The Financial Conduct Authority (FCA) has been tightening its rein on financial industry executives, going as far back as the banking crisis episodes of the late 2000s. In 2013, it slapped the former finance director of Bradford & Bingley (B&B) with £30,000 fine on his failure to disclose critical information days before a cash call.
According to a Financial Times report, Christopher Willford withheld information after being given access to the real financial position of the firm, which was declining. Net interest margin had fallen while bad mortgage debts had risen.
He got possession of the report on May 16, three days before a scheduled rights issue. According to the FCA probe, he was being penalised for failings to alert the B&B board and to analyse “potentially material risks… at a crucial time”.
Tracey McDermott, director of financial crime and enforcement, said: “His conduct fell short of the FCA’s standards — senior managers should expect the FCA to take action if they fail to show due skill, care and diligence.”
This was in accordance to the Statements of Principle 6 from the regulator’s Statements of Principle and code of conduct for approved persons. Willford was approved by the Financial Services Authority (FSA), FCA’s predecessor, as B&B Group’s finance director beginning October 2005.
The rights issue was botched; the firm did not get to raise capital, was sold to Spanish lender Santander, while having what was left of it nationalised.
FCA is the regulator of financial firms such as payday lenders and in charge of prudential supervision of those outside the watch of Prudential Regulation Authority. It strives to keep the integrity of UK financial market and seeks to protect consumers.
Trouble at the top
Throughout the years, there has been clamour for bank’s top officials to be held more accountable to the market’s demise between 2007 and 2009. The responsibility falls on the shoulders of FCA.
In the Willford case, the watchdog found that his actions did not cause the profits warning that led to the cancellation of the fund raising. Willford was neither blamed for B&B’s nationalisation. But his failure was in the conduct of his duty. He was supposed to share the information to the board, and provide the shareholders with the correct view of the company’s financial standing.
Thus for his misconduct he was penalised according to timing and length. The FCA put it at three days, from May 16-18. Willford was originally fined £100,000, but was able to reduce the time period for his misgivings and the amount to £30,000. Among the mitigating factors for his case was the poor health of B&B’s CEO, Steven Crawshaw, who stepped down on June 1, 2008.
Senior officers like Willford are expected to investigate and evaluate information they receive, so they can identify the risk and consequences that may arise from it. Ultimately, they have been trusted by the public and should always keep that trust in mind.
Failure of management is a serious weakness in the financial services system. If it is to be the cause of subsequent downfalls, then there should be stricter principles to govern their placement in office. “Due skill, care, and diligence” must be further hardwired into individual bank’s policies.
Change in culture
McDermott, in a separate speech in December 2014, called for a generational shift among individuals and firms in the sector of banking. There is a tendency for rules to be used against themselves, she implied. And that is how those who have great responsibilities may have been dodging the repercussions of their actions.
“Rules cannot simply be put in place that paper over cultural deficits, rules can actually encourage people to abdicate responsibility; if the rulebook doesn’t say it’s forbidden, it must be OK,” she said.
Further, the senior regulator said that firms cannot keep on releasing generic statements that sound like PR. It is indeed easier to say that a group is set to learn the lessons of the past while pointing a finger on a few individuals whom it has handpicked to handle its business in the first place.
She recognised that the changes they want to see at the core of the financial services industry have time as their friend. They are not expected to occur overnight. But what they need are firms that are fully committed to the task.
FCA Chief Executive Martin Wheatley also said something in the same vein. He was referring to the creation of policies from the dimension of morality. Management risk and consumer protection should be tackled from the point of view of someone who is questioning whether a certain deed should be restricted because it is wrong. And wrong is something that puts the public trust and the market integrity in jeopardy.
More bankers should be able to integrate risk management into their rules and regulations. But writing the fine print is not enough. More so, taking an oath is not enough. These individuals should exhibit personal accountability to the consumers, the firm they serve, and the industry they belong in.
Regarding customers, Wheatley once said, “The best firms, the most successful firms, the most trusted, are the ones that take customers seriously in this environment of expectation. The ones that understand the currency of trust in generating business.”
But how about issuing fines to those who failed doing so? The fines have been a topic of criticism for some, especially that they are thought to be high. The regulator must review its scale and ensure that the firms will not only pay their dues, get absolved, and just find another way to circumvent the rules. It is time to show results and not all talk about making these market players aware of their impact in the industry and society.
FCA still has reason to be wary over the figures. But all the more, the watchdog has to keep sniffing through the lines.
“I know that, at times for those in the industry who are encouraging the right direction of travel, there can be frustration,” said McDermott. “After all, despite their efforts to lead the change, we continue to fine firms for past bad practice. In the past eleven months over £1.4bn in fines has been issued, 40 individuals have been banned, and two convictions have been obtained.”
There should be no reason to stop its course now.