Last week, FCA Chief Executive Andrew Bailey gave a speech exploring trust and ethics from a regulator’s perspective.
With financial services firms always eager to understand the regulator’s perspective and priorities, we look at what he said and what it might mean in terms of future regulation.
What is trust?
In the speech, delivered on 16 October at the launch of the St Mary’s University School of Business and Society in London, Andrew Bailey said that he believes trust in finance has changed over time.
Trust, he said, ‘has a moral and ethical dimension to it, and it involves commitment. To be trustworthy we have to meet our commitments to others, and that in turn depends on us knowing how they have interpreted our commitments, the hope they have put in us’.
From an FCA perspective, these commitments map closely to its desired consumer outcomes and are underpinned by initiatives like its Treating Customers Fairly approach.
Bailey also voiced his belief that ‘the more trusted you are the more opportunities you will have to show and demonstrate that trust. We have seen that in financial services – but once trust is lost, it is hard to recover’.
This ‘self-regulation’ is a theme we have seen many times before from the FCA. The regulator is very much in favour of efforts to improve cultural compliance and make firms more proactive, rather than ‘tick box’ regulation-oriented. In March this year, the Authority released a discussion paper looking at how to transform the culture of the UK financial services industry in support of its efforts here.
Knowledge and skills are key – but so are good intentions and honesty
Bailey believed that ‘Trustworthiness demands two things: knowledge and skill; and good intentions and honesty’.
While the knowledge and skill aspect relies more on technical ability, the second element depends on firms’ and individuals’ moral and ethical standpoints. A focus on increased individual accountability is another of the regulator’s priorities, seen in new regulations like the SMCR.
Relying on past evidence, or unproven signs of trustworthiness – banking exam certificates, for instance – is not enough. Trust comprises ‘an expectation of future behaviour, an identification of common interest and values and the development of a reputation’.
Has trust in finance providers changed over time?
Bailey believes that it has, in line with a wider drop in overall interpersonal trust in recent years. In the US, research has found that public trust in Government has declined over time, while in Western Europe, trust in the military exceeds that in banks and financial institutions, parliaments and the news media.
This has been linked to the remuneration of senior finance executives – the ‘Greed is good’ era of the 1980s and 90s. Bailey quotes an article written in the New York Times in 1970, which claims that the responsibility of business leaders to make as much money as possible for their firm ‘should conform with the basic rules of society, as embodied in the law, and ‘in ethical custom’’.
Pre-financial crisis – a permissive approach
Before the financial crisis, Bailey says, ‘the culture towards the public interest and ethical custom were essentially permissive, to the point of anything goes’.
There was light touch regulation in financial services, with a view that ‘left to themselves firms would succeed; and to paraphrase, just as a rising tide lifts all boats, so the whole public interest would benefit’.
As we know, things didn’t quite turn out that way – and in the wake of the crisis, the approach to regulation has had to change. Now – although the UK regulator has repeatedly stated a preference for self-governance and a ‘hands-off’ approach – there is an ever-growing list of regulations to comply with. In 2018 alone, firms face five new regulations.
Do we trust people, institutions, or both?
Bailey concluded his speech by looking at who we trust. Certain professions – the medical profession, for instance – garner trust via their individuals, through rigorous training and ethical standards.
Institutions are different. Their purposes and objectives differ – they vary in their ability to make the commitments needed. Money-making is a consideration for financial services firms, whereas it’s not something mentioned in the Hippocratic Oath.
The financial services sector is largely organised around corporate structures, and a need for shareholder value. Contracts and client service are in part governed by law; ethics tend to be a secondary consideration.
In the wake of the financial crisis, Bailey says, the FCA was often asked whether it was regulating firms or individuals. Both, he states, although the regulator is driving ‘a shift of emphasis towards individuals’ – as we mentioned earlier. He referenced the Senior Managers and Certification Regime, and its central concepts of responsibility and accountability, as an example of this.
Rebuilding trust – a job for regulator and firm alike
Concluding, Bailey reiterated his belief that responsibility and accountability are key to rebuilding trust. This means some shifts from corporate institutional to individual responsibility, and firms and their staff need to be fully behind any programme designed to increase trust and public perception.
It’s clear that in the eyes of the FCA, creating a trusted and trustworthy financial services industry is dependent on building and sustaining an ethos of good governance. For advice on how to do this, we offer a number of distinct products and services which can be deployed individually or combined to form a broader solution including copy advice.
When you face business or regulatory challenges, we provide solutions that are tailor-made to your needs with a view to releasing your energies to focus on your clients.
We work both within individual teams and across many departments to offer a complete solution, with a range of cost effective, compliance and marketing solutions which are uniquely suited to supporting firms.