Have you made the FCA business plan YOUR business?


FCA cross-sector priorities – Conduct and Culture
Remember that an FCA Director of Supervision once said? ‘The right culture is essential for achieving good conduct performance. This is not though a fluffy view of vague corporate aspirations or value statements.’ If you do, you will also remember it was back in 2014.

Culture and conduct remain key targets in the FCA Business Plan for 2017/18 which aims to remind us why they are important; to the regulator, to us in the industry and ultimately to public confidence. There is no hiding place, culture and conduct are inextricably linked by definition and in practice. There is an old saying, ‘you can’t get a cigarette paper between the two, ‘ true…they are about the ideas and customs in organisations, the way firms are led and managed and the manner in which people in that firm actually behave. What has moved on since 2014?

We have seen the accountability regimes, SM&CR and SIMR, implemented in Banks, Building Societies and Insurers, in which core pillars are culture, conduct rules and standards and fitness and propriety. We have heard the announcement made about the extension of SM&CR to all FSMA firms from 2018. Therefore a sizable percentage of the financial services population is affected making them subject to formal rules which define the way they are expected to behave, including consequences for non-adherence.

Perhaps this is just noise then and something where boxes can simply be ticked?  Well this depends on the culture in your firm I would say, but the correct answer is no. That view would be supported by the regulators and indeed the firms who have successfully embraced this and made it part of their DNA.

Here is what I have taken from the FCA Business Plan about conduct and culture along with some thoughts on the impacts. I hope it helps point to the things you need to think about and where you can make an important contribution in your own firms or with your clients.

No one should be lulled into thinking that it is only the domain of senior managers

Culture and governance
The way employees, NED’s and the firm behave is top of the list. The FCA sees this as being directly linked to appropriate outcomes for consumers, markets and competition.The Business Plan points to Senior Managers and Boards playing a critical role in terms of setting the right ‘tone from the top.’ They should be taking responsibility for setting up, embedding and ensuring that business process, people and key enablers of culture are fully aligned to the desired outcomes both from a regulatory and a firm specific perspective. This means that it needs to be high on the agenda at all levels and must include incentives, remuneration schemes, performance management, governance and risk identification and mitigation.The FCA accept that culture in firms is influenced by a multitude of factors and they do not expect that all firms should or would have the same culture. However, they do try to explain what good looks like and the outcomes they expect.

  • Firms’ culture and governance deliver appropriate outcomes for consumers and markets, and effective competition in the interest of consumers.
  • Firms develop a culture of accountability at all levels and senior individuals are fully responsible and accountable for clearly defined business activities and material risks.
  • Senior managers can explain principles of appropriate conduct towards consumers and markets and incorporate them throughout their business.
  • Firms understand and can explain their cultures, including what drives their behaviours.
  • They proactively identify the risks their behaviours pose to delivering appropriate outcomes and act to address the drivers of these risks using appropriate systems and controls to create a culture that works in the long-term interests of the firm, its customers and market integrity.
  • Firms take steps to proactively identify and address issues when things go wrong, and can demonstrate that they learn from these events.

How does a firm set about delivering these outcomes?
The FCA have introduced the ‘5 Questions Strategy’ for wholesale banks which I think provides good practice guidance for creating the right culture and applying key evaluation and validation tests for all firms irrespective of sector:

  1. What proactive steps do you take as a firm to identify the conduct risks inherent within your business?
  2. How do you encourage the individuals who work in front, middle, back office, control and support functions to feel and be responsible for managing the conduct of their business?
  3. What support (broadly defined) does the firm put in place to enable those who work for it to improve the conduct of their business or function?
  4. How does the Board and ExCo (or appropriate senior management) gain oversight of the conduct of business within their organisation and, equally importantly, how does the Board or ExCo consider the conduct implications of the strategic decisions that they make?
  5. Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct?

I agree that it is important for all employees to play a part in assessing their own contribution to firm culture and specifically their own conduct. This means that performance appraisal processes and/or T&C frameworks should be adjusted to include this. Conduct and competence attestations should be backed up with evidence and honest conversations which also need to be considered as part of fitness and propriety assessments.

Where non-adherence, concerns or issues are identified, they will require to be escalated and addressed with relevant management intervention, training and development or if necessary, appropriate disciplinary action. Transparency and visibility of this must reach senior managers and the Board, meaning that efficient data capture and process management is a necessity.

Where can it all go wrong?
The Business Plan providers some pointers:

  • Poor cultures in firms drive behaviours that deliver inappropriate outcomes for consumers and markets.
  • Firms’ strategies, business models and governance arrangements are not aligned with appropriate conduct.
  • Incentive structures and performance management do not reward behaviours that act in the long-term interests of consumers and market integrity.
  • Weak governance creates poor oversight of risks to consumers and market integrity risks in how firms are run.
  • Lack of accountability results in weak focus from senior management on risks to consumers and market integrity.

Readers of T-CNews have a big part to play here. Your T&C framework may need to be fully reviewed and changed where necessary to ensure that it is aligned and focused on the right things. For example, traditional T&C KPI’s could be deficient in defining, measuring and reporting on conduct adherence and cultural contribution. Training programmes, including conduct rules training, Also need to help educate new entrants and existing employees on what culture and their good conduct means to the firm, consumers and peers. Supervision activity and competence validation must get under the surface and test more than just the advice process for example.

Interestingly the Business Plan talks about ‘control of entry’ where individuals who do not pass fit and proper assessment should not enter or re-circulate around the market. So, in recruitment screening and assessment, you will need to consider how you will examine the candidate’s history, behaviours and potential alignment with your firms’ culture. Will they fit with it or threaten it? Regulatory references can obviously help but they cannot be the only driver of employment decisions.

The important output from all this activity is contextually related and intelligent data which will help Boards, governance structures and senior managers understand culture and conduct in their business, make informed decisions and take the ‘reasonable steps’ required to manage and govern their business effectively. As an example, FCA PS 17-9 on The Duty of Responsibility makes it abundantly clear that SMF’s must take reasonable steps to reach reasonable conclusions on which to act.

Firstly, this isn’t easy! This is not just a simple ‘comms. job, some nice new values or mission statements that get ignored or indeed some new training to add to the mandatory list every year. It’s about business fundamentals; there will be tough talking, lots of out of comfort zone stuff and a need for intelligent data, great systems and controls. One thing is obvious though, it is simply not negotiable and it needs to be embraced positively by everyone in the business. No one should be lulled into thinking that it is only the domain of senior managers through their prescribed responsibilities and the reasonable steps they need to take.

Responsibility for culture and good conduct sits with all people, and from our perspective as T&C, L&D and people risk specialists, it is a brilliant opportunity to demonstrate how robust T&C systems, processes and frameworks can help the firm deliver the required outputs and outcomes.  I see this as ‘reasonable steps’ in action and an important tool in the fulfilment and evidencing of accountability. After all, if we look closely there is really nothing new here, good practice learned the hard way from years applying T&C rules, from the RDR and MMR (to name a few) can be evolved, scaled and applied across your business top down and bottom up.

For those firms already wrapped up into SM&CR and SIMR the conduct and culture challenges are already with you. The rest of the industry waits to see what the accountability and conduct regimes will mean for them. And yes, it can be a constructive challenge and experience as evidenced by observations by the FCA and from our own extensive engagement with Accountability 1 firms. Tackling culture and conduct constructively and honestly DOES have a positive impact.


About Author

Callum Grant is Product Director at Trailight, a compliance technology business who specialise in software platforms which help organisations manage accountability and people risk. He also chairs the Training & Competence Strategy Group.

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