The FCA has published a speech by Andrew Bailey, FCA Chief Executive, entitled Culture in financial institutions: it’s everywhere and nowhere.
Mr Bailey begins his speech by discussing what he means by culture and then sets out what he sees as the respective roles of firms’ governing bodies, management and public authorities. He then uses two case studies, around remuneration and governance, to illustrate the changes the FCA is seeing. In the final part of his speech Mr Bailey describes the FCA’s role, underling that culture, well defined, is at the heart of how it assesses firms and looks for improvements where needed.
When discussing the remuneration case study Mr Bailey states the following:
“It is critical that boards and regulators think through the consequences of structures and incentives. In bank remuneration in the UK we have emphasised the importance of deferring variable remuneration consistent with the observation that the risks and returns of activities evolve over a considerable time. And, during that time of deferral and after it, variable remuneration can be cancelled where problems or poor performance materialise. The objective here is to align structures with incentives, and create the culture that people have skin in the game. We are also acting to stop people evading this discipline by moving jobs and cashing in deferred remuneration – the problem known as rolling bad apples.
“Second, we have used the regulatory system to establish clearly that variable remuneration cannot be paid if a firm does not have adequate capital resources. This is an obvious point you might say. Well, not so obvious that it was followed in the past.
“In all of this, the approach is not to cap the level of remuneration, but rather to act on the structure of it and the incentives created. As financial regulators, we do not seek to control the level of pay, outside its impact on our public policy objectives. But, the influence that we do have will affect the culture of firms. That is intended.”
Mr Bailey concludes by discussing the FCA’s role as a regulator. He notes that the FCA is using a range of supervisory tools and methods to work with firms on issues relating to their culture such as the firm’s stated purpose, “tone from the top”, incentive structures and the effectiveness of management and governance.
Mr Bailey explains that a firm’s stated purpose is an explanation of what a firm is trying to achieve – the definition of what constitutes success for a firm. The tone from the top, how the firm’s leadership behaves, drives the behaviour of staff and the outcomes they deliver. In turn, behaviour throughout the firm and outcomes also form a measure of the effectiveness of the tone from the top.
For its part, the FCA notes that culture in firms is an outcome of many inputs and the incentives that are created around those inputs. The FCA seeks to form judgments as to whether these inputs are producing appropriate culture and outcomes. For example, the FCA will question whether the practices round recruitment, performance management, reward and capability drive positive behaviours and create a culture that works in the long term interest of the firm, its customers and market integrity.
View Andrew Bailey speech on culture in financial institutions, 16 March 2017