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Derek Neldner, 46, became the group head of RBC Dominion Securities on Friday.

Andrew Vaughan/The Canadian Press

There’s been a changing of the guard at Canada’s biggest investment bank.

Derek Neldner took the reins as group head of RBC Dominion Securities Inc. on Friday, and he’s got his work cut out for him.

Make no mistake: RBC’s capital-markets arm still defines the big leagues on Bay Street and is a Top 10 global investment bank. But these days, its bankers have a little less reason to swagger. Corporate clients are more cautious about deal making and borrowing because of uncertainties stemming from a slower U.S. economy, Brexit and high-profile trade spats.

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While those trends are weighing on investment banks around the globe, RBC’s bragging rights are also in shorter supply because of its own foul-ups. A spate of regulatory smackdowns, mostly south of the border, are creating new reputational risks for RBC’s capital-markets division which once prided itself on being the Boy Scout of investment banking.

Mr. Neldner, 46, has plenty of cred on the Street. But he still faces a formidable challenge. Not only must he propel new revenue growth without excessive risk taking, he must also keep his bankers and traders on a tighter leash. And if that wasn’t enough, his outspoken predecessor, Doug McGregor, will still be looking over his shoulder – at least for the time being.

Mr. McGregor, 63, spent more than a decade at the division’s helm, and during that time, earned a reputation for his blunt talk and imposing personality. On Friday, he became chairman of RBC’s capital-markets division and will remain in that job until he retires on Jan. 31, 2020.

It’s hard to imagine Mr. McGregor holding his tongue, especially given the division’s challenges. During its fiscal third quarter, net income and revenue from RBC’s capital-markets division fell – both year-over-year and quarter-over-quarter.

Results were hurt by lower investment-banking revenues, lower equities-trading revenue, a slowdown in mergers and acquisitions activity and bigger provisions for impaired loans.

While Mr. Neldner can’t control those macro trends, shareholders will expect him to improve certain financial metrics. For starters, the capital-markets arm’s return on equity of 11.1 per cent is sagging relative to the bank’s other divisions including personal and commercial banking (28 per cent), wealth management (17.2 per cent) and insurance (39.2 per cent).

There will also be more pressure to control costs, including in the way RBC pays its bankers and traders. The capital-markets division’s ratio of total compensation to revenue – which includes a variety of compensation costs including salary, benefits, stock-based compensation and retention bonuses – stood at 37.9 per cent during the third quarter.

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Mr. Neldner, meanwhile, is also heir to other headaches, including the fallout from cultural and conduct problems.

Last year, RBC abruptly dismissed Blair Fleming, then-head of its U.S. capital markets business, after an internal investigation found he allegedly violated company policies pertaining to workplace relationships.

Mr. McGregor later encouraged employees to “speak up” when they see improper behaviour, an obligation that Mr. Neldner now inherits as regulators sharpen their scrutiny of misconduct risks at banks.

The division’s compliance issues have come to the fore again in recent months. In August, RBC agreed to pay a $13.55-million financial penalty to the Ontario Securities Commission to settle charges that it failed to supervise foreign-exchange traders over a three-year period.

Regulators alleged that traders used electronic chatrooms to share confidential customer information with their peers at other companies between 2011 and 2013. What’s more, the OSC alleged that RBC didn’t completely correct its chatroom compliance problems until 2015. (Toronto-Dominion Bank separately agreed to pay the OSC $9.3-million.)

And just last month, the Commodity Futures Trading Commission (CFTC) slapped RBC with a US$5-million fine for “failing to meet its supervisory obligations, which resulted in hundreds of unlawful trades and other violations” from late 2011 through May, 2017. This was despite the fact that RBC was punished for similar compliance violations in 2014, when it was ordered to pay a US$35-million penalty for engaging in illegal futures trading.

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There’s no understating how harmful blunders such as these are to RBC’s brand, especially after the Michael Lewis book Flash Boys lionized the bank’s do-gooder culture.

The bank made public-relations hay from the publicity for years. Perhaps, its executives’ biggest mistake was believing their own PR.

Mr. Neldner, who has worked his way up the ranks at RBC since 1995, is now responsible for mopping up such messes. The bank cannot afford more hits to its reputation. His troops will have to fall into line.

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