Regulation vs Culture

Regulation vs Culture

Following recent scandals and allegations of market manipulation, can financial services adopt industry-wide culture changes and sweeping reforms, and what have fined firms done to demonstrate their commitment to change? Alice Attwood reports.

Reverberations of the Libor and foreign exchange benchmark fixing scandal can still be felt throughout the market and the creation of a regulator focused on conduct is indicative of the focus on employees and the culture embedded within companies operating in the space.

Principles or Rules?

Regulators have been shifting focus from a rules to a principles approach to ensure that impending rules are appropriate for the industry they are governing, as part of an industry drive to change the culture investment banking.

Tracey McDermott, director of supervision and authorisations at Britain’s Financial Conduct Authority, told FOW: “The idea of principles-based regulation is not new. It has been a key part of the regulatory approach in the UK for many years.

“What principles-based regulation seeks to do is to focus on the core outcomes. This approach recognises it is impossible to set out detailed, prescriptive rules for every situation in a fast-moving market and that rules can, themselves, encourage some people to play to the letter, rather than the spirit, of what they are trying to achieve. It places more responsibility on firms and those that run them,” she added.

“A universal, one-size-fits-all approach to regulation works best for principles based conduct,” suggests president of ACI - The Financial Markets Association, Marshall Bailey.

“This leaves no room for uncertainty and means market participants all over – regardless of geographical location – are abiding by the same rules and held to the same standards of ethics and behaviour. When regulation is introduced on a national or regional level, you run the risk of ethical arbitrage,” he added.

As documented over recent years, some financial institutions have failed to keep to this responsibility. The fallout of the Libor scandal alone lead to shock and awe, and increased scrutiny over financial markets.

Since then, industry bodies have been working to ensure more effective checks and balances, as well as market-wide reviews to ascertain the real scope of the issues.


The Bank of England’s Fair and Effective Markets Review (FEMR) - established in June last year - seeks to tackle malpractice and restore confidence in the fixed income, currency and commodities market, and was born from the realisation end-users are largely ill-suited to the task of combating market misconduct across the fixed income, currency and commodities (FICC) markets.

Opinion has been divided over how best to strengthen oversight of wholesale markets, what approaches are most appropriate and which regulatory body should lead the charge.

The FEMR’s consultation report released in October last year detailed what needs to be done to reinforce confidence in the fairness and effectiveness of the FICC markets, and to restore trust, following high profile cases of abuse.

Established by UK Chancellor George Osborne, he said of the FEMR: “I am determined to deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them.”

Martin Wheatley, chief executive of the FCA said: “Much has been done to tackle the underlying causes of past misconduct, but the perception remains that too often private interests are placed ahead of fair competitive markets. Rebuilding trust in these markets will take time and requires firms and the authorities to take action... Given the essential role of these markets, it is vital that we get this right.”

ACI’s Bailey told FOW: “Regulators are rightly stepping up efforts to tackle trader misbehaviour and place ethics at the heart of their market reforms. There is a clear and urgent need to reform the culture and conduct of the financial services sector.”

McDermott told FOW the FCA will be looking at codes of conduct in greater depth as part of the FEMR.

The review’s consultation period ran to the end of January this year, with final recommendations set to be made in June.


Extraterritoriality has been a stumbling block for regulators for years. The FCA has been working to meet the challenge of co-ordinating across borders with international regulators while also forging ahead with plans to combat abusive behaviour in Britain.

McDermott said: “We recognise international solutions are often better than national ones in cross-border markets.

“However, we also believe that London’s role as a leading market means that it should be seen to be taking the lead in driving for the highest standards of conduct,” she added.

Cross-border issues remain and the challenge of extraterritoriality casts a shadow over the market. Yet, while regulators have committed to working together, there are requirements and standards that vary between jurisdictions which have conspired to make this an area of debate for years to come.

While these issues need attention, operating across different jurisdictions ultimately means that greater cohesion between regulators is imperative, ACI FMA’s Bailey told FOW. “We believe a one-size-fits-all code of conduct, covering important principles would be appropriate for adoption by all financial markets participants but are mindful that regional codes have also been developed across the world which are sometimes tailored to specific markets.”

Wheatley has said the FCA’s new Senior Manager Regime approach is better than the current flawed model but the CEO conceded there are some practical issues: "The challenge is one of practical implementation. It’s not straightforward, frankly, to manage the behaviour of many tens of thousands of individuals across complex, global organisations.”

ACI FMA’s Bailey added: "Levelling the playing field internationally in this way will provide much needed clarity for financial market professionals. It is also beneficial for regulators, as they can measure the behaviour, ethics and conduct of all participants by the same criteria – regardless of geographical location – and any misdemeanours can be immediately identified and addressed.”


Fines over Libor are still coming; Deutsche Bank in April was slapped with fines amounting to more than $2.5 billion over the manipulation of London, Euro and Tokyo benchmark interest rates.

The bank was ordered to pay the biggest fine yet over Libor and to terminate and ban individual employees who engaged in misconduct. Deutsche was also required to commit to create a benchmark and index control group which oversees the bank’s Ibor submissions.

The German bank subsequently ramped up its focus on compliance in recent years. Deutsche’s ’Strategy 2015+,’ announced in June 2012, included an ‘Operational Excellence’ programme. Within this, €3.6b has been invested to upgrade technology and operations across the business, including instilling its “three lines of defence” against future conduct issues, and upping its front-office supervisory headcount.

Results from an employee-wide survey in 2013 – some 52,000 employees – asked for opinions and expectations. These results, as well as senior management discussions, led to the creation of Deutsche’s six ‘core values’: Integrity, Sustainable Performance, Client Centricity, Innovation, Discipline and Partnership.

Strategy 2020, updated and launched in April this year, includes a focus on embedding “deep-rooted cultural change,” said the bank, with controls, risk governance, compensation deferral and diversity on the agenda.

Barclays was hit hardest by global regulators when it was fined over $2.5bn in late May as part of bigger action against six banks over foreign exchange benchmark manipulation which saw them fined over $5bn.

The bank has in recent years taken steps to ‘Transform’ the business, that is: Turnaround, Return Acceptable Numbers, Sustain Forward Momentum.

“Transform” included a new code of conduct for employees, The Barclays Way, which included training to meet their working requirements: “Every colleague must abide by this and annually attest to having read and understood it,” said the bank.

In a speech on ‘Trust and Trustworthiness in Banks and Bankers’ in New York last year, Barclays chairman, Sir David Walker, said the bank’s culture is taking shape as it works to embed its values.

“This is a journey to which the best support from the regulator is likely to be in the form of high-level and relatively detached encouragement rather than prescriptive rule-making, which is all too likely to be counterproductive,” echoing sentiment from across the industry that a step away from a rules-based approach may be more appropriate for the modern trading landscape.

More costs to come

Earlier this year a report for Morgan Stanley analysts said Europe’s banks are facing an estimated $52bn in fines and litigation costs over the next two years, with RBS and Barclays set to pick up the biggest bills.

"FX settlements underscore (the) need to prove culture and business models are transformed before returns and payouts can rise," analyst Huw van Steenis said in the bank’s note.

At the time, Morgan Stanley estimated that UK government majority-owned RBS, will have to pay another $10.6bn on top of the $12.6bn already paid or provisioned for, while Barclays, could have to pay another $8.3bn, HSBC $7.7bn, Lloyds $6.1bn and Deutsche Bank $5.1bn.

They also estimated that future litigation costs for European banks would include $6.5bn for interest rate benchmarks Libor and Euribor, and $9.4bn related to US mortgages.

Who’s to blame?

Accountability has been creeping up the agenda for regulators. Britain’s FCA in March outlined the thinking behind next year’s proposed Senior Managers Regime, with Wheatley stating that the SMR is important because it demonstrates an acceptance that professional accountability is a priority because it makes “commercial sense.”

Under the SMR, the FCA has urged City firms and managers to embrace the reform that forces individuals to be more accountable for conduct on their watch.

Increased professional accountability - for both individuals and companies - has only increased as a result of high profile scandals.

US Commodity Futures Trading Commission commissioner Sharon Bowen highlighted in March the increased focus on culture in the industry.

“It’s not just that we need to disincentivise people from going against the rules. I think we also need to improve the culture of communication within financial firms. In a world as complex and convoluted as finance, it is easy to make mistakes,” said Bowen.

“Every company needs to make it easy to fix or mitigate those mistakes, and that requires a culture where information about mistakes easily travels from the bottom to the top and vice versa,” she added.

The link between regulation and conduct is inextricably linked, Bailey, president of ACI FMA, told FOW, and professional accountability is imperative.

“Ultimately, it comes down to the behaviour of individual market participants, and the ability of their supervisors to enforce the standards required through oversight and governance. The actions of this relatively small and unrepresentative minority have damaged the reputation of the market in the eyes of the public, and the industry must now support regulators to drive positive cultural change and demonstrate that bad behaviour isn’t widespread across the market,” he said.

Regulation vs Culture

But what is more appropriate - a focus on prescriptive regulation itself, or the conduct of employees and the culture within businesses themselves.

The two go hand in hand, but regulators are implored by industry participants to consider the practicalities of potential rules ahead of implementation.

Speaking at The ACI UK - The Financial Markets Association’s Square Mile Debate in March, Gavin Wells, global head of LCH.Clearnet’s ForexClear and CDSClear businesses, warned: “You cannot be prescriptive with regulation. Rules should not be so specific that creativity is lost from within a market, there needs to be a balance between conduct and regulation, and at the centre of this balance is people.”

David Clark, chairman of the Wholesale Markets Brokers Association, said: “Behaviour has changed more than people think. The fines, especially the scale of the fines has scared people. The subsequent impact on individual behaviour has been huge, and on the whole, underestimated by the media.”

McDermott conceded that while the industry has come some way, conduct has to remain the key focus for financial professionals: “The issue with FX or Libor was not the technology, it was market participants working together in an attempt to game the market. In many ways, it was very traditional misconduct simply carried out in a different way as a result of different technology.”

Bailey told FOW: “Regulation alone will not stop bad behaviour, as it is rarely ever harmonised across borders. This means codes of conduct have a key role to play, and the best scenario would be for such codes to be implemented and backed up by legislation,” he said. 

A trader code?

The foreign exchange and derivatives trade body recently launched its updated code of conduct, the Model Code, and called for international co-ordination between national regulators to ensure against abusive behaviour by bankers and traders.

ACI FMA has said FX market participants should consider adopting a process under which managers periodically supervise FX policy compliance by their staff, indicating the trade body’s focus on conduct and transparency across the FICC markets.

"There is a clear and urgent need to reform the culture and conduct of the financial services sector,” said Bailey.

The trade association has acknowledged that there is more to be done to ensure behaviour changes and global institutions are clear on what is and isn’t acceptable.

“The idea of the ACI’s Model Code being used as a ‘stamp of approval’ adopted by the industry, is worthy of consideration,” a source told FOW. “At a high level, this already happens, and this framework is already used by central banks. Official adoption of the code would be a positive thing as it would create a level playing field.”

WMBA chairman Clarke backed the idea but noted: “The potential power in a code of conduct is still not fully exploited. Regulators have realised the potential positive impact that a code of conduct can have on trading behaviour.”

Another market source, who did not wish to be named, told FOW: “Codes of conduct have always existed but they must be updated and evolve to suit our evolving market.”

“In the traditional voice-trading environment, a trader’s word was his bond; there was an expected and accepted ‘gentleman’s agreement’ that was kept to,” he added.

“Many firms have adopted their own internal codes of conduct, and are required to complete frequent training to ensure they are up to date with requirements; this is common practice nowadays,” said Darryl Hooker, head of Icap’s EBS Market. 

Indeed CFTC Commissioner Bowen has called for employee requirements to “become part of the DNA of the organisation”.

Failure to comply

What is abundantly clear is that the repercussions of failing to meet internal and industry requirements should be severe, through fines, dismissal, or, if appropriate, imprisonment, to protect companies and the industry from future violations.

The responsibility to meet such requirements lies with individuals and companies.

Bowen said: “Each organization should have codes of conduct, rules of ethics, and conflicts of interest that are clear. Failure to adhere to this standard, absent significant extenuating circumstances, should result in termination of employment.”

Indeed, following the record fines that Deutsche was served in April, the bank was ordered to terminate and ban individual employees who engaged in misconduct; ten employees who were involved in the misconduct have already been terminated, according to documents from regulators.


However, while fines have been issued over compliance failures, there have been reoffenders.

“If a company has a number of violations, the sanctions for future violations would inherently have to be more severe to discourage recidivism, and it is possible that more than one person at the company among senior management would also be on the hook,” said CFTC Commissioner Bowen.

Bowen noted in March the effect that reoffenders have on the market as a whole. “Too many times, these settlements and alleged violations are coming from large actors who have previously run afoul of the rules, endangering the reputation of those actors and the trust that undergirds the larger financial system,” she said.

“We have a culture problem in finance, full stop, and it’s getting to the point of endangering firm’s profits and our system’s sustainability and stability,” she added.

Compliance spend

Compliance is now the biggest hiring area in financial services. A recent PwC study, the ‘State of Compliance,’ said that compliance officers are still facing challenges in understanding the full scope of business operations.

PwC supports industry calls for greater education of participants to ensure they are adhering to requirements, noting: “To be effective, compliance oversight of industry-specific regulations requires both knowledge of the regulatory requirements and associated expectations—and deep familiarity with the business context.”

The survey also noted that in financial services, the top skillset required when hiring for corporate compliance teams is ‘compliance or ethics,’ beating applicants with a legal background and industry experience.

“These teams are tasked with care-taking the whole business,” EBS’s Hooker told FOW.

The PwC study said 64% of financial services organisations reported increased compliance staff levels in the past year.

This is now a requirement for operating within financial markets. “While additional checks and balances around compliance may have started out as frustrating, they are now woven into the fabric of operations. In fact, it would almost be abnormal not to have this focus now, it’s a part of daily life,” added Hooker.

A source told FOW: “Protecting banks from employee behaviours is now the name of the game, and this is why we’ve seen such an increase in investment into surveillance and compliance divisions. Banks would much rather spend £100 million on infrastructure and compliance to protect themselves than billions on fines.”

What’s next?

While positive steps are certainly being made, WMBA’s Clark warned: “An unintended consequence of over-exuberant regulation is the hit on liquidity. I expect to see this during 2015.”

McDermott told FOW: “There has already been significant regulatory change, the most obvious example being the establishment of a regulator focused on conduct. But, ultimately, a cultural change cannot be brought about by regulation alone.”

“Looking ahead, scrutiny will only continue and increase. It remains to be seen what effect this will have on trader behaviour,” warned a former head of FX prime brokerage.

“We have come some way,” concedes the FCA’s McDermott. “Certainly when I speak with senior figures in the industry I know conduct is at the top of their agenda.”

When considering whether an industry-wide shift in focus for regulation – from rules to principles-based – market participants suggest that both can work: “It is the lack of understanding that creates regulatory uncertainty – this is the enemy and is very damaging to the market,” said the WMBA’s Clark.

EBS’s Hooker said, “The difference is rules are definitive and principles are open to interpretation. This therefore causes a struggle; running both in tandem, not contradictorily.”

McDermott warns the battle is not yet over and that changes to the culture of an industry is no mean feat.

Thus the future challenge is change: “Ultimately unless this change in culture becomes part of the DNA of firms, unless the front line owns this change and buys into it, it won’t happen, no matter how many fine words there are from those at the top and no matter how many thousands of compliance staff firms employ.”

Conduct and culture at financial institutions will be discussed indepth at FOW’s Regulation 2015 event on 8 September. For more information and to register, visit

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