Regulatory Change – Clearing the Fog & Considering Conduct

Posted on 30/04/2014 · Posted in Change, Financial Services, Process improvement, Strategy

I’m pleased to promote my Colleague, Rachel Whitehouse from The Lamberhurst Corporation, who has written this article on the subject of regulatory change in the financial services industry.

Change is underway in the financial services industry in response to pressure from the regulators and the public. But how can firms prioritize competing demands? What is meant by good conduct and how can financial services effectively make change happen?

Time For Change Means Different Strategy Or VaryFinancial Institutions in 2014 are faced with a potentially overwhelming mix of regulatory obligations from national, pan-European and global bodies. To meet these requirements alongside internally driven requirements and managing legacy issues, requires a high degree of organization, joined up thinking and change management capability. The challenges to the industry are to lift the fog; identify what is paramount; focus on key strategic priorities and manage, coordinate, plan and implement change effectively. All of this requires firms to have leadership, risk, internal audit, operations and change skill-sets engaged and involved.

In the UK there are particular challenges as the Bank of England through its Financial Policy Committee begins to steer the industry and new regulatory bodies the PRA, (Prudential Regulation Authority) and FCA, (Financial Conduct Authority), to focus on an agenda to promote financial stability. The specific remit of the PRA is prudential i.e. to ensure financial services firms are robust and sound, the FCA is in contrast consumer orientated, focusing on competition and protection for consumers. Both organizations have a remit to ensure overall stability of the financial system.

Some of the operational agenda of these regulatory bodies has been in play for many years, such as the requirement by 2019 to fully implement the Basel III capital adequacy standards, (regulated by the PRA). However the approach to how capital ratios should be measured, defined and disclosed for Basel III is still under discussion at FPC meetings. The FPC can be reactive, for example, in response to a concern about overheating in the UK housing market, a recent recommendation to the FCA to require mortgage lenders to implement interest rate stress tests to use in the assessment of affordability. (Source: Record of the FPC Meeting, 20th November 2013). Financial Services entities in the UK need to be able to drive regulatory change reactively in response to these and other changing regulatory agendas and requirements.

With the creation of the FCA the word ‘Conduct’ came explicitly into the UK regulatory landscape. In thinking about and planning regulatory change in 2014 the 26,000 financial services firms regulated on conduct by the FCA may need to consider what Conduct Risk exposure they might have i.e. are they ensuring their customers are getting a fair deal?

A number of firms may think they have considered conduct before through KYC (Know Your Customer) initiatives which were a requirement of the now defunct FSA (Financial Services Authority). However, having this initiative in place did not stop PPI; the mis-selling of interest rate hedge products to SME’s; mis-selling of CPP (protection for identity theft and credit card fraud) or LIBOR rate fixing and other scandals.
In considering Conduct it may be useful to start with an assessment of key current strategic risks affecting the firm in which you operate, this may include consideration of the following, and (this is not an exhaustive list):

  • – Incentive structures for staff including where there may be short term and sales driven re-numeration
  • – Products and their applicability / sale-ability to different customer groups (are they being sold to the right customer groups where it is in the customer’s best interest?)
  • – Potential operational and provision of service weaknesses that could impact customers, (for example cyber security and protection against cyber-attacks)
  • – Integration of systems/ data and reporting (to give early warning of risks and issues as they occur across the enterprise)

Each business is different and identification and mitigation of the key conduct risks specific to each environment is key. This may require resource and a dedicated change initiative involving all elements of the business and engaging employees in the activity (as the face of the business to the customer and whose opinions and insights on risks are valuable). While initiatives like this may require financial services businesses to work across the organization and communicate with each other in a new way, if they prevent the next PPI or other scandal the investment will be worthwhile. 

It is surely the financial services organizations that become proactive and embrace regulatory change ahead of the pack, identifying and mitigating strategic risks ahead of others; who will gain competitive advantage in the industry and drive long term shareholder value. 

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