Reporting and Governance

Culture in financial services became a key regulatory and political issue following the financial crisis with regulators exploring new approaches around interpreting conduct, but this could create some unintended consequences. By Polly James, partner, Adam Jamieson, senior associate and Daren Kemp, knowledge development lawyer at Bryan Cave Leighton Paisner.

There has been a shift in the Financial Conduct Authority’s (FCA) approach. Where a few years ago “tone from the top” was the main focus, more recently their focus has shifted to embrace new areas and disciplines. The increase in the number of FCA enforcement investigations opened in the last year on governance and accountability grounds tells us that it remains highly topical and looks set to stay.

Shifting focus

The FCA has started to use the phrase “the science of culture change” and is asking questions about things that, five years ago, would not have been thought of as regulatory priority areas – or even as anything to do with financial regulation at all (such as diversity and inclusion, and “non-financial misconduct”).

The FCA’s current message to firms on culture is: “We cannot specify the culture a firm should have, but what we can do is help firms to identify what is a healthy culture, and how to get there.” In developing its regulatory agenda, the FCA is increasingly involving experts from disciplines other than regulation.

For several years, the FCA had been interested in behavioural psychology, primarily as a tool to help firms think about how to treat customers fairly. More recently, though, we have seen the FCA turning to psychology to inform its thinking about why the staff of financial services firms behave how they do. For example, insights from psychology are now informing how the FCA thinks about leadership, and how firms equip their leaders to embed the right culture.

The FCA has spoken a lot recently about the purpose of an organisation, which is not necessarily the purpose “written on the walls”, but what people perceive to be the purpose from the way that their leaders behave – as being a key driver for staff behaviour. This is “tone from the top” but applied in a more practical form.

In February this year, the FCA also built a new webpage about psychological safety within the Culture and Governance section of its website. The concept of psychological safety is about feeling safe to raise concerns, within the normal line management process, without embarrassment, or fear of retaliation.

This new emphasis is not about having proper systems and controls in place for people who want to blow the whistle – that is now taken as read. The sands have shifted – the FCA now wants firms to move to a place where people do not need to blow the whistle at all.

It is also clear that in the context of diversity and inclusion, sexual harassment in the workplace, and a firm’s response to it, is an important measure of culture and one which the FCA are very interested in, following the FCA’s Megan Butler’s recent letter to the Chair of the Women and Equalities Committee. The letter set out the FCA’s views on how sexual harassment amounts to a breach of the individual Conduct Rules, is relevant to a firm’s assessment of fitness and propriety, and that firms tolerating it would be indicative of poor culture.

Individual responsibility

The Senior Managers and Certification Regime (SM&CR), which will be extended to all authorised firms from December 9, 2019, is one of the key tools the regulator is using to drive culture within firms, with individuals taking responsibility for their own conduct and that of their direct reports.

There are  prescribed responsibilities within SM&CR for banks and insurers, which are designed to ensure that an individual member of senior management is effectively “on the hook” for the firm’s culture. They will be expected to take reasonable steps to ensure that an appropriate culture is embedded within the organisation. In BCLP’s experience, where issues have arisen at firms which speak to the culture, these individuals have been looked to in order to lead the response.

Unintended consequences

One potential unintended consequence of SM&CR is that it may foster a culture where individuals are reluctant to take responsibility for dealing with issues due to a fear of reprisal if they deal with something wrongly. In some cases individuals choose to blow the whistle (or leave their firm) when something begins to go wrong, rather than take what they perceive to be a personal risk by taking ownership by dealing with the issue.

This unintended consequence of SM&CR has resulted in a number of whistleblowing investigations – increased whistleblowing in financial services firms is now a common occurrence.

Over the last few years there has also been a three-fold increase in enforcement cases opened by the FCA. Culture and governance are now leading themes in enforcement, and these cases seem to take longer to close than other case types. It can be expected that this trend in cultural enforcement cases will continue over the coming years.

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