Mark Carney delivered an impressive Mansion House speech last night.

Taking the Great Fire of London as his theme, Carney accepted that the FICC markets and the Bank of England had been scorched, before describing the innovative healing he wanted to see in response. On the FICC markets: “…we need real markets for sustainable prosperity. Not markets that collapse when there is a shock … Not markets where transactions occur in chat rooms … where no one appears accountable for anything. Real markets are professional and open, not informal and clubby. Participants in real markets compete on merit rather than collude online. Real markets are resilient, fair and effective … Real markets don’t just happen; they depend on the quality of market infrastructure. Robust market infrastructure is a public good, one in constant danger of under-provision … This inherent risk can only be managed if all market actors … recognise their responsibilities for the system as a whole. The City has a special responsibility …, which is why it has already brought so many ideas and such energy to financial reform … Reform is strengthening the resilience of major banks … ending the scourge of Too Big To Fail [and] improving risk transfer … This … has increased the effectiveness of FICC markets and reinforced their social licence. It is frustrating … that such … progress risks being overshadowed by misconduct problems. We must break the back of these issues, and the Fair and Effective Markets Review shows the way forward. With its publication today, all the main building blocks are now in place … The design and regulation of key FICC benchmarks has been overhauled and transparency … is being enhanced. Compensation rules have … been transformed … From next year, senior managers of banks and insurers will be held directly accountable for failures in their areas of responsibility. And the best firms are improving the ‘tone from the top’… But major gaps remain. These are evidenced by enforcement actions … These sanctions, while necessary, aren’t the solution … the $150 billion of fines levied on global banks translates into more than $3 trillion of reduced lending capacity to the real economy. We need a better balance between individual and firm accountability. But who should be accountable? Against which standards? And with what consequences? In these regards, I welcome the Review’s recommendations that … individuals must be held to account … firms must take greater responsibility for the system by improving the quality, clarity and market-wide understanding of FICC trading practices … regulators should extend the coverage of market abuse regulation to include every major fixed income and currency market ...”

Few will expect greater individual accountability and firm responsibility to be restricted to the FICC markets they describe.

On the Bank: “… All must play a role in building real markets, including the Bank … Although [it] does not regulate conduct or markets per se, it has responsibilities for, and powers over, the stability of the UK’s financial system … In the run-up to the crisis, the Bank’s contribution to the effectiveness of markets fell short … In all cases, the Bank is now responding. First, the Bank’s framework for providing liquidity was shown to have lagged behind market developments. Once under pressure, the Bank could neither stabilise overnight rates nor support the banking system … [So] We have expanded the range of eligible collateral, and will lend to many more counterparties, at much longer maturities. The Bank … stands ready to act as a market maker of last resort. Constructive Ambiguity has been replaced by Open for Business. Second, … the Bank neither identified the scale of risks in the system nor spotted the gaps in the regulatory architecture … the Bank now has statutory responsibility to protect and enhance the stability of the UK’s financial system, and is working as One Bank to do so. The FPC and the PRA have catalysed a series of actions that influence market resilience including stress tests of banks and hedge funds, system-wide capital actions, and new tools like the leverage ratio and minimum repo haircuts. Third, the Bank’s arcane governance blurred the Bank’s accountability and, by extension, weakened the social licence of markets. Before my arrival, the Bank’s governance was reshaped. The Bank’s board of directors, Court, has been strengthened. Its external members now have formal powers to observe the meetings of the Bank’s policy committees and to commission reviews into the Bank’s performance … The Bank will continue to modernise its operations. Following the Grabiner report, the Bank has focused its Market Intelligence programme, strengthened procedures, improved training and overhauled compliance. And the Bank is introducing today a new code of conduct. The Bank expects its senior management to meet the highest standards of professional conduct. As one example, the Bank will apply the core principles of the Senior Managers Regimes to its own senior staff, including the Governor. This is in addition to existing obligations and scrutiny from Court, Parliament, the media and the general public. And the Bank will continue to reinforce its commitment to openness and transparency … Whenever there are difficult issues, outside reviews of the Bank’s performance will be conducted, publicly released and acted upon

These last comments have the look and feel of a rejection of recent criticisms about the way in which the Bank conducted its internal forex inquiry; and they may be an attempt to (a) mitigate the risks and possible consequences of the ongoing the US DoJ investigation, and (b) avoid the potential UK Treasury Select Committee inquiry that’s waiting in the wings. (Our recent blog on these issues is here.) If they are, they might well succeed. But they generate a number of questions: The Bank has quite reasonably decided to apply the core principles of the Senior Managers Regime for banks and insurers to its own senior staff. So, will it apply them to senior PRA staff, as well? And will the FCA also step up to the mark?

Applying the SMR to senior PRA and FCA staff seems entirely reasonable and proper – provided, of course, that each of these organisations can find an appropriate way to identify and respond to breach allegations that arise in the context of a dispute with a regulated firm or individual; and they can find a way to incorporate the SMR principles into their respective staff cultures, without harming morale. At the FCA, in particular, there is still a sense, at least among some of its staff, that whilst they’re expected to do no more than make a reasonable judgment on the information available at the time, if that judgment turns out to have been flawed, heavy criticism will follow however reasonable the judgment might have been when taken. Applying the core principles of the SMR to these staff could increase their perception of risk, and make them less likely to take a decision, for fear of getting it wrong. And that risk would be exacerbated, if the reverse burden of proof from the banking SMR was applied across the board as well. I suspect that most would argue that applying a reverse burden of proof to senior regulators would be a step too far – just as it is with the banks.