Compliance Blog

New FCA speech reinforces importance of cultural compliance

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On 12 July, the Financial Conduct Authority’s Jonathan Davidson, presented to a range of firms at the second annual Culture and Conduct Forum for the financial services industry.

At the conference in London, Davidson reiterated the regulator’s stance that culture is at the heart of compliance. The speech focused on the need to get culture and conduct right, and examined the FCA’s role in achieving this.

Culture key to good conduct

The regulator set out to clarify its own position, stating that the culture of our regulated firms is and always has been vital in our regulation of their conduct.’

Davidson referred to the FCA’s 2016/17 Business Plan (summarised in this recent blog), which lists culture and governance as one of its priorities.

What is culture and why is it important to the FCA?

In the speech, Davidson defined culture as ‘the typical, habitual behaviours and mindsets that characterise a particular organisation.’ Underpinning these behaviours, he went on, are the mindsets that determine behaviour at all levels of the firm.

Recent scandals, he went on – such as the LIBOR rigging case and PPI mis-selling – have demonstrated that these mindsets have not always had the best interests of consumers at heart. Changing firms’ cultural mindsets, therefore, is a key component of delivering compliant behaviours and outcomes.

Davidson acknowledged the difficulty of prescribing a set culture, as firms vary so much in make-up, aims and ethos. Rather than setting industry-wide cultural objectives, then, the FCA sees its role as helping corporate mindsets and incentives to shift. This will make doing the right thing for consumers and the markets the priority for all firms.

How does the FCA measure culture?

Predominantly, by looking at the behaviours it sees when supervising firms. When the regulator comes across poor practices, it takes action – for example, by banning directors that encourage a culture counter-productive to good consumer outcomes.

Davidson focused specifically on four areas the FCA believes are vital to shaping culture:

  1. ‘Tone from the top’ – the way leaders role model the culture they profess to encourage. How do firms ensure that good cultural conduct is rewarded – rather than the opposite being the case? Davidson referenced the Senior Managers and Certification Regime (SMCR) for its role in encouraging accountability and personal responsibility.
  2. What he referred to as ‘the formal, tangible practices and cues which tell people what they need to do to be successful and ensure that the right people are employed and rise to leadership roles’. This includes processes for recruitment, compensation and promotion. In all of these areas, practices can be used to encourage good practice or – conversely – to reinforce or reward poor conduct.
  3. The narratives that a firm uses to describe its goals, vision and achievements. Encouraging employees to meet sales targets at all costs, for example, might cause conduct standards to slip.
  4. An organisation’s capabilities – is the firm able to truly understand a customer’s needs, rather than simply have a conversation geared towards selling a particular product? Having the right culture may demand that new skills are learned.

Although all of these aspects are important individually, Davidson stressed that it’s a firm’s ability to demonstrate them all in tandem that sets good cultures apart from inadequate ones.

How the FCA is influencing good conduct culture

The regulator was keen to point out that although it is working with individual firms, encouraging an industry-wide ethos of good culture and conduct is its primary aim. Davidson went into detail on the ways he believes the SMCR has positively influenced good cultural conduct, with its focus on personal accountability. This will be amplified in the second round of implementation, with all financial services firms needing to comply with the regime by 2018.

Looking to the future

Davidson concluded by saying that more and more firms are recognising the need for a strong conduct culture, and appreciating that this approach is in their own interest, as it increases consumer confidence, with positive results for firms and their shareholders.

Finishing with a confirmation that the FCA’s ‘expectations around conduct, whether the firm is large or small, will remain high’, Davidson reiterated that the regulator looks forward to working with firms ‘to achieve a high performing and a healthy industry.’

Meeting the challenge of cultural compliance

Ensuring a compliant culture is not easy, as the regulator recognises. If you want to make good conduct innate within your firm, you need to:

  • Make sure your processes and procedures support a compliant culture
  • Make it difficult for non-compliant behaviours, financial promotions or other materials – such as sales presentations, proposals or investment documents – to slip through the net
  • Ensure it’s easy for everyone across your firm to follow the required procedures
  • Put compliance at the heart of what you do, with accurate and up-to-date corporate information, branding and protocols easy to understand, access and use

If you would like tips and hints on meeting the FCA’s requirements for a culture of compliance, you can download our whitepaper on How to embed a compliance culture into your business. It’s free and you can read it here.

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