The issue of whether the financial services industry is learning from its previous mistakes was the centrepiece of a recent speech to the Financial Conduct Authority (FCA)’s Enforcement Conference.
The speech was delivered by Tracey McDermott, director of enforcement and financial crime at the FCA. She will shortly take up a new role as head of supervision and enforcement, effectively replacing director of supervision Clive Adamson, whose departure from the FCA has been connected in the media to a bungled announcement of a review into charges on old life insurance policies. In March 2013, the Daily Telegraph newspaper was briefed by an FCA employee that the regulator would be reviewing exit charges on some 30 million pension and savings plans sold by insurers, dating back to the 1970s. Six hours after publication, when the FCA finally admitted that the scope of the inquiry had been exaggerated in the briefing, the share price of many leading insurers had plummeted.
The first topic mentioned by Ms McDermott was the recent foreign exchange manipulation fines handed out to major banks. Noting that some of these failings occurred after the institutions had been fined for manipulation of the LIBOR interest rate, she said that the forex episode showed that the industry was “still some way short of the corner that needs to be turned.”
Ms McDermott noted that a common theme was emerging in statements put out by firms who had been subject to FCA enforcement action. The statements usually said:
- The misconduct was down to a few individuals within the institution
- These individuals had failed to act in accordance with the firm’s culture
- The firm had learned lessons from the episode and taken steps to ensure that they would not occur again
The FCA director suggested that, instead of being the work of a few rogue staff, conduct failings were often due to the corporate culture. Individuals at the coalface, such as LIBOR submitters or forex traders, knew that their conduct was wrong, but also knew that their organisations would tolerate or even welcome their misconduct.
Ms McDermott likened the cultural change that she believes is necessary to the changes in thinking towards drink driving. Here, many people now see it as a moral issue, and the fear of being caught is not the only reason people abstain from drinking and driving.
Next she said that she rejected both the view that FCA fines were too large and impacted unduly on shareholders, and the opinion that they were too small and failed to act as a sufficient punishment or deterrent.
She revealed that she did not support calls for bankers and other key financial services staff to swear an oath, similar to the medical profession’s Hippocratic Oath. “Rather than an oath creating a culture, I believe it should be reflective of it,” said Ms McDermott.
In November 2014, the FCA imposed its largest ever fines on five banks, after they were found to have manipulated the foreign exchange markets. UBS was fined £233,814,000, Citibank £225,575,000, JPMorgan Chase £222,166,000, The Royal Bank of Scotland (RBS) £217 million and HSBC £216,363,000. This action came just over a year after banks including RBS, UBS and Barclays were fined by the FCA for manipulation of the LIBOR interest rate. The industry has also been beset by mis-selling scandals, from payment protection insurance (PPI) to interest rate hedging products and mortgage endowments. Some commentators are predicting that annuity mis-selling could eventually eclipse the scale of the PPI scandal.
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