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Pressure on multiple fronts

Banks and their senior management continue to face pressures on multiple fronts as the fallout spreads from the LIBOR scandal, money laundering and corruption investigations, sanctions breaches and mis-selling claims. In an era of economic uncertainty and austerity, the regulatory response to these issues and the instigation of enforcement proceedings is becoming increasingly politicised.

In the UK, the new head of the Financial Conduct Authority (taking over from the FSA), Martin Wheatley, declared last month that he would “shoot first and ask questions later”. In doing so he cast doubt on the traditional model for the formulation of regulation policy, the consultation process (“The key difference between the future and now … is we are being given the power to shoot first and ask questions later. Today’s approach is we find a problem and do lots of analysis, then we publish a set of draft rules and do a cost benefit analysis, we consult with the industry and you tell us we have got it wrong, and we publish another set of rules. A year later we get to the point where we think we got it right first time. We have got to reverse that process”). These comments have raised concerns that the FCA may herald a more autocratic regime.

The new SFO director David Green QC (an ex-criminal barrister) also appears to be committed to a more aggressive approach. The SFO has declared it is targeting high end corruption and companies may have a “rude awakening when they start to see what the SFO is able to do in the future”.

We continue to see moves by UK regulators to act in concert with overseas regulatory and anti-trust authorities, not just in the main financial centres, but across markets, particularly in Asia. This is presenting greater challenges for in-house and external legal teams in navigating the cross-border collection and production of data. It is requiring ever more coordination in the management of internal and regulatory investigations, compliance with self reporting obligations, the management of litigation risk and defence strategies, and the fair conduct of associated disciplinary proceedings. If overtly political, uncoordinated, and potentially abusive use of regulatory power is put into this mix, legal and reputational risks multiply exponentially.

Across almost all developed financial centres we continue to see regulatory focus on those that create, distribute and market financial products, particularly complex or structured products. We are witnessing two particular trends. The first could be termed the “retailisation” of the wholesale banking sector – with regulators increasingly willing to import concepts and protections from the retail sector into the wider wholesale market. The second, at least in the UK, is the troubling divergence between the standards demanded by the courts, which still largely respect the effectiveness of appropriate risk warnings and clear limitations of duty or liability between consenting adults, and regulators, whose standards are often informed more by hindsight and political expediency.

One of the challenges all this presents to the senior management of banks is how to find ways to attract and retain experienced, high calibre professionals and to align their remuneration with regulatory and risk management objectives as well as the bottom line. Another is how to reconcile matrix management in global institutions with local regulators’ demands for local accountability.

A failure to meet these challenges will be seized on by regulators when the next instance of improper conduct at a junior level occurs, as justifying direct sanction on the individuals in senior management as well as the institution. While regulators have faced setbacks in adopting this approach in the past, they will keep trying. But the tide of regulatory enforcement action is creating an interesting cross-current, namely more nationalistic concerns about reduced competitiveness. There is an increasing tension between the political need to satisfy the customer’s and taxpayer’s urge for retribution and the desire not to cede markets and market innovation to more permissive financial centres. When a heavily politicised approach to enforcement is coupled with a regulatory reform agenda that aims to deconstruct complex organisations and to simplify products, the tension becomes greater. Ultimately, that may be the force that prevents the pendulum swinging too far.

Legal and Regulatory Risk Note
United Kingdom