Regulators are posing complex and challenging questions to firms and their individuals. Recent developments on senior management responsibility and remuneration really underline how all firms across the financial services spectrum and their senior leaders need to understand and embrace regulators' expectations.

The reality is that the regulators are playing hardball with fluffy concepts – the culture of firms and requirements for corporate decisions to be based around doing "the right thing". Senior leaders have no option but to take responsibility for that culture – and that's a hard ask given that it's so tough to pin down what culture and doing the right thing mean in reality.

To highlight the importance of the regulatory focus on culture and behaviour, we are planning a series of briefings on new developments that financial services firms and their personnel will need to embrace over the coming 12 months.

The pace and scope of change in financial services is wide, so this briefing series will cover key areas for individuals where the work of compliance and human resources specialists overlaps (including remuneration, recruitment and regulatory approvals for new senior manager positions, individual accountability and responsibilities, and setting your firm's culture in line with regulator expectations).  

What are the issues?

Financial services regulators around the world want senior management to be responsible and accountable for business failure and wrong doing. In the UK, a range of measures are moving forward and regulators are:

  • introducing more onerous rights and requirements on remuneration (bonus caps, deferrals, buy outs and clawback);
  • widening the potential for senior personnel to be accused of criminal wrongdoing;
  • requiring tight and closely aligned personal responsibilities;
  • recognising the need to encourage and protect whistleblowers; and 
  • requiring higher standards of overall conduct and probity by introducing changes to the approved persons regime.

Culture needs to get on the leadership team's agenda.

While boards, senior managers and business leaders are ultimately responsible for steering their firms through the inevitable changes, human resources, remuneration and incentives specialists, and those with responsibility for executive level personnel are at the front of this challenge. This is not just box-ticking for legal and compliance.

Employment issues are among the most delicate and important a business has to face, so HR specialists need to be on board, working closely with regulatory experts, as the firm must show how its ethical ethos permeates throughout.

What does this mean for your business?

In this e-alert we set out a checklist of elements to help your firm identify what the regulators want it to do to embed the right culture.

It is useful to understand what culture means to the regulators, as ultimately they will decide whether your firm and its senior management have the right ethos. And, of course, it's important to understand how a firm will be assessed.

Doing the right thing

While the legislative response to the financial crisis trundles on, regulatory bodies have adopted a simple mantra: firms need to adopt a culture of doing "the right thing". Ensuring the fair treatment of customers really has to be the cornerstone of the firm's approach to business.

In the UK, the regulators want culture and behaviours in the financial services sector to support business models and practices and allow for longevity and sustainability. Firms should treat customers fairly by placing them at the heart of their decision making.

This means the regulators will look at how a senior leadership team engages (e.g. whether it probes high return products or business lines, whether it knows about and understands cross-selling strategies, whether it questions how rapid or unexpected growth is obtained and whether it challenges if product governance processes are robust) as well as the overall governance and systemic approach of the firm.

Achieving the right culture

The regulatory approach places a significant duty on compliance and HR teams, who need to think about how these abstract concepts get worked into senior management consciousness, and practical reality at all levels.

The right approach will depend on the size of your firm but any firm must allocate appropriate resource and time to make this transition. We would suggest that the head of HR needs to engage with the head of compliance and specialist employment and regulatory counsel.

  • Each firm must decide (and communicate internally) what its culture is. It may be useful to involve external specialists to facilitate the leadership team reaching a decision on what the firm's culture is; they can draw on expertise from mediating at a senior level, impartiality and the ability to benchmark against peers. 
  • The tone from the top must be right – senior leaders must walk the talk. These developments need discussing at a leadership level. The company secretarial (or partnership secretary) team should be engaged to plan the timing and lead time for briefings and decisions.
  • HR must work with legal, compliance and operations specialists to translate the firm's cultural buzzwords into easily understood business practices, with appropriate guidance for supervisors and managers at all levels; and HR must support "the right behaviours" in all personnel through programmes aimed at performance management, employee development, training and competence and incentives. The spirit of the cultural buzzwords must pervade the firm.
  • Roles and responsibilities documents need to be amended and updated – and closely co-ordinated. Employment contracts need amending. Remuneration schemes need changing. Recruitment processes and in-train recruitment need reviewing. The firm's senior managers need training – both on culture and on the detail of the work undertaken by the teams they supervise.
  • Compliance processes need to reflect changes to the way in which the regulators interface with senior management (e.g. through the approvals process, supervisory tools including attestations, and greater use of enforcement action against individuals).
  • Effective whistleblowing policies should be in place, with senior management accountable for ensuring concerns can be raised by anyone without fear of reprisal and will be properly investigated.

Rolling this out through the business will raise many practical issues organisationally, particularly for staff. Getting it right can build trust and reputation with the regulators, staff and customers. Getting it wrong spells a hit to the bottom line: fines and sanctions (potentially including the loss of key individuals), brand damage, and a huge drain on management time.

Checklist for a foundation of fair treatment for customers

  • The Firm's culture is about more than mere compliance with rules and regulation – senior managers should not abrogate responsibility for deciding what is right or wrong.
  • Senior leaders (including the board) should check that control areas (such as risk, compliance and internal audit) are effectively managed, resourced, and able to raise concerns.
  • Identify the skills you need your leadership team to model
    • Executives should role-model integrity as well as technical and technological ability in addition to standard leadership skills.
    • Specialist leaders must demonstrate core attributes – e.g. during business reorganisation and integration, leaders must be good at managing cultural differences so "doing the right thing for the customer" survives.
    • Amend succession planning and talent programmes and brief search consultants.
  • Consider the senior management structure
    • Do roles tessellate so responsibility and accountability cannot fall between gaps?
    • Are responsibilities and accountabilities documented in clear, precise and unambiguous terms?
    • Do all personnel have the knowledge and the skills to carry out their role properly?
    • It helps if all personnel have clear goals, objectives, and performance metrics that are aligned vertically and horizontally – with overall firm culture paramount.
    • Do leaders, junior managers, teams and business lines understand the fixed and dotted reported lines they should use?
    • Does everyone know where and how to report any worries about potential wrongdoing?
    • Question whether your matrix management or fixed structure is appropriate, or would a combination be better?
    • Ensure roles, responsibilities, accountabilities and dotted and fixed reporting lines are refreshed periodically, especially following business reorganisation.  
    • Make sure your people know how to work in the structure your firm adopts.
    • Enable staff to focus on long term benefits to the firm.
    • Walk and talk culture – empower managers (at any level) to be able to communicate and demonstrate what the fair treatment of customers means for them, their personnel and their business line.
    • The firm's entire governance structure, including systems and controls, process, procedures (from product development to complaint handling) should be revisited on a periodic basis as part of a cultural review.
    • Firms should understand their future as well as their past – spot the potential upcoming issues not just handle fallout.

The UK is not going it alone. An increasing range of legislation coming in from the European Union (including MiFID II) is linking remuneration and incentive structures with fair treatment of the customer base and setting expectations around the role of management bodies in firms. All firms need to undertake this journey.