Can you really make finance industry spivs do the right thing?

The Federal Government is giving it a fair shot with its proposed new Financial Accountability Regime (FAR), due to be introduced to Parliament later this year.

But the UK’s Financial Conduct Authority (FCA) has its concerns.

In 2018, the FCA did a cost-benefit analysis of the UK’s Managers & Certification Regime (SM&CR),  which began in 2016 and is the model for FAR.

Here’s one of its observations:

“Contrary to its intention, the SM&CR may increase the proportion of excessive risk-takers at the top levels of firms.

“Risk-averse people may be put off applying for senior manager posts by the perception of increased accountability (and therefore potential liability).

“This would leave a pool of applicants more prepared to take risks and potentially behave recklessly, which is precisely what the rules aim to avoid.”

The SM&CR – and FAR – are designed to make sure rogue money managers have nowhere to hide. And not just money managers but also HR and IT bosses.

Under the new Australian rules, finance industry companies will need to identify all of their key decision-makers, who will face big fines and docked pay and bonuses if they do the wrong thing.

Sounds reasonable but is naming and shaming and financial pain enough to keep dodgy managers honest and clients out of harm’s way?

Or, as the FCA warns, instead of weeding out the spivs, will the new rules just help their run to the top?

The FCA’s 2018 assessment also acknowledged (and who would have guessed this?)  that companies will face increased costs, not only in complying with the new rules but also as a result of managers spending more time monitoring staff, and resources potentially being diverted from “other, more profitable activities”.

But the FCA shrugged off that concern, with an argument you suspect the Australian regulators have taken note of:

“While we expect senior managers to focus on the regime, they still have strong incentives to manage firms in the interests of the firm and its owners.

“Further, the requirements of the regime are designed to be proportionate to the complexity of individual firms and the risks they pose to consumers from misconduct.”

Which, when translated from bureaucratese, would seem to say: “Yes, there will be costs, but that’s not really our problem. We just make the rules.”

The FCA also conceded some of the implementation costs might be passed on to consumers in the form of higher prices.

But it had faith that the market would sort it out.

“The degree to which consumers pay these costs, rather than firms through lower profits, will depend on the intensity of competition,” the FCA said.

But, in the end, the SM&CR (and the FAR) are not really about cost and benefit as measured by a bottom line but rather about changing the culture and behaviour of the finance services industry for the benefit of consumers.

“A robust individual accountability regime can reinforce acceptable standards of behaviours and be a critical factor in deterring misconduct,” the FCA said.

“Ultimately, its main aim is to drive culture change by making senior managers accountable and by applying baseline standards to all financial services staff.”

And this, the FCA insisted, “will result in decreased misconduct and, therefore, benefit consumers and firms, as well as the market as a whole.”

It went so far as to suggest the new accountability regime would result in “improved trust in financial services” and would “help raise public confidence in the industry”.

The industry needs all the help it can get to win back public confidence and the Federal Government clearly had to do something after the findings of the banking royal commission.

It’s logical to adopt and adapt an existing set of accountability rules that the UK developed after its own series of banking scandals  – from interest rate rigging to bad insurance practices.

Will FAR work? The proof will come in the negative – the absence of future finance sector scandals.

But one thing it will surely do is provide even more work for the booming risk and compliance industry.

Not that further stimulus is needed.  News Corp recently announced that its Dow Jones risk and compliance division has clocked up its 12th consecutive quarter of 20 per cent plus growth.