Fund Forum

Culture and its role in driving behavior has increasingly been the focus of regulators in the United States. American regulators, however, do not have a monopoly on the discussion of regulating culture. In the fall of 2015, Mark Steward, Director of Enforcement and Market Oversight for the Financial Conduct Authority (FCA) in the United Kingdom delivered remarks on culture and governance.1

In his remarks, Director Steward cautioned that culture was in danger of becoming a "buzz term" and "merely regulatory"2 in nature. He questioned "how to make it easier for those who know the price of relying on the wrong values."3 Director Steward answered the question by itemizing four components to a good culture: (i) good rules and standards, (ii) a detailed understanding of the business, (iii) effective systems and controls, and (iv) a healthy dose of reality, or more specifically, systems and controls that cannot be "set and forget."4

In closing, Director Steward asserted that there are no complete prescriptions to achieving good culture and "no standard regulatory metric,"5 but argued that early detection and correction of problems or misconduct can "become the insight for a series of effective cultural metrics."6

More recently, Jonathan Davidson, the Director of Supervision – Retail and Authorisation for the FCA delivered remarks at the 2nd Annual Culture and Conduct Forum for the Financial Services Industry. Director Davidson stated that "culture and governance is one of the FCA's seven priorities"7 in its annual business plan. The FCA defines culture as "the typical, habitual behaviours and mindsets that characterise a particular organization."8 Sounds familiar.

Director Davidson goes on to identify "mindsets" underneath these behaviors as the "beliefs or values that people feel are important."9 He attributes recent scandals to mindsets divorced from the impact of actions on clients and society. However, he cautions that the FCA does not believe there should be a "one-size fits all culture," but rather that "mindsets and incentives will shift to make doing the right thing for consumers and the markets the objective that is always considered."10

Director Davidson then asks the blockbuster question: "How do you measure culture?"11 He acknowledges that certain survey methods and metrics are being used by firms to understand mindsets and behavior, but articulates that the FCA is looking at what management is doing to shape culture. Director Davidson identifies four areas that leaders can use to shape culture: (1) tone at the top, (2) practices that tell people what they need to be successful and ensure the right people are employed and rise to leadership roles, (3) narratives that explain what the firm is trying to achieve, and (4) the capabilities of an organization.

With respect to tone, Director Davidson acknowledges that leadership sets the firm's direction, but argues that middle management is critically important to tone. In terms of practices, he identifies recruitment, compensation and promotion as critical to culture. As for narratives, the FCA looks at the tone of strategies, business plans and mission and value statements. Finally, new mindsets and behaviors may require new capabilities, such as learning how to solve customer problems in addition to the competency to sell specific products.

Director Davidson states that it is "vital to establish a culture of accountability for conduct at the heart of a firm's activities." In March of 2016, the FCA launched the Senior Managers and Certification Regime (SMCR), which provides clarity around roles and responsibility and ultimately is designed to hold managers accountable for their decisions and those of the people they oversee. The SMCR is based on three underlying ideas: (1) senior managers should be clearly accountable for their decisions, (2) senior managers will be accountable for decisions of their subordinates, and (3) senior managers will be accountable for ensuring that their subordinates meet appropriate standards of conduct.

The international view of culture appears to be headed in the same direction as recent commentary from U.S. regulators. Similar to their counterparts, international regulators provide a bread-crumb trail to follow in the search for good culture, which include good rules and standards, a detailed understanding of the business, tone at the top and at the middle, and narratives that explain what the firm is trying to achieve. But where does this leave us?

International regulators acknowledge that there is no "standard metric to measure" or "one-size fits all" culture. However, certain familiar themes emerge linking two things: (i) culture and conduct, and (ii) culture and governance. The bread crumbs sprinkled by the international regulators again provide clues to achieving good culture, but the question remains how culture will be measured. Clearly, mindsets divorced from impact can result in scandal. The SMCR is an example of a regime designed to reconcile culture, governance and conduct. Firms that are able to craft programs containing these bread crumbs are more likely to inject the "healthy dose of reality" necessary to achieve good culture. And to reiterate Director Davidson, a good outcome is more likely "if it is chosen and not imposed."12