How to survive when the regulators come calling

Barely a week passes without news of another big name feeling the heat from the watchdogs. What to do if it's you in their spotlight? Jeremy Hazlehurst investigates.

by Jeremy Hazlehurst
Last Updated: 16 Jun 2015

You've got to feel for Dave Lewis (pictured). He was meant to start his new job as CEO of Tesco on 1 October, but was handed the keys a month early to fire-fight a disastrous set of results. The man known as 'drastic Dave' for the way he turned round Unilever's UK arm was already knee-deep in management changes when – oops! – it emerged that the supermarket chain had overstated its half-yearly profit by £250m. 

Cue panic and the suspension of several top execs. Warren Buffett said that buying shares in the business had been a 'huge mistake'. The share price plummeted to an 11-year low. And on 1 October, instead of swaggering into his swanky office and feeling smug as he dropped into his comfy big chair, the poor new boss was being informed that the Financial Conduct Authority, the body that regulates the retail industry, was launching an investigation into Tesco's bean-counting botch. Welcome to the hot seat, Dave.

So how do you survive if the regulator comes knocking on your door? It's something that more and more CEOs are going to have to deal with, as the newly minted Financial Conduct Authority shows its claws. The FCA only came into existence in April 2013, when it took over the regulation of the financial sector from the Financial Services Authority, which oversaw markets at a time when banks sold PPI and the banking system almost collapsed.

The FCA is keen to be more effective than its predecessor and is quickly expanding its operations. In April, it started regulating consumer credit, which covers credit cards, peer-to-peer and payday lending. Wonga was the first high-profile firm to come a cropper when it had to write off £220m of loans.

Someone who knows better than anyone what it's like to get the call is Jonathan King, who became UK CEO of HomeServe just before the regulator launched an investigation into overaggressive selling at the firm, something that culminated in a £30m fine and the loss of around 600 jobs. (He has since left the company and now advises on how to deal with regulators.)

Following a career at Boots, where he opened stores in Thailand, Japan and the Netherlands, King met HomeServe's CEO, Richard Harpin, at a party, was attracted by the business, an insurance product that ensures you can find a plumber in an emergency, and joined. After four years as managing director of the UK business, he was chosen to take the business to the US and Australia.

It didn't take off Down Under, but it was a success in the US, where King expanded the operation from an office at the end of Miami airport with 30 people to one with 600 employees and 1.5 million policies. He had extensive experience of dealing with regulators, having worked with five in each state in the US, before he was promoted to CEO of the British business. He quickly got to know the UK version.

The problems started before he had even landed back in Blighty. He knew there were problems with HomeServe's selling tactics and had commissioned a report from Deloitte to look into it. 'I realised there were issues around cross-selling, particularly on the phone - we made calls to existing customers and offered them extra products,' he says. 'We weren't explaining what customers were getting well enough and what the price was. It was a complicated pricing mechanism and it wasn't good enough.' He adds: 'The FSA visit kind of confirmed all this.'

So what happens when the financial regulator pays that first visit? 'It was all very civilised,' says King. 'They sent a letter saying they'd like to come in and do a review. They were unhappy about the way we were handling customer complaints - people had been going direct to the financial ombudsman; there were a lot of referrals. And there was a whistleblower.'

The first thing was a so-called Arrow visit, followed up with an RMP, a risk-mitigation programme - a list of things to improve. 'There was quite a lot on ours,' admits King.

Then they entered the supervision period, which was pretty intense. The regulator was in contact daily at the start, he says, then cut that down to weekly, then monthly, before eventually stopping.

But interventions are not always so civil, says Margaret Cole. She is now general counsel at PwC, but as the FSA's head of enforcement she was considered the woman who taught it how to bite. 'The regulator comes knocking in a variety of ways,' she says, 'the most extreme of which is turning up unannounced with a warrant at the premises.'

This can be an office, but in some cases it's the family home when there is suspicion of criminal activity, which is normally insider trading. 'When a gang of regulators turn up with a bunch of police, it is a bit of a shock to people. It's quite dramatic,' says Cole. On one occasion on her watch, the FSA arrived with police at five separate premises at once, she says, and started putting things in sealed evidence bags.

Tesco's Dave Lewis has an FCA investigation on his hands after profits were overstated

The HomeServe investigation was less theatrical, but far more public than a dawn raid. There were television crews outside the gates and it was all over the financial press. The share price tanked by 30%.

But King says he was always confident the business would survive, because the core product was strong. They had an 80% renewal rate, and it didn't drop much despite the bad press.

He reacted calmly and, because he knew at the outset that he would have to fully co-operate with the FCA, ensured that he got this message out in person. 'Did people bang on my door and stop me in the corridor in tears? Absolutely. I had weekly surgeries where people could come to speak to me and I chose to give some of the messages myself about redundancies, standing up in call centres and saying: "Quite a few of you are going to lose your jobs."' How did he feel doing that? 'Awful.'

Others are not so sanguine when faced with an investigation. 'People can get very emotional,' says Cole, especially on a raid. 'The man - and it is usually a man - can have family around. There is anger, tears, all that kind of stuff. The more businesslike and sophisticated the person you are dealing with, the calmer they would be,' she says. 'Sometimes people get very upset and behave irrationally, sometimes they are straight on the phone to their lawyers to find out what it means.'

HomeServe also acted quickly, and immediately suspended its sales and marketing operation. 'We sent quite a lot of people home,' says King. 'We carried on paying them, but there was no work for the outbound sales people to do.' How did that go down? 'People were pretty shocked. The people who were sent home were concerned, and quite a lot of them did eventually lose their jobs.' A workforce of 2,500 went down to about 1,900.

Cole says that this is the right way to react: putting your hands up and co-operating is really the only option. In the past, when the FSA was seen as toothless, people were more likely to react aggressively, to decide to 'fight them on the beaches', as Cole puts it, especially if it was an individual, rather than a firm, whose reputation was on the line. Now that its successor, the FCA, has shown that it is only too willing to see things through, people have realised that there is not much to gain from adopting a combative approach, says Cole.

The results in the HomeServe case were positive. It is still a thriving business. Revenues are lower, but more stable. Products are simpler and more wide-ranging. For example, it didn't used to fix dripping taps. Now it does. (It expected this to lose money, but it increased retentions and paid for itself.)

But the biggest change is the way salespeople are paid. It used to be that people had to hit sales targets, and if they did their customer service scores would be used to give them an extra bonus. Now it is the other way round: customer service is the key measure.

That might have pleased regulators and customers, but it wasn't popular with employees. 'Nobody likes being paid less,' admits King. But the firm seems to have become stronger and more stable, and perhaps nicer too.

The HomeServe tale was only concluded this year, but CEOs facing the regulator today might have a different experience from Jonathan King's, because the powers that be are increasingly going after individuals. Carlos Conceicao, formerly of the FSA and now a partner at law firm Clifford Chance, says individuals often contact their lawyer at the start of an investigation because the FCA wants to nab those on whose watch things went wrong.

Notoriously, nobody was imprisoned for the mistakes that led to the 2008 financial crisis, and a nebulous 'culture' was blamed instead. Now, says Conceicao, the FCA is trying to nail down how individuals foster cultures, looking at remuneration structures that create bad practices, but also the mood music set by senior management. 'The FCA is looking at the messages people were giving out to employees,' he says. 'What are they prioritising in weekly emails to staff, or in Christmas messages? It is looking at staff communications.'

A firm should set up structures to deal with investigations, he says, including a person to deal with day-to-day responses to enquiries and a strategic team for more critical decisions. Staffing this team can be tricky.

'Often the people who have the most emotional connection with the issue are the ones who know most about it. You can't completely distance those people from the investigation because they know why decisions were taken and what procedures were followed.' Self-preservation plays a part, too.

So what can you do to head off the FCA's worries? Being able to deal with regulators can be seen as a cost of doing business, if not a competitive advantage. 'It's essential to have good-quality, astute people who can win the confidence of their supervisory team, read the tea leaves and understand what the regulators' concerns are, and can anticipate areas of interest and address them,' says Nikunj Kiri, a regulatory partner at law firm Linklaters. 'That's why you see many senior ex-regulators being hired into private practice. The demand for talented senior compliance professionals in the financial services sector has dramatically increased.'

Ex-HomeServe boss King agrees. If the company had been more aware of the FCA's interests, it would have seen that the regulator was looking at sales practices and remuneration. 'A business that understood how to deal with this would have seen trends around customer complaints and other businesses getting fined, and would have spent time and money on it, and not got itself into that position,' he says.

What should firms be getting ready to deal with next? King says the FCA's current obsession is with behavioural economics. 'It is thinking about how customers make decisions. The implication is that they sometimes make bad decisions because of the way firms present choices about products,' he says. 'A wise business would be looking at this now.'



– Make sure your receptionist knows the regulator's name, so if investigators do turn up, they are quickly ushered into a private room. Otherwise, says a former FSA employee who took part in raids, they might be left in reception where they can see people ducking out of the back door. That doesn't help the firm in the long-run.

– Accept the investigation. 'The first reaction is often disbelief,' says Clifford Chance's Carlos Conceicao. 'People say: "I know we've had this issue, but why did they have to reach for the enforcement tool? This could have been dealt with differently. This shouldn't be happening to us." Often the instant temptation is: "I'm sure if I pick up the phone I can make it go away." You can't.'

– Speak their language. 'Like any organisation, they have jargon and current themes. If you can get a grip on that, it is tremendously valuable,' says Jonathan King. The FCA people have targets to hit and desired outcomes. Help them achieve what they need and they will help you, King says.


– Talk to the regulator when you are drunk. Our ex-FSA man says that he was once on a raid after the senior management had enjoyed a liquid lunch. 'The CIO was very chatty and told us all sorts of stuff he probably regretted.'

– Blab about an investigation, but also don't neglect to tell the people you need to.

'Normally, the fact an investigation has commenced is kept confidential, both by the firm and by the regulators,' says Linklaters' Nikunj Kiri.

'Some firms will disclose the existence of the investigation early on, for example, in the context of announcing remediation activity or to prevent a drip-drip of news. Others will choose to say nothing until it is concluded, or it is clear a disciplinary outcome is likely,' says Kiri. But they might have contractual duties to tell customers or counterparties and insurers or auditors or regulators in other jurisdictions.

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