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Transforming Culture in Financial Services


Having published a discussion paper on “Transforming Culture in Financial Services” on 12 March 2018, Andrew Bailey, the Chief Executive of the FCA, gave a speech to the Financial Conduct Authority conference where he emphasised that firm culture remains an important priority for the FCA.



However, for some of you – this may not come as a surprise. This is a subject that has been voiced upon at numerous times in the past. The predecessor to the FCA the FSA were frequently mentioning this – and out of scandals such as LiBOR and the mis-selling of Investments, attempts to change, modify or encourage “good outcomes” “treating customers fairly” “Risk Warnings” “Tone From The Top” and of course the remuneration issues.


The outline contains some of the FCA’s old-style thinking. By way of example, …..


“The financial services industry, in particular, has demonstrated instances of rate-rigging, rogue trading and mis-selling in the last ten years since the global financial crisis.
Despite record fines, increasing investigations and an expanding compliance industry, misconduct remains.
What have we not learned?”


I think that it is fair to say that this very “tone” or “comment” could have been made by either the FSA or the FCA in the last 10 or 15 years. It all sounds very familiar to me.


However, that said and done it is also fair to say that the accepted view is that there are a number of new observations are made and emphasised.


Culture is something that is always going to be divisive. Some embrace “culture” some – are against it – for whether it be their own personal beliefs, or opinions, or pure greed in financial scenarios. It isn’t something that will change overnight.


Nonetheless, this time, the FCA has taken a different approach in that it has issued what is known as a “Discussion Paper” on this. Unlike “Consultation Papers” or instead of issuing new Rules for example, it has given its audience a number of essay type scenarios (28 of them, covering 85 pages) with the purpose of encouraging further debate within the industry on “the importance of culture, and how to improve it”.


The FCA has a significant history of stating the importance of “culture” and has given Senior Management soundbites to think about such as:

• Culture is the way that things get done within an organisation

• The “tone from the top” is very important

• Culture can be measured if firms try hard enough, (and the FCA is able to measure it too!)

• Individual accountability is an important aspect of managing the culture within firms (the FCA has in the past fined, censured and banned certain individuals for behaviour that demonstrates a total lack of understanding of this part)


Modifying the Traditional Approach

According to Mr. Bailey, work on firm culture continues to be an important priority for the FCA – after-all – the FCA’s objective is to prevent and pre-empt misconduct, not just clear up the messes when they happen. There is no single right way to achieve this: regulatory rules and supervision help to create incentives and provide tools towards improving culture, but good culture will not be achieved solely by regulatory prescription.

The FCA clarifies that its focus is on assessing what management is doing to manage culture, using four of the main drivers of behaviours and mindsets as set out in a speech delivered by Jonathan Davidson in
September 2017:


• A firm’s purpose

• A firm’s leadership

• A firm’s approach to rewarding and managing people

• A firm’s governance arrangements


Whilst the Discussion Paper doesn’t go into any detail on how the FCA carries out these assessments, its handy to know so that we can ensure that we are considering the right topics.

Two fundamental concepts underpin all of its thinking about culture.

The first is that the FCA needs to hold individuals as well as firms to account — and in the UK, the Senior Managers and Certification Regime certainly gives the FCA the tools it will need to determine who is to blame for any particular failing.


Secondly, the FCA now acknowledges that “leaders can manage culture even if they can’t measure it very well”.

Formerly, the FCA had often encouraged firms to measure culture, in a 2016 speech, Jonathan Davidson stated “there are a number of survey methods and metrics being used by firms and others in the field to try to understand the mind-sets that are the foundations of culture. We are watching developments in this area
with interest”.


Measurements are described as merely the “tip of the iceberg”, and potentially giving a false level of confidence to management that because they are getting some data, everything must be “OK”.

Instead, the FCA seems to take the view that culture can be sensed, rather than statistically identified. Some data may help, but caution is advised on the weight that should be attached to, for instance, employee engagement surveys.


The FCA has ventured further than it has in the past by stressing the role of “middle managers”. This is not to detract from Senior Management responsibility — the FCA clearly still thinks that things can go wrong from the top. But, in addition, even if the right tone is set at the top, that may not be enough given the influence of middle management over conduct “on the ground”.


A detailed example is given in one of the stories where an organisation sets unrealistic targets.

Employee-facing customers accept those targets as unrealistic, and do not even try to meet them — their behaviour is not influenced. But Middle Management are incentivised financially to hit these unrealistic targets, and they “pressure” employees to hit them. Middle managers “creatively search for what we call structural vulnerabilities, which are placed in the overall performance structure of the organisation that can be exploited to create and conceal fake performance”.


In the example given, the definition of a sales call was expanded to include emails.

Staff were instructed to enter into quid pro quo arrangements with colleagues. Sales data was delayed on entry into a system to prevent it from being identified as a potentially fake call. And so on. Whilst focusing on the impact of middle management is not entirely new, the extent to which the FCA emphasises it in this approach
is striking.


Next Steps

The audience of this will need to take into account the points raised by the FCA in its ongoing work on culture. You may also wish to focus on the “actionable insights” highlighted in the DP by the FCA, such as “applying strategic focus to the continuous process for adapting culture”. Helpfully, at least, the FCA still understands that culture change takes time, and that firms cannot undergo a fundamental shift overnight.


As Jonathan Davidson puts it, “Like losing weight, culture change is not an eight-week crash diet…but a whole lifestyle change — an ongoing business priority”.


Above all though – think long and hard about those “catch phrases” that we all have – the “Mission Statements” how we put “The Customer at the Heart of Everything We Do” and so on. As – there is a conflict therein isn’t there.. .. .. .. .. Profitability MUST come into this – otherwise there would be no business, but on the other hand the “Mission Statements” and so on that some are releasing make it sound as if the “customer will ALWAYS be right” and we will never make a profit. The BALANCE needs to be there – but whatever happens make sure that there is “clear water” and at all times you can “Look through” to see the whole scenario and “OUTCOME”


TCF for now – for tomorrow complicit cultures, habits and behaviours are the menu of the day.


Feel free to contact one of the team if you wish to discuss any of the points raised either here or in one of the previous articles, or require any short or long term help or assistance with any of your regulatory requirements from AML – TCF – Z Bonds we have the team, the correct attitude and the right “balance” for the right “OUTCOMES” for YOU our respected Client.


One thing is for certain – culture wont change over night – which is why we are seeing it return to the tables yet again. Remember also, that the “products” and the way in which they are made, managed and produced and their outcomes as well form part of this. We need to ensure that the products we are using are “fit” for purpose and not likely to result in clients being mis-led or too complex to understand etc. This all forms part of the over-arching “Outcomes”.


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