29Oct

Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA), recently spoke on the subject of ‘trust and ethics’ when he attended the launch of the St Mary’s University School of Business and Society in London.

Mr Bailey began by commenting that trust and ethics was “by no means a subject unique to the world of financial services”. However, few people need reminding that the topic has particular relevance to the financial world, as we remember the financial crisis of 10 years ago, not to mention some of the conduct issues that have emerged both before and since 2008.

The FCA chief commented that “trustworthiness demands two things: knowledge and skill; and good intentions and honesty. One of these is more technical in nature, the other more moral and ethical.”

Many financial services practitioners need to pass examinations in order to carry out their role. In addition, everyone within the industry, from CEOs to junior administrators, needs to have some degree of knowledge of the environment within which their firm operates. However, the “good intentions and honesty” part of the trustworthiness definition is perhaps harder to judge. Financial services practitioners, especially senior management, need to demonstrate on an ongoing basis that they are ‘fit and proper’ to carry out their role; and an FCA-compliant fit and proper assessment covers financial soundness and personal integrity, in addition to competence and capability.

On this issue, Mr Bailey added:

“I can put an exam certificate on the wall for all to see, but trust depends on solving the conundrum that there isn’t an independent source to prove honesty and good intent.”

Next, he highlighted the changes of the 1980s as being of particular relevance to his narrative, and he described “a rapid increase in senior executive pay as the limits of the previous social norm were replaced by an approach which used remuneration to incentivise performance.”

However, whether they are senior executives or not, many people within financial services have financial incentives to act in a particular manner, for example salespeople and advisers who receive bonuses dependent on their sales volumes. Wherever a firm’s remuneration system has the potential to encourage staff to act contrary to the interests of customers, then the firm must have robust systems in place to manage and mitigate these risks.

Mr Bailey then directly addressed the subject of the 2008 financial crisis, suggesting that regulators have had to learn from the experience and change the way they operate as a result. Here, the FCA chief commented:

“There is little doubt in my mind that prior to the financial crisis, the culture towards the public interest and ethical custom were essentially permissive, to the point of anything goes. In financial services, it was evident in the advocacy of light touch regulation, the view that left to themselves firms would succeed; and to paraphrase, just as a rising tide lifts all boats, so the whole public interest would benefit. It didn’t work out that way, and in the wake of the crisis we have had to change the approach to regulation in the public interest.”

In conclusion, he referred to regulators having adopted “a shift of emphasis towards individuals.” He added that the FCA’s Senior Managers and Certification Regime included ”two very clear concepts, responsibility and accountability”, and said that “these principles are at the heart of rebuilding trust.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article