• Robert Bell

Defining a Healthy Culture: It’s Importance to Regulatory Compliance in 2022

At just under a week into the new year, it is time to assess the regulatory direction and the Conduct hot spots for 2022. The Financial Conduct Authority’s 2021/22 Business plan – published later than usual last year – highlighted an increased focus on accountability and customer outcomes. At the core of regulatory focus is culture.


The FCA refer to culture in just about every recent publication – whether it be consultation, guidance or speech. It is clearly considered vitally important by the regulator, and yet it is incredibly difficult to define. This leaves many firms – particularly smaller and medium sized firms – struggling to understand how it fits with their own approaches to business and what the FCA actually expects.


Defining a Healthy Culture: It’s Importance to Regulatory Compliance in 2022
 

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It can be helpful to visualise how the FCA currently approach supervision of financial services firms. At the base of the pyramid is stability and integrity of the market – in line with their strategic objective to make sure the relevant markets function well. Fair treatment of consumers is a very close second step on this pyramid, which drives the market to achieve the regulator’s operational objectives, securing an appropriate degree of protection for consumers, to protect and enhance the integrity of the financial system, and promote competition in the interests of consumers.


Fair treatment of customers is a catch-all term that, at its core, encompasses moral and ethical behaviour, working to ensure there are no harms or detriments to customers, and focussed work to ensure that those at the periphery of society – the vulnerable and those in debt – are well supported. Integrity, stability and fairness don’t just overlap with the concept of a healthy culture, they help to define it.


Defining a healthy culture

The FCA do have a definition for ‘culture’ (the “habitual behaviours and mindsets that characterise an organisation”) however, they do not have a clear definition for a healthy culture and acknowledge that what this looks like will be different in every firm. That puts the onus on firms to define what their culture is, and what a healthy, positive culture looks like in the context of their business.


After a difficult couple of years, this can seem like an unnecessary optional extra. However, good culture can make significant difference to the success of the firm. Management consultant Peter Drucker famously suggested that “culture eats strategy for breakfast”. Poor culture can lead to low performance and high staff turnover and within the last five years alone has been at the heart of a number of Financial Services scandals.


Creating – or changing – culture is not an exact science and will differ for each firm. Defining what a good culture looks like should not simply be a tick box exercise or viewed as something to get out of the way before moving onto weightier matters. Being able to clearly define good culture in the context of the firm underpins everything else the firm does. Is culture mostly driven by rules and policies? Is culture determined by the decisions taken, by the language used internally and externally or is it set by performance and behavioural metrics?


It is impossible to define a good culture without also defining what a poor culture looks like, including poor conduct and bad behaviours. These are very broad terms that need to be defined in the context of the firm, the products and services it offers and its unique customer base. It is also important to consider whether both financial and non-financial conduct and behaviours are included, especially given the increasing regulatory focus on non-financial misconduct.


Undoubtedly, good culture will include a number of basic provisions. Staff at every level should be able to speak up with confidence that their position will be secure, if they see something wrong. This should be the case whatever the issue – whether it’s an IT error or poor behaviour in a senior member of staff. The ‘tone from the top’ should be clearly ethical and strong involvement from senior management with an obvious focus on doing the right thing for customers should be visible to staff at all levels.


What is meant by ‘culture’ must be able to be described by the firm, and understood by staff. It should also be able to be measured, in some degree. This can be very difficult and the FCA acknowledge that. They suggest that the Board and Senior Managers can manage culture, even if they can’t accurately measure it, through a handle on the firm’s leadership, purpose, approach to people management and governance structures.


Measuring a healthy culture

However, having that clear definition of ‘healthy culture’ will allow for some measurement, and the above should not be taken as an opportunity not to try to measure. To define your metrics, it is imperative to understand what is important for the customer base, the conduct of audits, regular monitoring, and using well defined questions and systems of measurement that align with the definition and with the definition of good customer outcomes, with a broader view of staff capability, communication and wellbeing.


As with all measurement, the use of some quantitative metrics will be possible, particularly with issues such as complaints, but we must incorporate some qualitative metrics – such as the honest opinions of staff, lessons learned from whistleblowing, the expectations of customers and other stakeholders, staff understanding of good behaviour, and the actual behaviours demonstrated at all levels.


Defining a healthy culture is, then, critically important to regulatory compliance in 2022. So what do we need to bear in mind when creating the definition? It should be based around ethical behaviour – the values of the firm should incorporate the social good, and should not focus solely on profit for the firm. The firm’s purpose should play a part, and this should focus on social development, growing the business, ensuring stability and good outcomes.


Leadership and culture

Leadership plays a pivotal role and should look to effect real change. Leadership capability can be measured against behavioural and value-based assessment methods. Top-down culture and behaviour influences the ethos of the entire firm and those at the top should live and demonstrate the values. Personal interaction is often under-utilised. Having leadership regularly communicate with staff at all levels, whether through meetings, training or one-to-one interactions can have a very real and very fast effect on firm culture.


Employee engagement and culture

Employee engagement must be regular, of a high standard and through variety of channels. Trust must work both ways, and the organisation should be known to be a safe environment for challenge. Governance and Strategy should oversee all of this. Any rewards or incentives to drive good behaviour should be carefully planned and measured to ensure they align with values.


Indicators of poor culture

Finally, it is crucial to be aware of indicators of poor culture, the impact they could have on the firm’s business and regulatory compliance, and how to mitigate issues. Aspects such as staff stress can act as a warning sign for issues, which can then be treated. Staff at all levels should have a part to play in creating solutions to problems. At the core should be a shift away from any blame culture – everyone can learn from mistakes and Governance should understand the difference between unconscious behaviour and intent to behave poorly.





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