As discussed in a speech on conduct and culture by its Chief Executive Andrew Bailey on 19 March, the UK Financial Conduct Authority (FCA) has issued a new discussion paper on culture within financial services, in which the FCA states that:
“Culture in financial services is widely accepted as a key root cause of the major conduct failings that have occurred within the industry in recent history, causing harm to both consumers and markets… Given its impact and the role it needs to play in re-building trust in financial services, firms’ culture is a priority for the FCA. We expect firms to foster cultures which support the spirit of regulation in preventing harm to consumers and markets.”
The financial service regulators as well as the Banking Standards Board (BSB), Financial Reporting Council (FRC) and legislators have for a number of years been looking at initiatives to address the recent major conduct failings, economic downturn and range of scandals that have impaired trust in the sector. Whilst it cannot be said that there have been failings at all firms across the sector, this impairment of trust is a sector wide issue, and culture is about more than fixing conduct issues. As the FCA recognise: “…healthy cultures can also complement and support businesses’ financial performance.”
Culture has been at the heart of each initiative
The Accountability Regime (including Senior Managers Regime; the certification regime, new conduct rules as well as new regulatory reference and whistleblowing rules) was launched, focussed primarily on Banks, in March 2016. The Chief Executive of the FRC said then; “Good culture is essential to achieving objectives” and the incoming Chief Executive of the FCA stated that: “As regulators we are not able, and should not try to determine the culture of firms. We cannot write a regulatory rule that settles culture. Rather, it is the produce of many things, which regulators can influence, but much more directly which firms themselves can shape” Charles Russell Speechlys held a panel debate in 2016 that was chaired by the City editor of the Wall Street Journal with various participants including the Institute of Business Ethics, and issued a survey and a White Paper on the question: Is the Financial Services sector at the point of Cultural Risk?
Some key themes and takeaways were:
- It was generally agreed that culture goes beyond compliance and can be a valuable differentiator for Financial Services firms.
- Good culture needs to address more than the codes, regulations, duties to customers, conduct rules and the administration of justice.
- Values and good culture drivers should come from the top, and then become lived, part of the fundamental assumptions, beliefs and motivations of all in the firm. The tone from the top, the tune from the team.
- It should be a natural part of a sustainable business model for firms to put the client at the heart of the business, adopting a structure that encourages and rewards staff to serve the customer in line with the Firm’s culture is critical.
- A significant proportion of people feel that regulation is stifling innovation and damaging entrepreneurial spirit within the sector.
- Fear has driven some firms to overcomplicate the compliance process which has led to either negative or less than ideal culture. Some firms need to simplify by working out their shared values, attitudes, standards and beliefs and then aligning them across the Firm’s goals, strategies, structure and approaches to its people, customers, investors and the greater community.
The FRC embarked on its culture coalition project to gain a better understanding of how boards are addressing culture, to encourage discussion and debate, and to identify and share good practice. Their report Corporate Culture and the Role of Boards, published in July 2016, “sought to address how boards and executive management could steer corporate behaviour to create a culture that will deliver sustainable good performance”. The report covers the increasing importance which corporate culture plays in delivering long-term business and economic success and on the role of the board in shaping, monitoring and overseeing culture.
The Government is currently consulting on revisions to the UK Corporate Governance Code (against which Premium Listed companies on the London Stock Exchange must ‘comply or explain’). One of the updated Principles highlights how culture should be aligned with the company’s strategy and is supported by the following new Provision:
"Directors should embody and promote the desired culture of the company. The board should monitor and assess the culture to satisfy itself that behaviour throughout the business is aligned with the company’s values. Where it finds misalignment it should take corrective action." (Provision 2)
This is supported by the draft accompanying Guidance, which has a section on culture including the statement that: "The board sets the framework within which a healthy corporate culture can develop, that underpins the way in which the company operates. It then satisfies itself that the culture throughout the organisation is consistent with that framework, leading by example and taking action where it spots misalignment." (Guidance 39)
On 12 March 2018 the BSB published its Statement of Principles for Strengthening Professionalism designed to “challenge the leaders of banks and building societies to invest in their employees, and ensure a sustained focus on serving customers, clients and broader society”. On 15 March 2018 the BSB published its 2018 Annual Review, which includes the results and insights of its second annual assessment of culture, behaviour and competence in UK banking. This is based on core questions, each relating to one of the nine characteristics identified by the BSB as associated with a good culture. Andrew Bailey, Chief Executive of the FCA, commented: ‘For firms to be able to manage their culture, they must first understand it. The Banking Standards Board’s ground-breaking work gives its member firms an important perspective on their own culture, and addresses challenges that the sector collectively needs to overcome in order to serve both its customers and society well.’
FCA discussion paper: “Transforming culture in financial services”
Published on 12 March 2018, the FCA discussion paper is a set of essays that discuss what a good culture might look like, the role of regulation and regulators, how firms might go beyond incentives, and how to change behaviour for the better. The FCA would like all those with an interest in financial services to consider the issues in the paper and to engage in the debate about what constitutes a healthy culture, and how to promote it.
Jonathan Davidson, FCA Executive Director of Supervision - Retail and Authorisations, said:
“Culture may not be easily measurable but it is manageable. So firms can and should take responsibility for ensuring their culture is healthy for both their employees and customers, which can complement and support their business strategy. We as a regulator have long gone beyond having the mindset that simply complying with rules is enough. However we don’t believe a one size fits all culture is the right way to go. So we want to promote a discussion and consensus on the essential features of a healthy culture and how firms, regulators, employees and customers can help deliver that culture.”
He notes that the FCA focus on four main drivers when assessing a firm’s culture:
- its purpose
- its leadership
- its approach to rewarding and managing people
- its governance arrangements
Importantly, he specifically recognises that different firms will have different cultures. The FCA have prescribed minimum conduct rules, but do not prescribe what a firm’s culture should be.
On 19 March 2018 Andrew Bailey, Chief Executive of the FCA gave a speech emphasising that work on firms’ culture is embedded in the work of the FCA’s supervisors and is an important priority for the FCA and that the essays in the discussion paper indicate that culture is about encouraging and incentivising good things, not just stopping bad things from happening and that the Senior Managers Regime and measures to govern the payment of remuneration are important developments in creating incentives for good culture. It lists actionable insights for financial services leaders and practitioners to consider how they effect change in their organisations, including:
- using behavioural science to guide incentives and cultural change
- looking beyond the role of leadership in effecting change
- applying strategic focus to the continuous process for adapting culture
- fostering environments of trust to encourage openness and learning
- applying a systems perspective in assessing both internal culture and external influencers