrics.

The distinction between obeying the rules for fear of getting caught, and obeying them because you believe it to be wrong not to, was brought out by Tracey McDermott in an analogy with the change in generational attitudes to drink driving. She noted that while her parents' generation was only deterred from drink driving because they were afraid of the consequences of being caught, her own generation had come to view it as socially unacceptable. While the analogy is interesting in a number of contexts, it may be a gloomy one to Martin Wheatley, whose speech stated that he did not intend change to take a generation to effect.

Individual accountability

Another point of superficial (one suspects not actual) difference between the two, was that while Martin Wheatley referred positively to the recruitment of thousands of new compliance staff by firms, Tracey McDermott noted that it did not matter how many compliance officers were recruited, if the "front line" did not accept change. Both were consistent in saying that cultural change, and good governance, needed to come from the top of the business, and be part of its model, rather than being the sole preserve of compliance.

A key aspect of this, of course, is individual accountability for maintaining good standards of professional behaviour, although Tracey McDermott was dismissive of the suggestion that past misdemeanours could be blamed on a few "rotten apples". In that, she appeared to endorse the recent comment by Mark Carney that the problem was not with the apples, but with the barrel in which they were stored. In her terms, miscreants had not operated in a vacuum. Instead, they had believed (at best) that poor behaviour would be excused by good results, in a Machiavellian world of ends and means, and (at worst) that poor behaviour would be rewarded.

She pointed to the FCA's new senior management regime and certification regimes as a means of ensuring that cultural change took place, and that those at a senior level were responsible for implementing it. It therefore seems (unsurprisingly) that while the FCA recognises the difficulties of getting cultural improvement to percolate down the ranks, it will still hold senior management accountable for getting precisely that job done.

The role of the regulator

Both Martin Wheatley and Tracey McDermott referred to the role of the regulator in being forward looking, assisting to ensure future compliance as well as punishing the mistakes of the past.

However, Tracey McDermott defended the role of punishment as well, denying suggestions from the industry that the FCA enforcement division had a "Soviet tractor factory" mentality towards fines, of fulfilling ever-larger quotas. Reverting back to the analogy of drink driving, the FCA clearly views fear of the penalty as a necessary step to ensure compliance, and Martin Wheatley also noted the need for fines to "bite harder" the longer change took to effect. The FCA will review the current penalty regime during 2015 and as part of that review will consider whether the current regime is effective in encouraging changes in behaviour.

There was also, however, a rebuttal to those who have said that there is simply not enough regulation of the banking industry. Tracey McDermott argued against a proliferation of rules, and a culture which promotes strict obedience to detailed rules, and disregard to their underlying ethics. She pointed to the volume of guidance issued by the FSA between 2005 and 2008, and its lack of efficacy in preventing poor standards of behaviour. The FCA obviously seeks to promote a culture where poor behaviour becomes unacceptable and shaming at all levels, and governance which can deliver such a culture, and detect those instances where it fails.

The role of competition

Both speakers were keen to point out to firms the commercial imperatives for change. Tracey McDermott referred to the threat to London's pre-eminence as a financial centre, and said there could be little doubt that misconduct was one of the reasons. Given that the best publicised recent fines have followed international investigations, and that the same failings seem to have tainted more than one of the leading financial centres, this proposition might be challenged by some. It is also interesting in the context of the criticism usually made that excessive regulation will drive business away. Tracey McDermott's answer to that would presumably be that the key benefit of a positive culture is that it reduces the need for prescriptive regulation rather than requiring it.

Martin Wheatley focused instead on the threat to banks from domestic competition. He referred to findings by PWC that many customers stay with a bank more out of apathy than loyalty, and that if a market participant were able to produce a sufficiently different offering, it would be likely to entice a large number of customers. Referring to moves by the PRA and FCA to remove barriers to customers switching banks, Martin Wheatley's message was obviously that just as a positive offering could attract customers, so negative reports of poor behaviour would send them into the arms of competitors. There may be some arguments against this proposition. First, while Martin Wheatley was positive about the number of new entrants to the market, many have observed that there is still some way to go in that regard. Second, as both speakers appeared to acknowledge, much of the public believes that all banks are tarred with the same brush, and it may be that they would expect more of the same from any bank in relation to conduct issues.


These two key speeches at the FCA's enforcement conference could perhaps be criticised for one thing: they were proficient at identifying the problem, and much less informative about the solution. Indeed, feedback from the industry was that the FCA does not do enough to explain "what good looks like" (the industry might want to think carefully before asking for additional guidance).  It is always easier to criticise than to construct, and it is not the FCA's job to run the country's banks. Responsibility for doing what needs to be done in order to effect change must lie at the door of those who manage the businesses concerned.

However, the FCA is not in the position of a disinterested observer. Tracey McDermott must be correct that the pressure is on both regulator and regulated to regain public confidence in the financial services industry. It appears to be the case from these speeches that the FCA will seek to discharge its duties in relation to securing cultural change by wielding both carrot and stick.