COULD GREG MEDCRAFT BRING A MORE BALANCED APPROACH TO THE FCA?

Peter Johnson and Sam Burt, consultants at Leathwaite

Reports that Greg Medcraft is a contender to lead the Financial Conduct Authority (FCA) are in line with the shift in its leadership strategy. His experience within the banking sector and on the regulatory side indicates he could potentially bring a more balanced approach to the FCA than his predecessors, both in terms of rebuilding its public image and in dealing with the banks.

Rebuilding the regulator’s public image

The recent appointment of a consultancy to assess the FCA’s internal rules on risk and compliance demonstrate that plans are in motion to portray a more professional, transparent image. This is following a series of scandals within the financial services sector that have put the role and effectiveness of the body under the microscope. Most recently, KPMG called the regulator out over the effectiveness of its approach to risk-management, with data suggesting that investment firms are being caught off guard by the FCA for inadequate reporting of risk exposures.[i]

There’s no doubt over Medcraft’s credentials to tackle these issues. The fact that his most recent post was at the Australian Securities and Investments Commission, where he expressed a commitment to combating wrongdoing within the financial services sector, has to work in his favour.

Medcraft also boasts strong experience of global financial regulation. Not only has he chaired the IOSCO Board since May 2012, which includes membership of the International Financial Stability Board, but he’s also held senior financial services roles in regulated markets in Australia, Asia, Europe and the Americas. This experience makes Medcraft a strong candidate, with the necessary operational experience and rounded perspective to lead the FCA out of its current predicament.

Dealing with the banks

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 and Medcraft’s experience on both the regulatory and business sides of financial services would certainly make him in line with this image as a leader.  However, the modern financial regulation battle is far from over for banks. Maintaining a good relationship with the FCA will still play a major role and dictate the turbulence of times ahead.

Appointing a leader from a private sector background, such as Medcraft, 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. 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.[ii]  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 they 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. First and second lines of defence functions such as risk, compliance and front office controls are becoming ever more crucial in regards to managing regulatory risk within banks. 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 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’ will therefore probably be the result of a gradual adoption of regulatory compliance into bank culture. This means the appointment of a new FCA boss, whoever that might be, is likely to coincide with a seemingly less stringent regime. In reality, 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 them for years to come.