On 20 November 2023, the FCA published a speech by Sheree Howard, Executive Director of Risk and Compliance Oversight, delivered at the XLOD Global London event. The speech focuses on “building firm foundations for healthy cultures”.
In her speech, Ms Howard notes that heightened financial pressures mean making careful judgements around risk but should not mean dropping standards. She outlines a past example of deregulation which led to lower standards in New Zealand’s construction sector, and sets out various lessons that firms in the UK financial sector can learn from that example, including:
- Firms should ensure they have clear sight of the breadth of risks they face and the controls needed to manage them.
- Employees should never feel fear to challenge. For a healthy, purposeful culture to thrive, firms need to create an atmosphere of fearlessness, not fear.
- One of the FCA’s key current concerns is concentration, particularly when it is unintended. Ms Howard flags the “enormous risk when we concentrate only on our own firm and its culture and practice without realising what may be playing out or potentially waiting in the wings elsewhere”.
- The FCA has also seen how different types of risk can transform. What may start as conduct, operational or reputational risk can swiftly transform into liquidity or solvency risk, and in the event of liquidity or solvency challenges there are often new conduct, operational or reputational challenges to manage.
- A culture that tolerates non-financial misconduct is unlikely to be one in which people feel able to speak up and challenge decisions, or in which they will have faith that concerns will be considered independently and fairly.
- Should allegations or evidence of non-financial misconduct come to light, the FCA expects a regulated firm to take them seriously through appropriate internal procedures and act accordingly.
- An organisation with a lack of diversity, equity and inclusion is at much greater risk of not having a healthy culture.
- A challenging environment must not lead to diminishing standards, short cuts to vital processes, a reduction in the control framework or changes in the investment in or behaviour of our lines of defence, by short term commercial interest being prioritised over regulatory obligations.
- Boards and senior management need to provide an unambiguous tone from the top on the importance of good conduct. As a regulator, the FCA also hugely values the second and third lines, which should play a key role in assisting senior management with its oversight of business activities.