Compliance: Integration, Integration, Integration

by | Feb 13, 2014

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Lee Werrell, Managing Director of CEI Compliance Ltd, says this year will bring challenges of integration to the FCA. Not least, in the wider international context


In recent weeks, various speeches and quotations from the FCA have started to paint the picture for the regulatory landscape in the future. There have been huge changes in 2013, a year in which the financial world has moved on significantly.


Much of the year was spent on finalising market infrastructure and capital ratios – and those issues are now nearing completion. Thus allowing the FCA, between fines and new rate fixing scandals, to start articulating its vision.

The International Dimension

The spotlight now falls on conduct issues – and the agenda that addresses these cultural as well as somewhat legacy-driven technological concerns is now in full flight among the larger institutions, while also cascading down to the smaller firms and, perhaps more importantly, the asset managers and platforms which provide services to the various distribution channels.


We have experienced a number of years now where changing international policymaking has been threatening to swamp all sectors of financial services. On the EU the emphasis has been on MiFID II, EMIR and CRD IV; on the domestic front there has been a focus from end to end of the sales cycle and commission scrapping for investments, with the Retail Distribution Review hitting the IFA market extensively; but the year also included environmental fundamentals such as manipulation and alleged rigging of the banks’ indices.


All of which leaves the perhaps obvious question to ask:


What will the FCA do to drive future changes in both the domestic and international agenda? And how?

Looking ahead, is there now a sufficient platform to bed in all the recent regulatory changes and move things forward? Will we now see a professional and mature age coming in where customer outcomes and interests are at the forefront of firm's business models, and yet still  prevent an unintended consequence of forcing providers into developing vanilla products?

Can the regulator ensure that the transitions required from the international changes to try and keep the liquidity of the market place an effective trading venue, even in the face of the proposed transaction tax across Europe?


More Psychology, Less Stick

Traditionally, the typical way that regulators and governments have dealt with holes or uncovered weaknesses in cultural and community damaging areas was to introduce new or more robust rules  that to force greater disclosure or compliance with specific processes or procedures. Unfortunately this is so often ineffective as it not only leaves us to shut the stable door, sometimes years after the horse has bolted, but provides a false comfort and can actually encourage the very behaviour it sets out to curb, by providing further controls.

Martin Wheatley, the FCA Chief Executive, declared in a recent speech that, with hindsight, it was around 2005 to 2008 that we saw “the breeding ground for many of the conduct cases we’re dealing with today – like PPI and benchmark manipulation – we find them occurring in a period that saw Financial Services Authority (FSA) guidance expand by some 27%. In other words, growing the rulebook did not prevent cultural weakness."


The FCA’s response to this challenge has been to start using a broader array of judgement-based tools and techniques. These include competition, behavioural economics and more sophisticated modelling, to get right into the engine of the financial services industry and make sure consumers are treated more fairly.

Asset Management

Perhaps a fair benchmark of what to expect in 2014 and beyond would be the FCA announcements around asset management over the last few months.


Key to this debate are the points of principle and culture. Are asset managers acting as agents for clients by putting their best interests first? Or is there more we can do, on a collective basis, to restore the investors trust?

Now don't look too bleakly on this, obviously UK asset managers command significant and deep respect right across the global markets, and this is the main reason they attract so much inward investment. They do, however, run a risk of stagnation as other markets cleanse their own operations.

As competitors in the US and Asia (Singapore, Hong Kong and Australia, etc) improve their practices, it therefore becomes increasingly important to do the same over here. This calls for courage and leadership from the Asset Management Industry before it gets overtaken and has to play catch-up.

The FCA will be concentrating on solutions to key asset management concerns, including evidence of poor transparency. Other main points are evidence of a lack of accountability in spending commissions charged to customers. As well as question marks over conflicts of interest and firms pushing the definition of research.

Considering that these problems are mainly cultural and that any regulatory solutions need to reflect this, the FCA's approach has been to launch a conversation with the sector to probe for viable and long-term answers that don’t directly affect the competitiveness of the UK market.


At the far end of the regulatory spectrum, in terms of moving things forward, is the linked priority of achieving technical transition involving the tightening-up of legal requirements and rules similar to that happening across Europe and the US at the moment.

Most notable here are the increasing number of European conduct dossiers emerging- such as the Insurance Mediation Directive, Packaged Retail Investment Products, the Mortgage Credit Directive and so forth. Not to mention the market dossiers with conduct elements such as MiFID and EMIR.

MiFID, as we all know, is currently on the verge of moving out of the negotiating chambers of Brussels into the full glare of public scrutiny as a completed piece of legislation. The date of application is still two to three years away – but those who know are in agreement that there is still a vast amount of work to be done, both in terms of clarifying the application of the legislation before it takes effect, and of implementing these measures .


EMIR is concerned with the general reshaping of the international derivatives market, most of which is already well in motion. This will undoubtedly impact IFAs in the way that funds are managed and some products are structured, creating greater or lesser risks.

The cross-border application of derivatives rules clearly raises the fundamental question of whether regulators should operate independently on global issues so that they can intervene quickly in the national interest, or whether they should find international solutions to international challenges.

The former would be a patchwork quilt of national and regional rules, which run the risk of becoming unworkable and the latter involves immense negotiation and agreement.



It is apparent that the successful execution of deep cultural and technical reform should be balanced – although both challenges are extremely complex, in their own ways, to achieve

So it will be vital for organisations of all sizes to continue to engage positively with the regulator in the debate around all aspects of change as we move into 2014. At the least it is hopefully apparent that, in a regulatory environment that increasingly focuses on culture and conduct, a pragmatic, consultative, and cooperative approach guarantees a stable evolution and transition.

Markets regulation is at the heart of the FCA, and it operates in its own turn at the heart of international regulation. With this blend of consultation, co-operation, market expertise and international prominence, will it continue driving the changes in regulation, infrastructure, and culture effectively and pragmatically?

The regulator is relying, more so now than ever before, on all players in the financial services world to understand the details of their approach and to discuss how to best implement these changes.

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