1. Regulatory focus on ‘culture’ and what does it really mean for firms?


Andrew Baily, the CEO of FCA explained in a speech delivered on 16 March 2017 what the regulator expected of firms in terms of desired culture.


In Mr Bailey’s view, it could be debated whether culture is an input to institutional behaviour, or is it a summary outcome? This he said is relevant because “to my mind the former position – the input – requires the identification of a distinctive thing called culture. The second position – the outcome – puts culture more into the role of a summary indicator of the consequences, including for behaviour, of many inputs”. And as “you can’t take institutional culture down from a shelf and seek to change it in some mechanical way, I see culture as an outcome more than an input”. He then defined “cultural outcomes” as “the product of a wide range of contributory forces: the structure and effectiveness of management and governance, including the well-used phrase ‘the tone from the top’; and the incentives they create; the quality and effectiveness of risk management; and the willingness of people throughout the organisation to enthusiastically adopt and adhere to the tone from the top. That adherence is crucial: actions really do speak louder than words and are at the heart of how we judge the intent towards good outcomes and thus culture”.


Mr Bailey clarified that at the FCA, they use a range of supervisory tools and methods to work with firms on issues relating to their culture, such as the firm’s stated purpose, ‘tone from the top’, incentive structures and the effectiveness of risk management and governance.

The FCA strongly believe that ‘the tone from the top’, or how the leadership of a firm behaves and fulfils its responsibilities, drives the behaviour of staff and the outcomes they deliver. In turn, behaviour throughout the firm and outcomes also form a measure of the effectiveness of the tone from the top.

Mr Bailey said that incentive structures also drive the behaviour of staff, along with other people-related practices, such as recruitment and performance management. He stressed that governance is the framework of responsibility that oversees the operations of a firm and it is essential that the senior management of firms identify what drives their culture.

He added “For the FCA’s part as the UK’s financial conduct regulator, we seek to form judgements as to whether the inputs are producing appropriate culture and outcomes. For example, a question we seek to answer is whether practices such as recruitment, performance management, reward and capability drive positive behaviours and create a culture that works in the long term interests of the firm, its customers and market integrity”.

He concluded by saying that it was for firms to ensure that their desired culture is consistent with appropriate conduct outcomes, to identify the drivers of behaviour within the firm and control the risks that these drivers create and the FCA would like to be clear and transparent about the way they look at firms and share their expectations and view on culture so that their stakeholders understand the overarching approach and how it fits with the regulatory objectives.




  1. FCA’s plan to address key issues in consumer credit sector

Jonathan Davidson, Director of Supervision (retail and authorisations) at the FCA, outlined the regulator’s current view on the issues facing consumer credit market in his speech delivered on 30 March at Credit Summit in London. He set the scene by saying that “Borrowing in the UK is simply more common, and more socially acceptable, than in many other large economies. Use of debt to meet unexpected emergencies is also widespread. Many Britons don’t save for a rainy day anymore and StepChange estimates that over 2.5 million people are now using credit cards just to meet everyday living costs and emergency expenses. Meanwhile, 16 million people in the UK have savings of less than £100”.

Turning his attention to the notable features of the modern consumer credit landscape, he said “the growing interdependence of markets and products” was one where the regulator is considering the so-called ‘waterbed’ effect. He said that FCA’s ‘Call for Input on High Cost Credit’, which closed last month, “is looking at all high-cost products as a whole as well as overdrafts to build a full picture of how these are used, whether they cause detriment and to which consumers. This includes a review of the payday loan price cap.  This will include examining if there is any evidence that the price cap has caused consumers to turn to other sources of credit…”

He said that “it’s perfectly likely that a consumer’s debt portfolio will include products which provide flexible, appropriate means of meeting short-term emergencies and spreading out the cost of purchases”. However, “these same products can become extremely expensive and difficult to repay if used as longer-term sources of credit”.  Mr Davidson shared specific concerns that emerged from the FCA’s Credit Card Market Study last year which found that “some of these customers are on the edge of their finances, unable to do more than make minimum repayments. Others are not in financial difficulty but have rather ‘drifted’ into persistent debt through slow repayment of debt”.

In a scathing criticism of the culture within the sector, he added that as these customers remained profitable, most firms do little to intervene to help their customers manage their finances better, the attitude that the FCA would like to change.

He added that “while we will continue to take action to understand and mitigate against this type of risk, it is beholden on industry to consider and address these problems themselves. After all, firms see these patterns of consumer behaviour themselves directly and we expect this exposure to drive attitudes and culture accordingly”.

Elaborating further, he emphasised, “Firms who show that principles like TCF are integral to their business will generate far less regulatory concern with us than firms who focus on doing the bare minimum to see what they can get away with. The unique culture of a firm shapes the decisions its employees make, ultimately leading to behaviours that determine the conduct, either good or poor, of that organisation.  This can lead to good or poor outcomes for consumers at the other end”.


Mr Davidson mentioned the forthcoming extension of the Accountability Regime (also known as the Senior Managers and Certification Regime, or SMCR), to include consumer credit firms and pointed out that the Regime is designed to ensure that individuals, as well as firms, are accountable for the way that they conduct themselves.


With the roll-out of SMCR, senior managers of firms will be required to take reasonable steps to ensure that the areas under their remit are conducted appropriately and that people whose conduct has a major impact on consumer outcomes are not only competent but also take direct responsibility for ensuring appropriate systems and controls for delivering them. Employees who have an impact on consumer outcomes will also be held to account for their conduct by being subject to conduct rules. All of which means that when things go wrong the SMCR will enable the FCA to hold approved persons to account.





  1. FCA’s warning to loan-based crowdfunding platforms about business borrowers who lend to others


The FCA have written to firms that operate loan-based crowdfunding platforms to highlight that if a lending business borrows through their platform and then lends that money to others, it may be ‘accepting deposits’ within the meaning of Article 5 of the FSMA (Regulated Activities Order) 2001 (RAO). Carrying out a regulated activity without due authorisation is a criminal offence.

They have warned that “where a loan-based crowdfunding platform facilitates the acceptance of deposits by a borrower that does not hold the correct permission that platform would not be acting in a manner consistent with our expectations for regulated firms and may be in breach of certain regulatory requirements; in particular, Principle 6 (Treating Customers Fairly) and threshold conditions 2E (Suitability) and 2F (Business Model)”.


The FCA have asked the platform operators to:


  1. a) Establish whether you have been facilitating loans via your platform to lending businesses who have lent that money to others and they do not have the required ‘deposit-taking’ permission;
  2. b) If so, stop facilitating the acceptance of deposits by these borrowers;
  3. c) Consider what action you will take to ensure that you do not facilitate the acceptance of deposits by any such borrowers who do not hold the correct permission in the future; and
  4. d) Consider what action you will take in cases where a borrower has already been accepting deposits via your platform and does not hold the correct permission.



  1. FCA ask consumer credit firms to review the limitations on their debt permissions

The FCA have called for all consumer credit firms who hold the permission of debt adjusting and/or debt counselling with a ‘no debt management’ limitation to review the limitations on their activities to ensure they are appropriate for their business.


The ‘no debt management’ limitation is not appropriate for certain debt activities, so it is important to check and if necessary the firms should apply to vary their permissions. In order to help firms to determine whether or not the limitation applies to them, the FCA have asked them to review the glossary definition of a ‘debt management activity’.  The definition of ‘debt management’ provided by the FCA is as follows:


“The activities of debt counselling or debt adjusting, alone or together, carried on with a view to an individual entering into a particular debt solution or in relation to any such debt solution, and activities connected with those activities.


A debt solution is defined as ‘an arrangement, scheme or procedure, whether statutory or not, the aim of which is to discharge or liquidate a customer’s debts”


Based on the above definitions, the FCA have said that some firms with the ‘no debt management’ limitation may be carrying out debt management activity (due to the broad nature of its definition) so the limitation they hold is not appropriate for their business. By way of example, they have advised that “if you undertake activities such as settling and re-financing a customer’s existing debts then you are likely to be providing a ‘debt solution’. An example of this might be re-finance involving the part-exchange of a car or consolidating a customer’s multiple existing loan repayments into one single repayment”.


Firms can also refer to chapter 2.7 of the FCA’s Perimeter Guidance Manual (PERG) for clarification and guidance on what constitutes debt adjusting and debt counselling.  Chapter 17 of PERG provides guidance on what amounts to debt advice. In FCA’s view, rather than the ‘no debt management’ limitation, there are six new standard limitations, which may be relevant to certain firms.






  1. JMLSG revises its risk-based Guidance in line with proposed new Money Laundering Regulations 2017


The Joint Money Laundering Steering Group (JMLSG) publishes, on 21 March 2017, proposed revisions to Part I of its guidance on the prevention of money laundering and the financing of terrorism for the UK financial services industry. The proposed revisions reflect the provisions of the new (draft) Money Laundering Regulations 2017 published by HM Treasury on 15 March 2017. The new regulations, designed to transpose the requirements of the 4th Money Laundering Directive (4MLD) of the EU, will come into force from 26 June 2017.


At the same time as amending text to align with the draft Regulations, JMLSG have made relatively extensive changes to the material on electronic verification in order to address concerns that the present guidance does not fully cover the issues and practices in the electronic/digital world. The text in Chapter 4 (Risk based approach) has also been re-ordered, to present more clearly the separate text on Risk assessment, and the risk based approach. Given the introduction of a formal legal obligation to carry out a risk assessment, it was felt appropriate by JMLSG to present the supporting material in its Guidance more clearly.


The proposed revision is also believed to be consistent with the Risk Factor Guidelines (RFG), finalised by the European Supervisory Authorities (ESA). The final text of these Guidelines has not been published, but the JMLSG text reflects what has been proposed in the ESA Consultation paper published in October 2015, which provides a reasonable basis for any possible changes that the ESAs are likely to make. Comments on the proposed revision to JMLSG guidance are invited by 28 April 2017 and the finalised, updated Guidance would then be subject to a formal approval by HM Treasury, as required.



[Lightfoots have in-house expertise to help firms carry out a review of their Anti-Money Laundering systems and controls to ensure compliance with the requirements of 4MLD and (draft) Money Laundering Regulations 2017. Any firm that needs assistance in this area may contact inorman@lightfoots.co.uk or ragarwal@lightfoots.co.uk ]





  1. PRA clarify regulatory expectation on Internal Ratings Based (IRB) Approach


Prudential Regulation Authority’s (PRA) consultation paper CP5/17 sets out proposed changes to Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approach’  to clarify the PRA’s expectations for firms applying for IRB model approval as to:

  • How they can demonstrate that they meet the requirements of the Capital Requirements Regulation (CRR)  on ‘prior experience’ of using IRB approaches; and
  • On the use of external data to supplement internal data for estimating Probability of Default (PD) and Loss Given Default (LGD) for residential mortgages.


With regard to ‘prior experience’, the CRR requires firms to have experience in using their internal rating systems to a standard broadly in line with the CRR requirements for at least three years prior to approval. With the proposed expectations summarised below, the PRA have clarified that, in order to meet this experience requirement, a firm is expected to have in place a mature process through which it monitors and reviews its IRB framework, rather than a need for every aspect of the final IRB framework to have been completed and reviewed for three years prior to approval.

In order to be satisfied that the above requirements in CRR are met, the PRA have proposed that firms should be able to evidence that:


(i) Its complete IRB governance framework has been through at least one annual cycle since internal approval, in accordance with CRR Article 191;

(ii) It has used its internal rating systems in credit decisions, lending policies, risk appetite polices and credit risk monitoring for at least three years; and

(iii) There has been at least three years of monitoring, validation and audit of the firm’s IRB framework, recognising that the IRB framework is likely to be subject to development and refinement during this period.


PRA have also clarified that, where firms have low levels of actual internal default data, the PRA have proposed that external data may be used as a supplement to internal data for the purposes of rank-ordering different borrowers by credit quality and to help adjust for seasoning as credit quality changes with loan vintage. This is in addition to use of external data for calibration purposes (as proposed in CP29/16 ‘Residential mortgage risk weights’).The PRA expect that firms attempting to evidence comparability with third-party data should include a comparison of default rates.


The PRA are also proposing to set reference points for estimating Probability of Possession Given Default (PPGD) for residential mortgages for firms that lack significant possession data.

The proposals are relevant to UK banks, building societies, and PRA-designated investment firms.

The proposals in this CP are part of a suite of enhancements to improve the IRB model application process and to clarify the PRA’s expectations regarding areas of the IRB framework that have been identified by firms as lacking clarity.


  1. Investment managers still failing to ensure effective oversight of best execution

The FCA published on 3 March 2017 the findings from their supervisory work looking at how investment managers deliver best execution for their clients. The FCA rules require regulated firms to have a strategy to ensure that all relevant parts of the business are compliant in ensuring best execution. In a thematic review on ‘best execution’ published in July 2014 they issued the best practice guidelines including making it clear to firms that “there should also be clear management responsibility and co-ordination between the front office and compliance to ensure a robust monitoring framework”.

The supervisory review found that many firms had not conducted a proper gap analysis since 2014 and therefore much of the poor practice the FCA had outlined in their thematic review had not been addressed. FCA are concerned that the pace of change in improving client outcomes in best execution is slow, with few firms having a cohesive strategy for improving client outcomes.

The FCA found some good practice in firms where best execution was considered throughout the investment decision making process, and not just by the dealing desk and that some dealing teams provided feedback to portfolio managers on their preferred trading strategies. They observed that firms showing good practice “had an effective governance process in place that challenged the overall costs of execution, renegotiated commissions and identified trends that helped improve future execution, which fed into a high level trading strategy”.