THOMSON REUTERS ACCELUS. The FCA: A Game Changer

Transcription

1 THOMSON REUTERS ACCELUS The FCA: A Game Changer for Company Training Statement of intent This whitepaper, brought to you by Thomson Reuters, discusses the implications of the new financial regulatory framework set up in the United Kingdom in April 2013 for company training. The paper outlines the establishment of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). It also examines the pronouncements and actions of the FCA since it was established as indicators of the likely way in which the UK financial services industry will be regulated under the new regime. The restructuring of the regulatory bodies and the refined focus of the FCA specifically, will have a significant impact on financial firms and particularly their compliance departments, training departments, senior management and directors. The onus has now been shifted onto firms to establish the policies, rules and procedures they need to apply to put the consumer at the heart of their business. Firms will need to ensure that their training programs effectively address these changes to ensure they meet the new definition of compliance.

2 CONTENTS The UK s New Regulatory Framework... 3 Farewell to the FSA...3 The role of the PRA...3 A new approach from the FCA...3 A new definition of compliance...4 More intrusive regulation...5 More transparency in enforcement and a focus on senior management accountability...5 What this means for company training... 5 Shifting company culture to meet the new regulatory regime...5 General information...5 Board training... 6 Values and ethics... 6 Business practices... 6 Anti-money laundering... 6 Compliance...7 Learning Management Systems...7 Effective training programs can help to mitigate the risk of non-compliance...7 2

3 The UK s New Regulatory Framework Farewell to the FSA April 2013 saw the end of financial services regulation in the United Kingdom under the Financial Services Authority (FSA). Following the regulatory failure of the UK banking industry during the global financial crisis, the UK government restructured financial regulation in the country. The Financial Services Act 2012 came into force on April , abolishing the FSA and setting up new structures. Established as a quasi-judicial body in 2001, the FSA was criticized for a perceived reactive approach and a preference for light-touch regulation. Under the Financial Services and Markets Act 2000, the FSA had four statutory objectives: Maintaining confidence in the financial system; Contributing to the protection and enhancement of stability of the UK financial system; Securing the appropriate degree of protection for consumers; and Reducing the extent to which it is possible for a business carried on by a regulated person to be used for a purpose connected with financial crime. The new Act made the Bank of England responsible for financial stability, bringing together macro and micro prudential regulation. It also created a new financial services regulatory structure comprising the Bank of England s Financial Policy Committee and two new entities - the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The role of the PRA Part of the Bank of England, the PRA is responsible for the prudential regulation and supervision of the roughly 2,500 largest regulated financial firms in the UK. These include banks, investment banks, building societies, credit unions and insurance companies. The PRA has two statutory objectives: To promote the safety and soundness of these firms. Specifically for insurers, to contribute to securing an appropriate degree of protection for policyholders. While the majority of enforcement actions in the financial services industry are likely to come through the FCA, the PRA has its own set of disciplinary and enforcement powers that include the power to impose financial penalties and publish public censures. A new approach from the FCA The FCA is the conduct regulator for all regulated UK financial services activity. It is also responsible for the prudential regulation of the approximately 25,000 smaller regulated firms that are not considered systemically significant. It has the strategic objective of ensuring that the relevant markets function well and three operational objectives: Delivering consumer protection Securing an appropriate degree of protection for consumers. Enhancing market integrity Protecting and enhancing the integrity of the UK financial system. Building competitive markets Promoting effective competition in the interests of consumers. The FCA regulates the conduct of both retail and wholesale financial services firms and has been granted significant powers related to the marketing of financial products. Its goal is to put the consumer at the heart of everything it does and its pronouncements have made it clear that it expects the same from the financial firms whose conduct it regulates. 3

4 The FCA has defined its target outcomes as: Consumers get financial services and products that meet their needs from firms they can trust. Markets and financial systems are sound, stable and resilient with transparent pricing information. Firms compete effectively, with the interests of their customers and the integrity of markets at the heart of how they run their business. Both the FCA s objectives and outcomes demonstrate its focus on the experience of consumers rather than on firms compliance with rules. It seems that the doctrine of caveat emptor (buyer beware) no longer applies in the financial services industry. The FCA can specify minimum standards on products and establish product requirements. It also has the power to investigate organizations and individuals and has quickly demonstrated its intention to use these. It can force firms to withdraw products or remove product features for up to a year while it considers an indefinite ban. And, it has the power to instruct firms to retract or modify misleading financial promotions. A significant increase in power over the FSA is the FCA supervisors ability to impose their judgments on firms if these firms are not willing to accede voluntarily. A new definition of compliance There is also a new attitude to regulation under the FCA. The Authority is sending a consistent message that it will take a judgment-based, pro-active and pre-emptive approach to regulation. The FCA has signaled that its approach will be very different from a rules-based approach where firms measure their compliance against regulatory requirements in a tick-box approach. This is consistent with the FCA s belief that the behavior of market participants is most affected by how businesses are run, rather than how they are controlled (through regulation and compliance efforts). This represents a profound shift in the approach to compliance. The old definition of compliance rested on whether or not a firm was toeing the regulatory line and was largely the responsibility of the compliance department. The new benchmark set for financial institutions is whether the firm can demonstrate good consumer outcomes. This is a function of how the business is run, including its culture, and shifts responsibility for compliance onto the board and senior management. Their intention is to make sure consumers interests sit at the heart of how firms do business and ensure that compliance is not delegated to the compliance department. We want to move away from purely looking at controls to looking at how businesses are run. we want to move away from an approach which could have been seen as ensuring compliance with a set of rules to one where we're trying to get firms to do the right thing for their customers. Clive Adamson, FCA Director of Supervision The FCA has repeatedly flagged its intention to evaluate behavior and transactions in the context in which they occur, rather than applying a one-sizefits-all approach. So, for example, the regulator has stated that they will not set an arbitrary financial threshold that determines market sophistication in all cases, or regulate the wholesale and retail markets in a clearly distinct binary way. Regulatory requirements on firms will differ depending on the type of participant they conduct business with and the type of service provided. Fairness of conduct will also be evaluated on a judgment basis, in consultation with market participants. So this new approach relies heavily on the regulator s judgment and the outcomes it desires relate to the experience of the consumer, rather than to a firm s compliance with a set of rules. This represents a significant challenge for both management and compliance departments as it is now much more difficult to objectively establish what is and isn t compliant. 4

5 More intrusive regulation Just as it has become more difficult to gauge ongoing compliance with the regulator s requirement, the FCA has also signaled its intention to take a much more intrusive approach to regulation, especially in the wholesale market. Supervision and enforcement, which were separate divisions under the FSA, have been combined to facilitate rapid interventions. The FCA has promised proactive, early and decisive action where they see evidence of poor practices. We will take a more assertive and interventionist approach to risks caused by wholesale activities. FCA Business Plan 2013 This more aggressive approach is a crucial part of the regulator s strategy of credible deterrence. Successful prosecution of market misconduct will demonstrate the regulator s effectiveness to the public and politicians while helping to keep market participants wary of breaking the law. The trend in increasing penalties first apparent under the FSA continues. The FCA has the ability to levy increased fines and these are likely to rise over time to levels comparable to those levied by the US Securities and Exchange Commission. We will pursue a strategy of credible deterrence, taking tough and meaningful action against the firms and individuals who break our rules. FCA Business Plan 2013 More transparency in enforcement and a focus on senior management accountability The new Act allows the FCA to publish early details of warning notices identifying individuals or firms subject to enforcement action. These public notices include the FCA s concerns and will be posted before the subject has had a chance to challenge the regulator s finding. This is likely to have significant reputational implications for firms and individuals under investigation. Senior management accountability is another key part of the FCA s credible deterrence strategy and senior executives are likely to be held to account with far greater effect than under the FSA. What this means for company training Well-designed and documented training programs are essential for raising internal awareness and understanding around key issues facing any business. With the FCA, they are also an important way of demonstrating that an event of non-compliance is a once off individual failing rather than the result of a negative company culture. Shifting company culture to meet the new regulatory regime Given the significant shift in approach under the new regulatory structure, financial services firms will need to communicate the differences under the new regime. They will also need to start to effect the changes necessary to ensure compliance. A range of interventions is likely to be required and these may include a number of different information and training sessions. Where these are delivered through engaging, practical and interactive courses that drive active learning, retention and understanding will be significantly improved. General information Individuals active in the financial services industry will be aware to a greater or lesser degree of the new regulatory regime and the likely direction of future enforcement. New entrants into the industry need to be thoroughly trained in the implications of the Financial Services Act 2012 and the way in which the FCA approaches regulation and enforcement. Regular updates on trends in financial services regulation should be provided as these emerge. 5

6 Board training If directors are not already aware, they need to clearly understand the fundamental shift in focus that the FCA requires. As the FCA has repeatedly made clear, compliance is no longer about not bending the rules too far. Executives need to digest the new definition of compliance requiring a customer-centric business model and the policies and procedures to ensure good consumer outcomes. Directors should also be alerted to the risks they personally face from the FCA s drive to bring senior management to account for the failings of the firm. Senior executives set the tone from the top regulators are looking to in order to assess the culture of the firm. Non-executive directors fulfill an important function and need an understanding of the liability they may face from the broad scope of their duties. They also need to clearly understand how to ensure conflicts of interest do not arise in their roles. Effective board training starts with comprehensive and consistent induction training and ongoing training should be delivered in a way that is convenient for directors who travel extensively. Values and ethics The firm s values and culture should be clearly communicated to all staff to ensure they understand the behavior expected of them and the consequences of non-compliance. Training on personal conduct is an important part of this communication, both at induction and on an ongoing basis. This training would cover key areas of risk, the important regulations that apply to the financial services industry and how these impact on the employee s day-to-day responsibilities. Business practices Senior management will need to make sure that the firm has solid policies and procedures in place to show that it takes its commitment to the consumer seriously. Just as importantly, there need to be controls in place to ensure these are being consistently applied. Employees need to be well trained in implementing this customer-centric approach. In the financial services industry, training on market conduct, business conduct and fraud are particularly important. Employees need a comprehensive understanding of the key laws and regulations governing the client / firm relationship, the main types of corruption that can occur in financial services and the tools to recognize and mitigate unethical and illegal behavior. Anti-money laundering The FCA has indicated that it will continue to focus closely on anti-money laundering (AML) controls in the financial sector. This was borne out by the 4.2 million fine of the London arm of Swiss bank EFG Private Bank in April 2013 for poor AML controls. The regulator indicated at the time that there were two similar enforcement actions against other firms in process. While EFG bank had effective written AML policies and procedures, the regulator noted that these were not enforced in practice. If an institution does not necessarily have the systems and controls to pick up money laundering risks... they will have very serious questions to answer. Martin Wheatley, FCA Chief Executive Financial firms need to ensure that they have effective AML controls in place, including written AML policies and procedures and that staff are trained to apply these consistently. Where policies and procedures exist but are not applied there is the risk that the regulator will question the firm s culture and may lay the blame on senior management. 6

7 Compliance The role of compliance has broadened significantly under the new regulatory framework. Compliance departments will need to be reskilled to effectively monitor the significantly broader role required of them. For example, the FCA indicates that sales products and processes should not prejudice consumers by exploiting behavioral biases. It is unclear what proportion of existing compliance personnel currently have the skills to meet this requirement. Effective compliance training programs need to cover the key areas of corporate governance as well as case studies and real-world examples of the challenges employees are likely to face. Learning Management Systems Many leading companies report that Learning Management Systems are an effective solution to optimize the deployment, management and tracking of their training programs while reducing the cost and time associated with staff training. Where the system is web-based, technical requirements are minimal and implementation can be surprisingly rapid. Many training programs run through these systems can be tailored to the size of firm, jurisdictions in which they operate and customized for an individual firm s content, corporate policies and procedures. They can also be adapted to the learning needs and experience of the staff receiving the training. The reporting functionality integrated into these systems can measure the effectiveness of training, show which employee has completed which module, highlight areas that need additional focus and apply further education in areas of risk. Some systems include a comprehensive audit trail in their reporting functions to demonstrate regulatory compliance in high-risk areas. An intriguing trend is the move towards gamification of training programs. This approach can deliver complex and dry subjects in a fun and interactive environment with the look and feel of a game to maximize completion rates and knowledge retention. Even complex and risk sensitive business issues become easier for employees to engage with and understand and these systems feature exceptional analytics to support follow up interventions and future training. Effective training programs can help to mitigate the risk of non-compliance The FCA is certainly a game-changer for financial services firms. One of the key ways in which firms can mitigate against the risk of compliance breaches is through targeted training interventions delivered through a system that can deliver the right content at the right time to the right people. Audit trails generated by learning management systems can provide evidence that the firm is effectively communicating its business policies and procedures to its staff and demonstrate that incidents of non-compliance do not arise from an exploitative or unethical business model. 7

8 THOMSON REUTERS ACCELUS The Thomson Reuters Governance, Risk & Compliance (GRC) business delivers a comprehensive set of solutions designed to empower audit, risk and compliance professionals, business leaders, and the Boards they serve to reliably achieve business objectives, address uncertainty, and act with integrity. Thomson Reuters Accelus connects business transactions, strategy and operations to the everchanging regulatory environment, enabling firms to manage business risk. A comprehensive platform supported by a range of applications and trusted regulatory and risk intelligence data, Accelus brings together market-leading solutions for governance, risk and compliance management, global regulatory intelligence, financial crime, anti-bribery and corruption, enhanced due diligence, training and e-learning, and board of director and disclosure services. Thomson Reuters has been named as a category leader in the Chartis RiskTech Quadrant For Operational Risk Management Systems, category leader in the Chartis RiskTech Quadrant for Enterprise Governance, Risk and Compliance Systems and has been positioned by Gartner, Inc. in its Leaders Quadrant of the Enterprise Governance, Risk and Compliance Platforms Magic Quadrant. Thomson Reuters was also named as Operational Risk Software Provider of the Year Award in the Operational Risk and Regulation Awards For more information, visit accelus.thomsonreuters.com 2013 Thomson Reuters GRC00549/9-13