The UK’s Financial Conduct Authority has made a clear pronouncement

The UK’s Financial Conduct Authority has made a clear pronouncement that the culture in the financial services sector must be transformed: “Firms’ culture and governance is a continuing priority for the FCA because both can either drive or mitigate harm to consumers and markets, leading to either positive or negative outcomes.”

The Senior Managemers & Certification Regime (SM&CR) ushers in the FCA’s (and PRA’s) attempts to affect culture at the top of an institution by implementing a regime which holds senior and other key individuals accountable for specific risks and future failures. The SM&CR demonstrates active engagement by the regulators in ensuring proper management and accountability at the board and senior levels of regulated financial institutions. Cultural failure has been highlighted for years, but banks and employees have been slow or reluctant to change. Direct intervention by the FCA will be seen as critical to shifting bank culture and re-establishing financial market credibility with the public.

Changing a firm’s culture is a large, on-going multi-pronged project. GFE’s view is that ex-senior bankers are an important component to develop and execute an effective strategy for properly aligning a firm’s culture with stakeholder expectations. Ex-banking professional Experts are best placed to spot asset-class specific issues that may not be readily apparent to the non-banker. These Experts are especially familiar with the business of banking and therefore have a comparative advantage in determining whether there are issues to navigate – for example, traders exploiting client positions and asymmetric information or issues of credit valuation adjustment in relation to the market value of counterparty risk. In our opinion, peer group professionals can be positioned as an effective conduit through which governance and controls can be effected – as well as ways to position and implement effective governance and controls of and for front office personnel.

Indeed, the UK’s Parliamentary Commission on Banking Standards has stated that it: “has found the advice and evidence of some experienced bankers untainted by recent crises extremely helpful in exposing the flaws identified in the banking industry and proposing remedies.”

Banks are now subject to a degree of regulatory scrutiny they have never previously experienced. Unfortunately, some banks have seen their internal risk and control functions fail across multiple front office divisions. GFE’s own research and experience leads us to believe that the introduction of banking Experts plays an important role in cultural transformation. Broadly speaking, it will remain an ongoing problem, despite compliance overhauls, until banks realise that well-respected ex-bankers have far more influence in this sphere than non-banking consultants.