There is general agreement that issues around corporate culture have played a key role in many of the high-profile failings seen in financial services over recent years. The FCA certainly thinks so. Culture has become fundamental to its regulatory approach.
With public trust in financial services waning, it has become increasingly important to understand how firms end up acting against the best interests of their customers or the markets in which they operate. There is a growing awareness that rules do not keep companies honest - honesty does.
The way people act is strongly influenced by how they see those around them behaving. We are social animals, after all. That is why ‘tone at the top’ is so important. If senior managers embody a responsible, compliant culture, that encourages better behaviours and better outcomes.
Back in 2018, the FCA published a discussion paper on Transforming Culture in Financial Services, in which it emphasised the centrality of culture to its regulatory approach. This remains important reading for HR managers.
Rather than attempting to shoehorn different companies’ cultures into a one-size-fits-all template, the FCA has focused on setting minimum standards of behaviour. These are embodied in the 5 Conduct Rules which apply to individuals at every level within a business and are a fundamental part of the Senior Managers and Certification Regime (SM&CR).
Measuring mindsets and behaviours directly is no simple matter. So, the FCA focuses on what it sees as the four key drivers of those behaviours and mindsets: a firm’s purpose, its leadership, its approach to rewarding and managing people, and its governance arrangements.
In its FCA Mission: Approach to Supervision final report, published in April 2019, the regulator set out its approach to achieving its three core strategic objectives of protecting consumers, improving market integrity, and promoting healthy competition.
The FCA’s Firm Assessment Model (see page 32 of the report) identifies nine key areas to look at when coming to a judgement on a firm. Six of these relate explicitly to culture and the policies and procedures firms have in place to influence it. They are:
- People policies
- Systems and controls
Under the heading of purpose, the FCA assesses how a firm’s employees understand their collective purpose, mission, and intention. For example, if managers give the impression that a firm’s purpose is to maximise profits at all costs, this is unlikely to lead to positive outcomes for customers and markets.
Similarly, under the heading of leadership, the regulator looks at the attitude, behaviour, competence, accountability, and compliance of those at the helm of the business. People policies focus on issues like competence and remuneration - and increasingly on issues like ‘speaking up’, diversity and inclusion. Poorly trained, under-qualified or inappropriately incentivised staff have often been key factors in firms causing harm to consumers and markets.
When it comes to governance, the FCA focuses on effectiveness as well as design. It is looking for evidence of governance arrangements that effectively identify any risk of harm, and a strategy that enables firms to manage and mitigate those risks. All this needs to be reflected in systems and controls.
People - and therefore HR - are central to creating and maintaining a compliant culture in any firm. In a Dear CEO letter on non-financial misconduct in wholesale general insurance, issued in January this year, the FCA stressed that it sees an unhealthy culture as a ‘key root cause’ of harm: ‘How a firm handles non-financial misconduct throughout the organisation, including discrimination, harassment, victimisation, and bullying, is indicative of a firm’s culture. We view both lack of diversity and inclusion, and non-financial misconduct as obstacles to creating an environment in which it is safe to speak up, the best talent is retained, the best business choices are made, and the best risk decisions are taken.’
Culture and conduct are red-hot topics for the FCA right now. So having an HR framework in place that actively promotes a healthy organisational culture is a must. Firms also need to review their employee handbooks to make sure these clearly reflect the FCA’s expectations on driving positive cultural change. If you haven’t already, you will need to act fast to make sure all your documentation is fit for purpose in the current regulatory environment.
There is a lot to take in, and it can be a challenge interpreting exactly what is required in your policies, procedures, and employee handbook, to reflect the FCA’s expectations. The good news is our expert team at IHRS is on hand to provide impartial guidance and recommendations. We can also offer a Health Audit of all your relevant HR documentation. This will bring to light any issues or causes for concern, so you can address them before they cause problems for you, your customers, your market, or the regulator.
It is essential you engage with HR experts to review and consider your culture. If you have any enquiries at all, please do not hesitate to get in touch.
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