Parting is such sweet sorrow: contentious supervision and the breakdown of regulatory relations?

I’ve written a couple of articles this year that touch on the questions that arise when regulators become more intrusive, or muscular, in their approach.??

It being St Valentine’s Day, my thoughts turned to how we assess the value of maintaining a good relationship with the regulators.

There has always been a dominant school of thought that firms and their senior leaders ought to bend over backwards to maintain a strong and constructive working relationship with the regulator.?

The theory goes that the regulator is more likely to give you the benefit of the doubt if there is an open relationship of trust and confidence between regulator and regulated.

One one level that makes sense, but is it still true in our new, more intrusive, world???

Reciprocity goes a long (or is it a little?) way

The regulators tend to split their supervisory approach to firms into two broad buckets: firms that have named supervisors (or teams) and those which do not.??While in broad terms, the requirements applying to both types of firm are the same, their experience of regulation is radically different.??

Firms which are collectively supervised (e.g. through a contact centre) - and this is the overwhelming majority by number - often find that the lack of a named contact makes it very difficult to have a meaningful ongoing relationship with their regulator at all.

The larger firms have a person (and sometimes a whole team) who they can pick the phone up to.??In that case, it makes complete sense to invest time and effort in establishing a good relationship with the supervisors on the end of the phone.??

Whether that gives you more leeway is something of an open question - I’ve always believed that it helps in marginal cases, but that generally it doesn’t radically change the overall outcome.??So might be of assistance if you need more time to deal with an issue; but if the regulator is minded to refer to enforcement, or require a redress scheme, it will likely still do so no matter how good (or bad) your relationship is.

A limited field of regulatory vision

I noted in my last article that being a supervisor of a large firm is rather like looking at a movie poster through binoculars from a distance of about a metre and then trying to name the cast.??There’s a lot going on outside the supervisors’ field of vision.

And here’s the point: regulators absolutely rely on firms to provide them proactively with information in order to supervise effectively.??And not just information that firms feel obliged to provide under Principle 11 or Fundamental Rule 7 - most firms go beyond what is strictly required by the rules when discussing matters with their regulators.

And given that the rules themselves are drafted in something of an elastic way, there’s real scope for interpretation, and the potential for a reduction in supervisory effectiveness should firms move to a strict “letter of the rules” approach.??

Formal powers take longer to deploy, are more expensive in terms of supervisor and lawyer time, and come with risks of challenge.??So it will be vital for regulators to adopt a sensible approach to the use of those powers.??

Moving to an alternative future where firms push the regulators to use powers all the time would lead to real reductions in supervisory effectiveness at a time when regulators are already overburdened with work.

Constructive challenge is key

Principle 11 and Fundamental Rule 7 are often cited as reasons why firms feel unable to challenge their regulators. The concern is that pushing back on requests from the regulator shows that the firm and its senior management are not being open and co-operative.??

For that reason, often firms do not see challenging the regulator - whether formally or informally - as a fruitful occupation.??

While it’s true that firm pushback can cause some supervisory eye-rolling at times, it doesn’t tend to produce an enforcement response as long as it is done constructively and in a considered fashion.?

The point here is that it is perfectly legitimate for the regulator and the regulated to disagree as to a particular course of action.??And while the deck is stacked in the regulator’s favour, that doesn’t mean that a considered approach to dealing with areas of disagreement will be unsuccessful.??Far from it.??

But when pushing back, it is normally vital to recognise that the supervisors have a job to do, and to approach the challenge in that light.?

In sorrow, not in anger

So, when we say “challenge”, what do we actually mean???Well, there are clearly formal legal challenges - in the Upper Tribunal and the Administrative Court.??And these will have an increasing place in an environment where formal powers are used more often - and not only for those “bet the farm” moments that come round from time to time.

The use of informal mechanisms, such as letters from lawyers, and requests to escalate matters beyond the line supervisors or to committees, may also become more prevalent.??And if they do, then the regulators will need to be prepared to engage with those constructively.??

Both will feel to the regulators rather like I imagine sand does to an oyster - prickly, irritating, and something to be dealt with decisively.??But it’s vital that the regulators see increased challenge as a strength of the system, not a weakness.??In that context, I would hope they would be prepared to continue to engage in circumstances where firms challenge constructively.?

So, where does all that leave us???Well, regulatory relationships clearly remain vital for firms.??But the flip side of that coin is that they also remain important to the regulators themselves, given their limited field of vision.???

The advent of a more intrusive approach to supervision, with the more regular deployment of supervisory powers, will give firms more opportunity to push back against interventions they consider are wrongly calibrated.?

And in that environment, a well-thought-out challenge - one that is made in sorrow rather in anger - ought not to lead to relationship breakdown.