Authors: Peter Johnson and Sam Burt, Consultants, Leathwaite

The Government recently announced a shift in the Financial Conduct Authority (FCA)’s leadership – signposting, in some eyes, a move away from its crisis-inspired crusade against the financial services sector towards a more ‘collaborative’ effort. Martin Wheatley’s permanent successor may, as a result, appear more bank friendly. However, the modern financial regulation battle is far from over for banks. Maintaining a good relationship with the FCA may still play a major role and dictate the turbulence of times ahead.   

Appointing a leader from a private sector background would allow the FCA to focus on George Osbourne’s aim for a ‘new settlement’ with financial firms – a comment that has widely been interpreted as a desire to ease regulatory pressure on the sector.[i] Interim FCA head Tracey McDermott‘s background is far more in line with Wheatley’s, having previously risen to acting head of enforcement at the FSA.  Most recently the Bank of England’s Chief Economist, Andy Haldane, has been rumoured to be a frontrunner for the position.

As more time passes since the rapid-fire introduction of new stringent regulations during the financial crisis, it is only natural that the number of fines on banks, identifying the worst cases of misconduct that happened before the crisis, will wane as banks adjust to the increased expectations from the regulator. However, Wheatley’s successor will still need to continue the implementation of measures aimed at encouraging the culture within banks to change.

The Senior Managers Regime, designed to hold top executives to account, means improving internal culture is still a top priority. Banks will continue to make efforts to avoid being subject to misconduct fines for offences such as rigging interest rates and mis-selling financial products. Boards will be unlikely to bear the risk of any such consequences in the wake of some of the largest fines the City has seen.

Taking the foot off the accelerator when it comes to regulatory compliance is simply not an option for banks as the entire business is now being bought into the process. Risk, compliance and expanding front office controls functions are becoming ever more crucial as the first and second lines of defence within banks to manage regulatory risk. The importance attached to the roles of risk and compliance officers is continuing to increase due to their ability to build strong and effective relationships with regulators.

As the UK continues to emerge from the financial crisis, banks will increasingly wish to turn more of their focus towards staying competitive by building a good relationship with regulators and rebuilding public trust. Any future easing in ‘bank bashing’ is likely to be the result of a gradual adoption of regulatory compliance into bank culture. Wherever his career now takes him, Wheatley’s efforts to change the culture of both the regulated community and the regulator, after the exposure of the financial services sector during the crisis means his legacy remains; and will dictate relations between the financial services sector and their regulator for years to come