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4 Main Drivers of a Healthy Culture in Financial Services Firms

Last month, the Financial Conduct Authority published its 2019/20 business plan, setting out the regulator’s priorities for meeting its objectives: to protect consumers, ensure market integrity and promote effective competition. There is, unsurprisingly, a continued focus on culture and accountability, with one of the main cross-sector priorities being firms’ culture and governance, highlighting the important role good culture can play in reducing potential harm to consumers.

healthy culture in fs firms

Healthy culture is increasingly central to much of the FCA’s research and discussion as it considers how it can support the fair treatment of customers and build market integrity. The changes to the regulator’s accountability regime – the Approved Persons Regime – in the form of the Senior Managers and Certification Regime, highlights just how seriously the FCA takes this. Rolled out to banks in 2014, insurers in 2018 and to most FCA regulated firms by December 2019, the Regime brings new rules for all staff carrying on financial services activities and specific responsibilities and areas of accountability for the most senior people in the firm. Senior Managers will also be accountable for failings in firm culture. Whilst the Regime sets out new rules and principles, the FCA acknowledge that the measurement of a healthy culture is difficult in practice. There can be no ‘one size fits all’ concept of what it means, but FCA publications suggest there are some common characteristics that can help firms of all sizes define, embed and benefit from a ‘healthy culture’.

The FCA has recognised that culture is not easily measurable, but have defined it as ‘the habitual behaviours and mindsets that characterise an organisation’. This helps firms to understand what the regulator is driving at; that ultimately a healthy culture is one in which the norm is to aim for the best possible service and outcome, going beyond simply complying with the rules. The FCA have stated that they are not going to assess mindset and behaviour directly, but instead will focus on assessing the main drivers of behaviours: a firm’s purpose; leadership; approach to rewarding and managing people; and governance arrangements.

A discussion paper published in March 2018 by the FCA was intended to start a debate on transforming culture in financial services, setting out what a good culture might look like and how to change behaviour for the better. The paper aimed to offer a consensus on the essential features of a healthy culture, and how to deliver it.

Healthy culture isn’t just about meeting the requirements of the new Regime, or keeping the regulator happy. It has been suggested that there is a clear link between consumer trust and the success of firms and markets, with one essay in the discussion paper suggesting that firms that do not foster good cultures eventually find it difficult to sustain business in the face of customer protest, even if they do very well at first, and that conversely, those firms that do work to embed values-driven practices benefit from attracting staff who care and an increased customer base.

In March 2020, the FCA will hold a second Transforming Culture conference to share their findings from this work, setting out both what a healthy culture looks like, and how this translates into healthy outcomes for consumers. With this conference almost a year off, how should firms begin to embed a healthy culture? The four main drivers of behaviour provide a starting point:

  1. A firm’s purpose: At its most basic level, a healthy culture could best be summarised as ‘integrity’. This means that it’s not just about ensuring that bad things don’t happen, but that good things do happen. Doing the right thing isn’t mutually exclusive with growth and profit, either. Consumer-focused culture can be more attractive to consumers and talented staff, which in turn increases firms’ profits. Ultimately, firms should aim for fair outcomes for all customers, but a healthy culture is one in which customers can be confident that the firm will act responsibly, be transparent, and if it can, go the extra mile to exceed expectations in the best interests of the customer, whether this is saving them money, or helping to reduce their stress or anxiety.

  2. Leadership: The role of the firm’s most senior individuals is key – not only is it their particular responsibility to identify when harms might occur, and to prevent them, but to be seen to be doing so by the whole firm, thus helping to demonstrate good culture in practice. The FCA acknowledges that the part played by individual Senior Managers in establishing and embedding the right culture is critical in ensuring good standards of conduct at all levels, and Senior Management Conduct Rules reflect this. The FCA also suggest that there is an important part to be played by leaders who can manage culture even if they can’t measure it very well. Senior Managers, in practice, are accountable for their own behaviour and the management of behaviour of those in their areas of responsibility, so should aim to be clear about what a good culture should look like in their area of responsibility.

  3. Approach to rewarding and managing people: This isn’t just about remuneration. Staff incentives do play a part in driving behaviours, but the discussion paper suggests that firms are missing out on some additional – internalised - factors that motivate people. While we know that people respond to remuneration, targets, and sanctions, it is usually overlooked that they might also respond to praise, maintaining a moral identity or conforming to a crowd. Similarly, rewards can sometimes be too effective – with sales targets, for example, encouraging people to neglect other priorities to meet them. Firms need to be aware of external factors – the targets and rewards – and the internal factors – moral standing, status and praise - when considering how their people management is organised. Similarly, where negative effects are discovered, firms should consider removing specific targets and instead rewarding customer service or compliance.

  4. Governance arrangements: By complying with the letter and the spirit of SM&CR, most firms will have a good basis for a healthy culture. However, firms should see the Regime as setting out the minimum standards, with the firm looking beyond the rules and standards to achieve real culture change. Firms are required to know who is accountable for what, and to whom, with the SM&CR designed to encourage staff to take personal responsibility for their actions. Integrity and best practice should be visible from the top down, and this should be reflected throughout the firm’s governance structure.

Finally, where the firm can demonstrate an open and honest approach with the regulator, working in the best interests of consumers and the market, and operating a supportive environment for all staff, where they are encouraged to speak up and learn from mistakes, and where integrity is central to the behaviour of all from the top down, it can’t go far wrong.

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