The importance of culture in driving key behaviours in firms

Posted by Felicity Rowan on
Having only just taken up the reigns of regulation the FCA is keen to set out what it expects of firms to ensure that the FCA meets its statutory objectives of:
  • Protecting consumers
  • Enhancing the integrity of the UK financial system
  • Helping maintain competitive markets and promoting effective competition in the interests of consumers.

An idea of what is to come was set out in a speech given by Clive Adamson at the CFA Society – UK Professionalism Conference on 19 April 2013. The speech focussed on the importance of culture in driving key behaviours in firms and how the FCA will assess this.

Why is the culture of firms important? The FCA believes that the key failures in the past (PPI mis-selling) occurred as a result of bad behaviours in firms who were more focussed on ticking the right boxes than on customer's interests.

This is not a new proposition – the treating customer's fairly principle has been a key principle since the FSA was formed in 2001 with focus on culture being of the six TCF outcomes firms were expected to achieve. In 2007 – 2008 there was a concerted push by the FSA to get firms to demonstrate that they were consistently applying TCF to their business and demonstrate that they were doing so using appropriate management information.

TCF was broken down into six consumer outcomes which covered every aspect of a firms business and also reflected the life cycle of products and services.

In particular, Outcome 1 required firms to ensure that consumers could be confident that they were dealing with a firm where the fair treatment of customers was central to the corporate culture of the firm.

So what is new? The FCA has said that historically the focus has been on ensuring compliance with a set of rules rather than doing the right thing for customers.

This obviously proves a challenge for firms as culture is not easy to change. The FCA has identified three key drivers of culture at a firm:

  • setting the tone from the top
  • translating this into easily understood business practices
  • supporting the right behaviours through performance management, employee development, and reinforcing through reward programmes.

Taking each of these in turn:

Setting the tone from the top

Culture must come from the top. Senior management must take responsibility for setting values and translating them into behaviours so that staff can understand what is expected of them. Senior management must lead by example.

Translating this into easily understood business practices

The task the FCA has set is to translate this tone into business practices that drives how business decisions are made, how the firm responds to events, how individuals should behave and how issues are elevated in an open way.

Senior management also need to ensure that the business practices are fully embedded down to the lowest level and not simply assume that because it has taken a particular decision that this has been fully communicated and adopted by staff at all levels.

Senior management will ultimately be held responsible for bad behaviours so it is in their interests to ensure that positive behaviours are fully embedded across the business.

Performance management, employee development and reward programmes

How firms deal with performance management, employee development and reward programmes are key drivers in influencing the culture in a firm. How staff are assessed, the setting of targets and commission led sales can lead to bad behaviours.

The FCA expects to see staff performance management linked to positive behaviours.

The FCA has said that it intends to look at a number of different aspects of a firm's business and make an assessment of whether a firm has the right culture rather than focusing on one or two aspects. The sorts of things that the FCA has said that it will look at include:

  • How firms respond to and deal with regulatory issues
  • A customers experience when they buy a product from front line staff
  • How a firm runs its product approval process and the considerations applied
  • Remuneration structures.

The FCA's thinking on cultural behaviours is still in its early stages and you should expect to see more this in the coming months. Currently there are no rules around culture although corporate culture is an existing TCF Customer Outcome.

Is this recent announcement something new? Arguably not, but in setting out more detail a higher burden is being placed on firms to consider all aspects of their business with the onus on senior management to take responsibility for embedding the behaviours in their firm.

About the Authors

Specialising in financial services regulation, Felicity advises regulated firms and Approved Persons, private individuals and businesses on financial services issues.

Felicity Rowan
Email Felicity
020 7814 6877

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Kath leads the Banking and Finance team at Blake Morgan. She has over 25 years' experience in the finance sector, covering a huge range of client and transaction types.

Kath Shimmin
Email Kath
023 8085 7081

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