The FCA’s Review of Banking Culture

This is a research note on the decision of the FCA to abandon its review of banking culture and practices. I consider the following topics:

The genesis of the now cancelled review – who initiated it, how long ago, what problems was it designed to address, did Osborne or others say anything about it at the time?

Who initiated the review and when?

The ‘Culture Review’ was initiated by the FCA in its Business Plan for 2015/16 (published 24^th March 2015). The following was written under the heading “key priorities”:

“Culture review – In 2015/16 we will conduct a new thematic review on whether culture change programmes in retail and wholesale banks are driving the right behaviour, in particular focusing on remuneration, appraisal and promotion decisions of middle management, as well as how concerns are reported and acted on.”[1]

What problems was it designed to address?

The FCA structures its business plans by giving an overview of risk followed by a summary of strategy and key priorities for the coming year. In the 2014/15 Business Plan, culture in financial institutions was identified as one of seven key risk areas. In the 2015/16, these seven risk areas were distilled into four forward-looking areas of focus, which continued to be of interest to the FCA in the coming year:

“Technology may outstrip firms’ investment, consumer capabilities and regulatory response.
Poor culture and control continues to threaten market integrity, including conflicts of interest.
Large back-books may lead firms to act against their existing customers’ best interests.
Pensions, retirement income products and distribution methods may deliver poor consumer outcomes.

Under the heading “Categories and key areas of risk”, the Business Plan goes on to explain the importance of maintaining a “strong focus” on the culture of firms:

“The risks around controls and behaviours go to the heart of our work as a conduct regulator. In this area we consider that there is a role for both frontline and senior staff to prove that lessons have been learned from the experiences of the past. Our findings on the attempted manipulation of FOREX mirrored some of those in relation to LIBOR. It is vital that firms, in wholesale and retail markets, ensure that cultural changes have been made to prevent poor conduct in future.”

The Business Plan goes on to clarify what is meant by ‘culture’ in firms and provides some examples: remuneration; hiring; performance management and promotion decisions; how firms treat internal reporting of concerns; the level of responsibility the first line takes for the right outcomes; and the autonomy and empowerment of key control functions. The Plan summarises:

“we continue to believe that a cultural shift within firms to celebrating good conduct that places consumer interests and market integrity at the heart of the financial sector will benefit all stakeholders. We continue to address conduct issues arising from failures in firm culture and are committed to ensuring this momentum is not lost.”

And

“A firm’s culture is a key driver behind the behaviour of those in it. In many cases, where things have gone wrong in a firm, a cultural issue is at the heart of the problem.”

Findings in relation to the LIBOR and FOREX scandals form the immediate backdrop to the FCA’s concerns surrounding culture in financial institutions. So too does the Parliamentary Commission on Banking Standards’ (PCBS) Fifth Report [2] (published 12^th June 2013), which restated the Regulator’s role in moving towards a culture of individual responsibility within firms. The Business Plan affirms the FCA’s commitment in 2015/16 to implementing the recommendations of the PCBS.

The FCA retrospectively defined the scope of the review into banking culture in its press release scrapping the review:

“The thematic work we planned was not an overall ‘assessment’ of culture across the sector, nor an attempt to measure cultural changes. It was an analysis of two specific indicators – remuneration, appraisal and progression/promotion decisions taken about middle management/MDs and heads of trading desks; and how staff concerns are raised and acted on. The aim was to focus on the impact that culture change programmes were having on middle management and front-line staff. This review sat within a portfolio of other activities, such as our work to implement the recommendations of the Parliamentary Commission on Banking Standards and on remuneration.”[3]

Annex 1 to the Business Plan 2015/16 sets out the time scale of the review. The review is provisionally allocated to Q2 and the start of Q3, but the start and end dates were not confirmed:

Pronouncements on Review of Culture

In March-April 2015, briefing publications from EY and Deloitte seemed to place the review in the context of an increasing focus of the FCA on culture. The review therefore appeared to come as no surprise to EY:

“The FCA has been interested in culture as a driver of conduct since its inception and, while the regulator noted improvements in this space, it is keen to see culture further embedded through the processes that support it, including performance management… Additionally, the FCA will conduct a culture thematic review to assess whether culture change programmes are driving the right behaviour.”[4]

Or to Deloitte:

“Unsurprisingly, changing culture for the better features high on the FCA’s agenda, not only for banks and consumer credit firms, but also more generally. While it might be unrealistic for the FCA to expect large-scale cultural change programmes to have been completed, it will be looking for evidence of continuous improvement. In that sense, the clock is ticking loudly – with the passage of time, the FCA’s tolerance of failings which indicate poor culture will reduce from its already low level.”[5]

No pronouncements from George Osborne himself can be found from the time of the review. However, George Wheatley’s resignation as head of the FCA came in July 2015 came just a few months after the publication of the Business Plan 2015/16, and hence the announcement of the review of banking culture. Press have recently linked Wheatley’s “defenestration” (which was procured by the Treasury’s decision not to renew his contract) to the decision to axe the review of banking culture.[6] The vote of no confidence was seen by many at the time as an attempt by the Chancellor to install a CEO with a more “softly-softly” approach to regulation.[7] This was of course denied by Osborne:

“Britain needs a tough, strong financial conduct regulator. Martin Wheatley has done a brilliant job of launching the FCA in tough circumstances.

“Now that phase is complete, the government believes that different leadership is required to build on those foundations and take the organisation to the next stage of its development.

“The government is launching a worldwide search; Martin’s replacement will – like him – need to be passionate about protecting consumers, promoting competition and completing the job of cleaning up the City, so it is the best-regulated market in the world.”

The press around its cancellation – what have people been saying; is there any objective justification the regulator can point to‎ for why it’s no longer needed or is it just politically inconvenient

Initial report

The decision to scrap the review was initially reported in the FT on 30^th December 2015 before being picked up by other news agency that evening and the next day.[8] The initial article ran the headline “UK draws line under ‘banker bashing’ after scrapping assessment.”

FCA’s justification

The FCA issued a press release explaining the decision not to complete the review.[9] In that document the regulator point to two main reasons why the review was dropped:

Similar work of the BBA

Prior to commence the review, the FCA engaged with stakeholders include the FSCP, the FCA Practitioner Panel, the BBA and the Banking Standards Board. It was discovered that the Banking Standards Board had begun a piece of work focusing on similar issues and the FCA did not wish to duplicate.

Idiosyncrasy of culture

During the scoping exercise, the FCA found that each firm has and needs its own approach. Due to the idiosyncratic nature of each individual institution, any poor practice guidance was unlikely to be of sufficient value to justify continuing to focus resources on cross-firm work. The FCA would instead focus on dealing with culture on a firm by firm basis.

The FCA was keen to emphasise in the press release that work into culture had not ceased. Under sub-headings, the regulator set out the work it continues to do to encourage institutions to improve their culture:

Supervision – range of supervisory tools and methods to engage with firms, including encouraging banks to consider key questions.
Accountability – implementing Senior Managers and Certification Regime, put on statutory basis following recommendation of the PCBS.
Remuneration – changes to the Remuneration Code.
Conduct rules – rules that will help to shape the culture, standards and policies of firms and raise overall conduct standards in the industry
Whistleblowing – final rules on whistleblowing in deposit-taking institutions have been issued.

The Banking Standards Board was created last year to promote “high standards” in the banking sector. The BSB has no regulatory authority and is not a trade association. The BSB’s chair Dame Colett Bowe has said:

“the space we inhabit is a space no one occupies at the moment, except for top leadership of the banks, who are all thinking about culture.”

The body’s first annual report will be published in spring 2016, but the body has already sent assessment to some key players in the financial industry.[10]

The exact scope of the BSB’s review of banking culture is not immediately apparent, though it does appear that the Board will be “looking at bank remuneration structures” and the “messages these sent to their own workforces”.[11]

Press surrounding cancellation

The move to scrap the review has attracted criticism from the Labour Party. John McDonnell MP, the shadow chancellor, has urged George Osborne to exert his influence and reinstate the review. He said:

““This will be a huge blow to customers and taxpayers who are all still paying the price for the failed culture in the banking sector that’s been widely attributed to be among the main causes of the crash and the scandals over LIBOR and price-fixing…the FCA is making a dangerous and costly mistake”[12]

Labour MP John Mann, a former member of the Treasury Select Committee, has related the decision of the FCA to the sacking of Martin Wheatley in July:

“This relates to the sacking of Wheatley and the opportunity this has given Osborne to pull the dogs off the banks.”[13]

John Mann tweeted on 31^st December 2015:

“Osborne has used void from no ceo in post after he sacked Wheatley to dismember critical FCA enquiry into banking culture. FCA surrender to big banks today is entirely from pressure from Treasury and Osborne.”[14]

Mark Garnier MP, a Conservative MP on the Treasury Select Committee told the Today Programme:

“There has always been this great argument that perhaps the Treasury is having more influence over the regulator than perhaps it ought to and certainly, if I was looking for a Machiavellian plot behind what’s happened here and the tone of the regulator, then I suppose I would start looking at the Treasury.”[15]

Andrew Tyrie, the chairman of the Treasury Select Committee has since summoned FCA chairman John Griffith-Jones and acting CEO Tracey-McDermott to be questioned over the decision to scrap the review. Andrew Tyrie has said in a statement:

“The FCA’s decision to drop its review of bank culture does seem curious… Getting it right – securing better protection for consumers and markets while at the same time ensuring they don’t make life unduly burdensome for business, from which everyone would ultimately be the loser – is a big undertaking. The Committee will want assurance from the FCA that it is up to the job.”[16]

John Griffiths-Jones and Tracey McDermott appeared before the Committee on 20^th January 2016.

The Bank of England has become embroiled in the decision of the FCA to scrap the review. The FT reported on 12^th January 2015 that a BoE official on secondment at the FCA oversaw the decision.[17] It is alleged that Megan Butler, an executive director at the BoE’s PRA, was a key figure overseeing the plans to drop the FCA’s inquiry. John Mann MP has called for Ms Butler to appear before the Select Committee on 20^th Jan 2016. The FCA responded in a statement:

“as Tracey McDermott has previously said, the FCA decision to not continue with the thematic review on culture was taken by her. To Suggest there has been any PRA/BoE influence on this decision is simply unture.

A Bank of England spokesperson said

“The Bank of England had no influence otherwise. r role in the Financial Conduct Authority’s decision to drop the thematic review on culture and it would be wrong to suggest otherwise.”[18]

Response of Osborne and Treasury

George Osborne has told the BBC that:

“That was a completely independent decision that I had no advance warning of, no foreknowledge of. It’s got to be an independent decision for our banking regulator.”

The Treasury have predictably denied asserting influence over the FCA:

““Ministers had no involvement in, and indeed no advance notice of, this decision by the independent regulator. To suggest otherwise is utterly false. For Labour, whose system led to the banking crisis and the great recession that caused such misery to millions of families, to complain now about regulation is risible.”

And

““The government has been absolutely clear that the integrity of the City matters to the economy of Britain, which is why we have taken action to improve conduct across the banking sector and deal with the abuses and unacceptable behaviour of the past. The independent FCA is responsible for ensuring that the top management of banks instil the right culture and standards of conduct in their institutions. This decision by the independent FCA reflects its view that the best way of doing this is for it to support individual firms bring about change within their organisations. The government was not involved in this decision, to suggest otherwise is wrong.”

Statements of George Osborne about reducing regulatory pressure on the city, particularly at the time Wheatley was let go from the FCA last summer

See above for Osborne’s statement at the time of Wheatley’s resignation

In his Mansion House speech on 10^th June 2015, George Osborne talked about:

“a new settlement in what we ask of your important industry, financial service…Our financial services industry in Britain has, in recent years, been seen as part of the problem – now it must become part of the solution…I want Britain to be the best place for European and global HQs. It’s in our national interest to be so.”[19]

The press leading up to the speech speculated that George Osborne was going to use his Mansion House address to extend an olive branch to the City, reflecting a belief that regulation had become excessive.[20] An aide of Osborne’s told the FT:

““We have reached a position that is sensible — there is a sense that this is a settlement…We are in a stable position.”[21]

On 22^nd October 2015, George Osborne was questioned about Wheatley’s resignation by the Treasury Select Committee, he said:

“Martin Wheatley did an excellent job in creating the FCA but we took the view that he wasn’t the right person to carry on with the next phase of the FCA’s development….On the basis of the applications we’ve had for the job, that justifies our decision. Obviously I am in conversation with the chairman of the FCA….I don’t directly interact with the board and I don’t want to suggest anything about the nature of the conversation.”[22]

One recurring them e in articles concerning the scrapping of the review is the FCA’s decision to take no further action against HSBC after allegations it helped customers of its Swiss subsidiary to avoid tax.[23] Another recurrent theme is the decision of the FCA not to publish a report on how firms offer inducements to some staff to encourage them to make sales.[24] These decisions are used to suggest that the FCA has demonstrated a pattern of going soft on banks since Wheatley’s exist.

KYC360 Editorial Team

[1]

[2] http://www.publications.parliament.uk/pa/jt201314/jtselect/jtpcbs/27/2702.htmh

[3] http://www.fca.org.uk/static/documents/foi/foi4350-information-provided.pdf

[4]

[5] http://blogs.deloitte.co.uk/financialservices/2015/03/fca-business-plan-2015-16.html

[6] http://www.ft.com/cms/s/0/e926e9e2-aef1-11e5-993b-c425a3d2b65a.html#axzz3x7u4R9ob

[7] http://www.theguardian.com/business/2015/jul/17/city-watchdog-chief-quits-fca-george-osborne

[8] http://www.ft.com/cms/s/0/e926e9e2-aef1-11e5-993b-c425a3d2b65a.html#axzz3x7u4R9ob

[9] http://www.fca.org.uk/static/documents/foi/foi4350-information-provided.pdf

[10] http://www.theguardian.com/business/2015/dec/29/uk-banks-receive-first-report-cards-from-banking-standards-board

[11] http://www.ft.com/cms/s/0/e926e9e2-aef1-11e5-993b-c425a3d2b65a.html#axzz3x7u4R9ob