Every firm’s culture is different. The FCA does not believe that there should be a one size fits all model and does not prescribe what any firm’s culture should be. However, it is of the view that it is the responsibility of everyone in financial services to focus on culture, and it expects leaders in financial services firms to manage the drivers of behaviour in their firms to create and maintain cultures which reduce the potential for harm.

What is the FCA looking for from senior management?

Guidance was provided on this point in an FCA speech in 2017 which described the regulator using four types of lever. The first lever being 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?  

Enforcement action also demonstrates that the FCA will consider these factors in the event of failings by firms and their senior management and will look to see to what extent the firm’s culture was a contributory factor to what went wrong and whether the firm’s culture was appropriately focused, for example, on governance. 

What about the CEO?

In March 2020, the FCA published a Discussion Paper which set out a collection of essays from industry leaders and others which explored the role of purpose in driving a healthy, sustainable culture. From a governance perspective perhaps the most striking point was that both purpose and culture are set by the CEO who need to constantly re-evaluate both their vision and leadership of people. The leader’s role is to focus on developments, take on board knowledge, disseminate this information to employees and continually ensure that employees understand the purpose of  the organisation. To this end, the leader needs to really understand what drives their employees and ensure it accords with the firm’s culture.  Enforcement action has also reflected the FCA’s view that some roles, including the CEO and Chairperson, carry higher expectations in terms of conduct standards and that greater penalties may be imposed on more senior members of the management team.

And middle management?

The March 2020 Discussion Paper followed an earlier Discussion Paper published in 2018 and a Transforming Culture conference which dived into four themes which included leadership and management capabilities. Among the points raised on leadership was the importance of leaders having the capability to support middle managers, who were viewed as crucial to delivering the ‘right’ culture. We have not yet seen enforcement against managers not performing a senior management function role but they too may be held to account for misconduct. 

Mind your language

In an FCA speech last November the point was made that the most direct ways leaders can shape culture from the start – and spot when it needs changing – is through language. The speech also spoke of the “revolutionary technique” of cutting down emails and walking around and talking to people being more effective and immediate.

Speaking-up is sometimes still unsafe

In September 2020, the FCA issued its 2019/20 report covering engagement work for the 5 Conduct Questions Programme for wholesale banking supervision. The report was delayed due to prioritising COVID-19 work and made the point that conduct and culture will remain a key focus of the FCA’s engagement activity. Among other things, the report warned that the FCA saw a persistent and significant lack of psychological safety in day-to-day speak up and challenge and this was something that firms needed to address. Also, whilst the FCA found clear official whistleblowing and other escalation channels in place participants described them as largely unused and reserved for the most serious cases. We have published numerous updates on whistleblowing, most recently providing key practical steps for firms to consider taking when a whistleblowing report is received.

Consumer Duty will ask significant questions of firms

The same FCA speech noted that the new Consumer Duty, which soon applies to closed book products and services, will focus minds on culture. The reason for this is that the Duty challenges firms to ask significant questions about their purpose. The FCA has made it clear that it expects the focus on acting to deliver good outcomes to be at the centre of firms’ strategy and business objectives. The higher standard of the Duty and the shift to focusing on customer outcomes will require a significant change in many firms’ culture. Chapter 10 of the FCA’s guidance on the Duty discusses culture, governance and accountability. In particular, the FCA sets out a table which provides examples of the type of questions firms can expect to be asked in their interactions with the FCA in relation to their governance arrangements and the Duty.

Diversity and inclusion

Another telling indicator of culture is diversity and inclusion. In its firm wide review on understanding approaches to diversity and inclusion in financial services, the FCA found that very few firms understood diversity and inclusion as a fundamental culture issue. In an FCA speech published last November the regulator mentioned that there was growing evidence that a diversity of perspectives and thought, when part of an inclusive culture, results in better judgements and decision making.

A similar point was made in the FCA’s Discussion Paper on diversity and inclusion which pointed out that there was growing evidence that diversity of thought, when part of an inclusive culture, supports better decision making by firms. It added that diversity made business sense – from both a financial and a consumer perspective on the basis that it can lead to better outcomes for firms, support their safety and soundness, and promote financial stability. The FCA believes that more diverse and truly inclusive firms will benefit from better risk management, as individuals will feel more empowered to have open discussions and debates, without fear of having their views shut down. It should mean that concerns about imprudent practices are more likely to be raised and acted upon.

The FCA wants to see diversity and inclusion as an important driver of healthy cultures, so that it is embedded throughout firms – from the Board and senior management to developing diversity in managerial, technical and professional staff, making it part of ’business as usual’ through all of a firm’s activities. Among the applicable regulatory requirements is the PRA’s Supervisory Statement on Corporate Governance which applies to all dual‑regulated firms. It sets out that to be effective, Boards need to include individuals with a diverse mix of skills and experience so that they have capacity to provide effective challenge across the full range of the firm’s business and the opportunity to explore key business issues rigorously.

And finally, adaptability

Arguably, perhaps one of the most important practical things for management to consider is what to do when things go wrong. When a firm makes a decision or sets out a new policy it may not be right. Senior leadership need to acknowledge mistakes and investigate alternative solutions.  When issues are raised internally, this can be an opportunity to make enhancements and strengthen the firm’s culture.  Being flexible and adaptable to changing circumstances is key. A proactive culture is significantly more effective than a reactive culture and we can assist firms when undertaking such reviews.