WHAT IF REBEKAH BROOKS HAD BEEN THE HEAD OF A FINANCIAL SERVICES FIRM?

Written by Neil Herbert, Director of HRComply

A recent joke doing the rounds goes like this:

Q: If a bus load of tabloid journalists and a bus load of bankers drove over a cliff – which would hit the bottom first?

A: Who cares?

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Hilarious? No, but it does provide insight to the similar levels of contempt in which both professions are seemingly now held. The result of this contempt has been sharply increased levels of scrutiny and proposed regulation for both, most recently through the Leveson Inquiry for the media industry and the Parliamentary Commission on Banking Standards for the banks (the latter following recent legislative change to further tighten regulation).

The outcome of these inquiries, however, could not be more different. The former makes vague demands for tighter self-regulation, which so far have had only the effect of producing howls of protest from the free press lobby. The latter has been a more thorough affair, with the already very much empowered and aggressive financial regulators (most definitely not self-regulators) being handed further powers to tighten regulation. These make it easier to hold individuals (in particular the senior management that run financial institutions) to account. They will also enforce sweeping cultural change in ethics standards and governance, introduce new certification and conduct standards and further tighten remuneration controls (already among the tightest of their kind in any regulatory jurisdiction in the world).

Therein lies the big difference between regulation in the financial and the media industries. The banks have the FCA; the press still have their own self-regulating PCC.

The FCA already has very big teeth indeed and likes baring them on a regular basis. Since its formation in April last year it has really hit the ground running with vast increases in enforcements, fines and bans.

And so we come to the eponymous analogy of this article – what if Rebekah Brooks had been the head of a financial services firm?

Rebekah Brooks was the editor of the News of the World when the newspaper carried out illegal phone hacking. If she had held a similar post in the financial services industry could she have escaped punishment, or at the very least a massive fine? And would she be allowed to return to the industry in a similar post?

What has emerged from the financial crisis is that it wasn’t just the dealers and traders that were out of control; senior management in those firms also failed to control them. The response has been draconian.

If you listen to any speech made by the FCA, the importance of senior management instilling a compliance culture within their firms is being drilled into chairmen and CEOs. In fact 2013, was almost the first year when more individuals were fined than companies.

Principle 7 of APER (the FCA’s statements of principle and code of practice for approved persons) requires an approved person to take reasonable steps to ensure that the business for which he is responsible complies with regulatory rules and standards. This regulation has become a source of some trepidation among the higher echelons of financial services firms. For example, John Pottage, an employee of UBS, was the first individual to be fined by the regulator for insufficient supervision of his own team. Although Pottage (the former CEO) had his £100,000 fine overturned at tribunal in 2012, he nevertheless lost around four years of his life while proving his innocence.

In the eyes of the FCA, wherever there is a rogue trader, there is a rogue manager who is equally culpable (unwittingly or otherwise). Unless a firm has put in place the correct policies and procedures to mitigate its conduct risk and the rogue trader has totally ignored every measure that the firm has initiated, the regulator will seek retribution from the senior manager also.

The new proposed Regulatory framework FCA CP14/13 – along with a further consultation paper from the PRA CP14/14 proposes amongst other things:

  • A new Senior Managers Regime for the most senior individuals in affected firms
  • A Certification Regime affecting a wider population of risk takers who could harm the firm, its customers, or markets
  • A new set of Conduct Rules, divided between those that apply to all non-ancillary staff within a firm and others that apply only to senior managers.

The result of this will be senior managers being held to account for conduct failings within the businesses they control. This is a clear reversal of the burden of proof in the case of regulatory misconduct, with senior managers needing to prove that they took reasonable steps to avoid it. They face up to seven years imprisonment and an unlimited fine where the regulator can prove reckless misconduct resulting in bank failure. There will be a doubling of the time available to bring actions against senior persons (to six years from the time of the offence). There will also be further remuneration restrictions on top of EU imposed caps on variable remuneration. In short, the net is tightening on senior management who preside over firms that fail to stamp out reckless behaviour and unethical conduct.

What is already abundantly clear is that senior management must focus on establishing tighter governance and controls through a culture that encourages ethical conduct and compliant behaviours. This can be achieved through a mix of training, monitoring, policy, assessment and appropriate remuneration structures. Senior management must lead by example and ensure that this culture is instilled from the top down.

On this basis alone then, it is inconceivable that Rebekah Brooks would have escaped enforcement from the FCA had the News of the World been a bank.

We are constantly reminded that the FCA is now focusing on ‘outputs’ not ‘inputs’ i.e. the resultant behaviours of staff that affect the product, the markets and customers. A newspaper editor can clearly see the outputs of his or her staff on the pages of the newspaper before it goes to press. A senior manager of a bank cannot possibly oversee every transaction, trade or piece of advice being delivered across desks, products and international markets. It should have been a lot easier to spot the unethical practices being blatantly carried out in the News of the World.

It is indeed the regulatory imposition of an acceptable culture that differs so starkly. The FCA demands and expects all financial institutions to instil a code of practice and a culture that is acceptable. The tabloid press expect no such thing.

On the subject of apologies, there could hardly be a sharper contrast between the two industries in their levels of contrition. The banking industry has bent over backwards to comply with the ever-growing demands of regulation. On the other hand, on the day of Brooks’s acquittal the sister paper of the News of the World (the redoubtable Sun) ran the headline – ‘Old Bailey Sensation – A Great Day for Red Tops’ – with a full page picture of the red-headed Ms Brooks.

Can you imagine any bank daring to thumb its nose so blatantly at the FCA?

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