Learning the lessons of history

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I watched the film “The Big Short” again in the run up to the festive period. On my own, as I couldn’t entice anyone in the house to watch the story of how close we came to moving back into the Stone Age.

It’s very powerful and I highly recommend it. One of my favourite scenes is when the Fund Manager, Mark Baum, visits S&P to try and understand why they won’t downgrade the ratings on mortgage backed securities and collateralised debt obligations (CDOs), despite the defaults rates of mortgages breaking all the historic levels. The S&P representative admits that if when approached by the banks, they don’t give their instruments AAA rating, the Banks will simply go to another organisation and they will lose the fees paid.

Of course, this is a dramatisation of history and in reality, we all trust we are a long way from these dark days.

Well it does mean that those working in CRAs, who provide the rating to the funds and investment vehicles that we encourage clients to invest in, will be subject to the same level of regulatory scrutiny and FCA fees as the rest of us

Why is this of interest today? Well, an unintended consequence of Brexit (there I said the B word), was a page I found when preparing a round up of regulatory activity in 2019. Come the exit day of 29th March, the FCA will become the UK regulator of credit rating agencies and CRA need to advise the FCA if they intend to offer services to the UK markets from exit day. N.B if there is an implementation period after Brexit, the change will be delayed until the UK is fully out but will still need to happen.

Does this impact us in retail markets? Well it does mean that those working in CRAs, who provide the rating to the funds and investment vehicles that we encourage clients to invest in, will be subject to the same level of regulatory scrutiny and FCA fees as the rest of us. Which means that they too, will be subject to the SMCR regime when implemented in December 2019. I took a look at the 27 page notes to completing the conversion document and couldn’t help but think it may be a bit of leap for organisations which have historically been on the edge of our regulated world looking in but significantly impact it. Section of the guidance include;

  • Ownership structure
  • Corporate governance
  • Financial resources for the performance of credit rating activities
  • Staffing and compensation
  • Issuance and review of credit ratings
  • Conflicts of interest
  • Programme of operations
  • Outsourcing

Uncannily like the preparation others are now undertaking as their SMCR projects.

I am not suggesting for one moment that CRAs will be unable to complete the application successfully and fully comply, but use it to highlight the absolute directions of travel. All FCA regulated firms have to be properly run, irrespective of the activities they provide to financial markets and the clients they service. Organisational clarity and the management of the firms’ risks and potential conflicts have to be carefully orchestrated and effectively managed to avoid the near absolute collapse that we witnessed in 2008. Individual accountability will capture the Senior Managers of all firms, is not Brexit dependent and requires significant planning to incorporate it as the firms “living and breathing” BAU post December 2019.

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Through our award winning training and consultancy partnership FSTP LLP we hope to become a trusted provider of services to client firms across Financial Services. Specialties: Training and consultancy, project and interim management from regulatory issues through to management development and board services. Chartered Member of the Chartered Institute of Securities & Investment

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