Two senior Directors at the FCA made important speeches yesterday. Not unsurprisingly, they are connected, and between them attempt to strike a delicate and difficult balance. 

Both also link back to Andrew Bailey’s HK speech on “Culture in financial institutions” back in March – which rebooted the FCA’s approach to firm culture - and they each refer to the FCA Mission. So there is a lot of triangulating going on…

Jonathan Davidson’s speech, referred to in the attached article (which also draws on research by Willis Towers Watson and Allen & Overy), focused on the FCA’s extension of the SM&CR to all regulated firms, and emphasised that “reasonable steps” will mean what they say on the tin. He wants SM&CR to be part of “moving beyond a ‘fear-based’ culture”. 

However, Mark Steward, Director of Enforcement & Market Oversight, struck a different, if not inconsistent tone. His speech ("A Better View"), partly about MiFID II and MAR, also majored on the FCA’s willingness to take on more enforcement cases – the number of investigations it has opened is up 75% over the past year. Partly this is in response to Andrew Green QC’s findings in his review of the Enforcement elements of HBoS’ failure. 

Circling back, politicians’ anger that no one senior was held to account during the crisis was of course the origin of SM&CR, while MiFID II and MAR are themselves part-responses to the misconduct the crisis revealed. So again, there is a lot going on…

At this early stage, I think there are two messages firms should take from this particular set of tea leaves. 

1. The FCA is genuinely trying to strike a difficult balance between its wish to introduce complex sets of policy proposals sensitively, and the need to demonstrate it is consistently willing to ask the awkward questions, and potentially take enforcement action, when it detects misconduct. Given the range of sectors and situations the FCA covers, and its own complex operating model, there will inevitably be some mis-steps. Firms should design their compliance approach to SM&CR with this in mind. 

2. There will be considerable and increasing noise around the extension of SM&CR, and this in itself will have an impact on your firm’s culture. Consequently, a passive approach to the new regime is highly unlikely to work, so firms should think carefully about what they want that impact to be and how they can shape it.

At the end of his HK speech, Andrew Bailey acknowledged that “Culture change is itself a challenge, and we know it takes time.” These speeches show that the FCA is aiming to go through its own culture change as it seeks to move on from the post-crisis period. It’s a good sign but it could still be a bumpy road for all concerned.