PROTECT LEGAL AND REGULATORY REVIEW NOVEMBER 2014

PROTECT

LEGAL AND REGULATORY REVIEW

NOVEMBER 2014

I’m a Director – get me out of here!!

(c) Paginator Limited 2014

FCA has totally changed the game


The Key Words . . .

Executives - and their responsibility for . . .

their firm’s Culture


Let’s just go back in time


We used to have . . .

Rules

And if firms broke rules

They got fined


Well firms still get fined!!!


But some (most) of these fines . .

Are not for breaking rules . .

They are for breaching the Principles for Business

Even if your firm meets every rule in the FCA Handbook

It can still be £30m the lighter for failing to additionally meet . . .


“Principles-based regulation”


So you hopefully know . .

That you must embed the principles for business into everything you do?

But - do you actually do it?

The regulator found that most firms do not

Which is why . . . .


It fined and made an example of some of them


But fining firms isn’t working . . .

“Ultimately, the events of the past few years — from the crisis itself, to PPI, to Libor — can be laid at the feet of individuals.”

Tracey McDermott, FCA Director of Enforcement and Financial Crime


So FCA has changed its point of attack

“Our supervision focuses on firms’ culture, looking at their business models to ensure that consumers are at the heart of what they do and that

remuneration practices do not incentivise employees to put quick profit first, at the expense of consumers getting products and services that meet

their needs or of the integrity of the market”.

(FCA Business Plan 2014/5)


Where is the responsibility for this?

“We also ensure that senior individuals carrying out significant functions are accountable for their firm’s conduct and compliance. In particular we

will look at the robustness of firms’ governance and risk management processes, their market abuse controls, the revenues that firms generate

from their existing customers, and how they monitor sales practices”.

(FCA Business Plan 2014/5)


Which is why . . .


How was it they became personally liable?

CEO - Fined £412,700 – for failing to deliver management controls to ensure customers were treated fairly. Also failed to recognise that the Director’s share scheme might engender a culture where the profit motive harmed TCF.

Finance Director - Fined £208,600 for his failures of oversight over the compliance function by “missing warnings of compliance problems” and for being heavily involved in creating and implementing a business strategy to maximise operating profits “that he should have seen would lead to a sales-focused culture that would act to the detriment of customers’ fair treatment”.

Marketing Director – Fined £306,700 for playing a central role in developing and launching the monthly add-on strategy at Swinton by being responsible for their design, development and marketing and for “also being involved in the strategy to maximise Swinton's operating profits”.


So the (conduct) risk of running a regulated firm in 2014 is . .

Meet all rules (of course)

Embed the Principles for Business into everything

But now there is much more that firms must do

And “executives” will take personal responsibility for doing it


What you now must do . .

Have a Culture which you can demonstrate puts consumers at the heart of what you do

Have a Business Model which is utterly resilient to FCA investigation

Ensure that remuneration practices do not incentivise employees or distributors to put quick profit first

Have in place robust governance and risk management processes from which you can demonstrate that you are on top of . . . .


Delivering . . .

the culture,

the integrity; and

the consumer outcomes

which is contained in your Business Model

OurBusiness

Plan


FCA has a totally different regulatory approach to FSA

FCA

Compliance

Senior Management“Business Model”

Operational Management

Culture

To ensure the delivery by . .

Operational Management

“Good consumer outcomes”


Not only is the approach different – so is the target . . .

FSA focused its attention on regulating interaction between firms and customers at the point of sale

The assumption was that consumer detriment would occur if the wrong product was sold to the wrong person

But “point of sale regulation” totally failed to avoid this . . .


So FCA have changed the point of attack

Insurer/Underwriter/Syndicate

Retailer/Sub-delagee/Connected contract

Coverholder/Intermediary/Administrator

Managing Agent

Agent/Intermediary

Point of Sale with the end customer

FCA is focusing its attention . . .

on delivering change in the financial services industry by asking:-

What are the key drivers in your Business Model?

Where is the focus on good consumer outcomes in your Business Model?

Who is taking personal responsibility for this?


FCA’s fundamental concerns

“Firms do not design products or services that respond to real consumer needs or that are in consumers’ long-term interests;

Distribution channels do not promote transparency for consumers on financial products and services”

FCA Business Plan 2013/14


FCA are making a direct link between

Product Design and Governance

Poor Consumer Outcomes

POS Regulation Route to Market


To address this the Regulatory focus will be on your “Business Model”


What is a “Business Model”?

Defined, in the Threshold Conditions, as a firm’s “strategy for doing business”

The definition goes on to elaborate that . . . .

Your Business Model is “the reasons why you do what you do”

This will reveal your culture


You must be able to

Justify to FCA the fundamental reasons why you:-

are in the market you are in; and

you offer the products you offer; and

you choose and operate the routes to market you use?


FCA will tunnel into your firm to:-

“assess how culture affects the way your firm is run”


I cannot emphasise too strongly

How different a regulatory regime this is

FCA want to engage with senior management directly

They want to find out all your secrets – why you do what you do and the reasons why you do what you do


What will FCA find?

In most firms a culture that demands sales and profit

A structure which is locked into a means of distribution developed over a 20/30 year period

A market where product design and delivery matches the retail markets in which the product is sold - where product is “pushed” to customers

A market where product design is driven to set customer need as much as to meet customer need

A market where identifying risk to customers and offering “peace of mind” defines and justifies product offerings – “insurance is sold and not bought”


And if FCA do find such a culture in your firm?


FCA will . . .

“ensure that senior individuals carrying out significant functions are accountable for their firm’s

conduct and compliance”


So make very sure you are not in the next headline . . .


You can help make sure . .


Thank You

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PROTECT LEGAL AND REGULATORY REVIEW NOVEMBER 2014