Teal blue header image

FCA ignites debate on transforming culture within financial services

The Financial Conduct Authority (FCA) recently published consultation paper CP18/2 ‘Transforming Culture in Financial Services’ (CP18/2).

It sets out a number of essays from market leaders, academics and regulators which are intended to stoke debate on the complexities of culture and how to drive change.

The FCA recognises culture as being a key root cause for many of the major conduct fallings in recent times.

The FCA aim to tackle the difficulties in defining, measuring and managing culture in practical terms.

Importantly the FCA understands regulation is only one piece in the culture puzzle. CP18/2, in its essay responses, set out some challenges to the status quo approach toward culture and respondents offer many common themes which the FCA hopes will be a platform for continued debate, discussion and change within the market.

Notably the FCA intends to use this discussion as a platform for future change and will incorporate insights into its continued regulation of financial services.

Is there a ‘right’ culture?

Essay responses conclude culture is not optional. It exists within firms and markets regardless of it being good or bad.

A common theme from respondents is culture has to be right for everyone; shareholders, employees and consumers. Some respondents go further and argue a customer-centric approach which aims to deliver a positive social impact is a necessity for success and the cultivation of a good culture.

Most respondents agree aligning economic goals with positive customer outcomes is vital for a progressive culture. Good culture may mean ‘fair’ outcomes for consumers but CP18/2 recognises there is no ‘one size fits all’ approach.

Conduct rules and standards are important but a good culture is more than ensuring bad people don’t do bad things, it is also enabling good people to do good things.

Managing culture: the role of regulation

The FCA recognises behavioural levers are essential in the measurement and management of culture. The essays in this section look at how regulators elsewhere are approaching the role of measuring and monitoring culture.

Essay respondents argue rules can focus market players’ actions too narrowly. Ethically based principles may be more effective in promoting good culture.

Critical assessment of firms should mainly come from within the firms themselves; however schemes such as the Senior Managers and Certification Regime (SM&CR) have important roles to play.

There is disagreement from respondents on the regulators role in measuring and assessing culture. Some argue it must be a collaborative effort between firms and regulators. Others set out why culture cannot be measured, and instead regulators should concentrate on asking the right questions of individuals and firms to assess culture, rather than searching for measurement tools.

The FCA recognises this is the area which requires further investigation.

The role of reward, capabilities and environment in driving behaviour

CP18/2 sets out the need to approach incentives (and disincentives) differently. It is widely accepted, within responses, financial rewards should not be a firm’s sole focus. ‘Softer’ incentives such as praising employees, allowing them to maintain moral identity and allowing them to ‘own’ values are equally as important.

Responses indicate numerical incentives (i.e. sale goals) can have a negative impact, encouraging employees to neglect other priorities and even result in unethical practices.

Driving employees to recognise consumers as individuals (for example seeing a customer as a ‘pensioner’ instead of an ‘investor’) can have a positive impact.

Many responses attempt to debunk the ‘bad apple’ myth and highlight examples (like PPI) where, when driven by fear or the need to conform, good employees act badly. A focus on middle managers taking more responsibility in driving culture is argued to be a solution. Allowing an employee to effectively dissent is vital to ensuring culture is kept in check.

All respondents seem to agree traditional incentives cannot be relied on alone and more consideration needs to be given towards other factors within the work environment which drive employee behaviour.

Leading Culture Change

Several respondents challenge the ‘tone from the top’ attitude.

Senior leaders are still central; however everyone has a role to play in cultivating a good culture.

Self-awareness, authenticity and principle based pragmatism are key features of leaders who drive positive cultures. Allowing employees to effectively challenge agendas set by leadership is important to ensure negative or fear based behaviour does not set in.

Respondents generally agreed firms needed to set values, however it is important employees feel a sense of ownership and investment over these values.

There was some argument for more locally based values, rather than blanket values. This ties in with the argument middle management need assume more responsibility for driving culture.

Next steps

The SM&CR is a positive step from the rule-based side of culture change. However the FCA recognise this type of action alone is not sufficient.

The FCA states CP18/2 has caused debate amongst practitioners and academics and three key themes have come out of the essay responses:

  1. There has been a shift in perception. There is now a focus on influencing factors which cause individuals to act in ways which impact culture.
  2. It is important for firms to foster physiological safety and learning to allow employees to speak up, collaborate and innovate.
  3. Regulation can only go so far, and all market participants have a role to play.

Whether culture can, or indeed should be measured, was the source of disagreement. The FCA recognises this question, and its role as regulator requires further investigation.

The FCA are not requesting formal feedback at this stage, although it does pose general questions to further debate, which it hopes will help shape the agenda for the FCA’s ‘Transforming Culture Conference’ on 19 March 2018.

The FCA plans to incorporate insights from this paper and the continued debate in its approach to supervision, enforcement and policy initiatives. This is an area which is likely to have a heavy impact on the FCA’s outlook on regulation and should be taken seriously by firms.

Contributor: Luke Rodgers

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Insights & events View all