- Posted by Michael McKee
- On 16 March 18
- Accountability Regime, FCA, Financial Regulation, Senior Managers Regime
On 12 March 2018, the Financial Conduct Authority (FCA) published Discussion Paper 18/02 on transforming culture in the financial services industry. You may access Discussion Paper 18/02 here.
Poor culture in the financial services industry has resulted in instances of rate-rigging, rogue trading and mis-selling in the last 10 years since the global financial crisis. Despite record fines, increased investigations and an expanded compliance industry, misconduct remains. The Discussion Paper contains a series of essays from regulators, academics and industry leaders on the challenges of creating positive cultural change in the financial services industry. The views expressed do not necessarily represent the views of the FCA.
Is there such a thing as the ‘Right’ Culture?
The FCA has defined culture as the ‘habitual behaviours and mindsets that characterise an organisation’. From something as simple as ‘the way things are done around here’ to the norms, values and practices which are revealed by how people think and behave in an organisational sense, culture is pervasive being ‘everywhere and nowhere’ according to the FCA’s Chief Executive Andrew Bailey. The essayists in the Discussion Paper invariably suggest that there is no such thing as the ‘right’ culture but that it is possible to have healthy cultures with positive characteristics such as adaptability, emphasis on quality, integrity and supportiveness. These healthy consumer-focused cultures result in attracting talented employees as well as increasing profits. Monzo Bank’s Chief Executive Officer Tom Blomfield, suggests that delivering positive social impact is necessary for economic success.
The Role of Regulation
Globally, regulators are recognising that the traditional regulatory toolkit – such as rules and enforcement – may be ineffective or create unintended consequences in terms of industry culture. The FCA, among other regulators, is increasingly recognising and employing behavioural levers in the measurement and management of industry culture. Publicity, supervisory deep-dives, peer reviews and behavioural nudges are all being used by regulators to create more positive and lasting industry behaviour.
Drivers of Behaviour
The classic article ‘On the folly of rewarding A while hoping for B’ (Kerr, 1975) sums up the influence of rewards on behaviour and the problems caused by faulty incentives within organisations. Industry and regulatory understanding of how certain drivers of behaviour results in positive/negative outcomes continues to become more sophisticated. For example, the PPI scandal which already cost billions of pounds in compensation and fines was perpetrated by people working in a culture driven only by short-term profit maximisation. TSB Bank CEO, Paul Pester, explains in an essay in the Discussion Paper how the bank has scrapped sales-driven targets and instead replaced them with rewards based purely on positive service to customers. TSB Bank claims this change is paying off as it was awarded Britain’s most recommended high street bank and has a growing customer base.
Delving into psychology as a driver of behaviour beyond financial incentives, several essayists noted the power of social rewards like praise, respect and status as superior tools for producing positive cultures. Forward Institute’s Founder and Director, Adam Grodecki, argued that we tend to overestimate the power of individual character and underestimate the power of the environment and company we keep. This demonstrates the importance of an organisation’s moral identity as being open to, and shaped by, the external community (customers) and public more generally which the organisation serves.
Leading Cultural Change
Counter to the wisdom that cultural change must be driven only from the board and executives (‘tone from the top’) or centre, some of the essayists in the Discussion Paper argue for devolving some aspects of culture to the local level. Senior leaders from Credit Suisse note that leaders must embody desired behaviours but that is not enough. Leaders should also empower ‘culture carriers’ who influence at all levels of an organisation. Instead of a mere focus on messaging from the top or the permafrost of middle management, a more complex multi-system approach to influencing behaviours at all levels of an organisation may be the best way to drive true positive cultural change.
Where to from here? FCA’s Accountability Regime
The FCA is using the Senior Managers and Certification Regimes (Accountability Regime) to create positive cultural change in the financial service industry. Following the recommendations of the Parliamentary Commission on Banking Standards, the FCA and the Prudential Regulation Authority introduced this new Accountability Regime for banks and insurers on enhancing individual accountability.
The FCA is currently consulting on the expansion of the Accountability Regime across the entire financial services industry including funds, consumer credit firms, brokers and financial advisers. You can find draft rules in Consultation Paper 17/25 here and technical rules on the expansion of the rules in Consultation Paper 17/40 here. The Accountability Regime will entirely replace the existing Approved Persons Regime for all firms regulated solely by the FCA, excluding payment institutions. Final rules are expected in Summer, 2018.
The expanded Accountability Regime will require all Senior Managers to know what they are responsible for, as must key board members. Certain firms will be required to produce a comprehensive map of responsibilities and ensure absolute coverage of all businesses and functions by a Senior Manager. More junior staff performing key certification roles will be required to be certified as fit and proper for their particular roles by their firms. The process of certification must be overseen by a Senior Manager who is will be responsible to ensure it works. The FCA will pay particular interest to how firms are certifying staff as fit and proper including on how robust firm processes are to make this assessment.
Consistent with the views expressed in the Discussion Paper, the Accountability Regime applies to all persons in the industry, not just Senior Managers or Certified Persons. All persons in the financial service industry will be held individually to account by the FCA to comply with five Conduct Rules. These Conduct Rules require individuals to act with integrity, act with due care, skill and diligence, be open and cooperative with regulators, pay due regard to customer interests and treat them fairly, and observe proper standards of market conduct.
The FCA’s intention in applying the Accountability Regime is not to change how firms organise themselves or impose a particular culture but rather to enforce a standard of accountability at all levels. Whilst acknowledging that cultural change must be chosen rather than imposed, what is clear is that the FCA will continue to express its expectations and will use the new Accountability Regime to ensure firms and persons live up to the high standards expected by both the FCA and the public at large to restore public trust in the financial services industry.
FCA Chief Executive Speech
Following the publication of the Discussion Paper, the Chief Executive of the FCA Andrew Bailey gave a speech on culture at the Hong Kong Monetary Authority Annual Conference on 16 March 2018. You may view a transcript of his speech here.
Mr Bailey noted that formation of positive cultures is the responsibility of firms in the industry and that it would not be appropriate for regulators to prescribe what ‘good’ culture look like. Nonetheless, Mr Bailey noted that regulators such as the FCA will continue to share their expectations and form judgements as whether cultural inputs (such as banker remuneration, other incentives and corporate governance) is producing appropriate cultures and conduct. Mr Bailey noted that the FCA’s Accountability Regime will embed responsibility and accountability of all persons in the financial services industry to the regulator. Mr Bailey concluded that the Accountability Regime would therefore have a profound impact on the culture of the industry as a whole.