The FCA has published a speech by Jonathan Davidson, FCA Executive Director of Supervision – Retail and Authorisations. The speech is entitled Culture and conduct – extending the accountability regime.

Mr. Davidson discusses culture and conduct in financial services through the lens of the senior managers and certification regime (SM&CR). Mr. Davidson discusses the progress the FCA has made on its mission as a conduct and competition regulator and why and how that has shaped its continuing focus on culture. He also talks about the design of the SM&CR.

Key points of interest include:

  • following the publication of its 2017 mission statement earlier this year, the FCA will publish a follow-up paper in early 2018 on how it approaches supervision. The FCA will address the challenge of how to approach the supervision of around 56,000 firms with huge variation in size and business type. The FCA cannot continuously and closely supervise outcomes in every one of these firms. Its ambition is to be forward looking and pre-emptive by addressing root causes. The two root causes the FCA sees as important are: (i) the strategy and business models of firms; and (ii) the culture of firms;
  • the FCA looks to assess what a firm’s management is doing to manage culture by using four types of lever. The first lever is a clearly communicated sense of purpose and approach. Clearly communicating the “what” and the “how” are very important in getting a firm to work effectively and efficiently. But this pales into the background when the power and effect of a well communicated ‘why’ is contemplated. The second lever available to senior managers is “tone from the top” – what staff hear and see from senior management. The third lever is the formal governance processes and structures, the policies and systems that specify expected behaviour and decisions. From a conduct culture point of view, the FCA looks for a well thought through conduct risk framework: is there a clear exposition of conduct risks, the systems and controls for mitigating them and risk indicators for monitoring them? The fourth lever is the people related practices, including incentives and capabilities. Remuneration, promotion and recognition criteria all matter. Does a firm’s pay structure reward misconduct? Is the pressure to turn a profit driving employees to act against consumers’ interests? People capabilities are becoming more and more important to having the right culture. It is not enough to be motivated to behave in a new way; people also need to understand how to be successful with the new behaviours; and
  • the emerging field of behavioural economics has important implications for how financial services culture can embody and deliver on the conduct rules. Mr Davidson notes a few examples that show that an ethical culture can be more powerful than one based solely on financial incentives. In addition, Mr Davidson notes that it is possible to move from a compliance culture to an ethical culture. He further adds that it is not the FCA’s role to dictate a firm’s culture any more than it would dictate its business model or strategy. However, an ethical culture could be a sound business proposition – a sense of inspiration not only enables some firms to deliver the right customer and conduct outcomes, but it also leads to greater employee engagement, better teamwork and innovation.

View FCA speech on culture and conduct in financial services, 20 September 2017