People and Regulation


Despite financial services regulation being in place for many years, why do we still have regular examples of those rules not being followed?  And it’s not just the Handbook rules that the PRA or FCA are interested in. Non-financial misconduct, which focuses more on ethical and expected behaviours, is climbing up the agenda, too. Some high-profile examples from Lloyd’s show that the expected behaviours were clear but not everyone lived up to those expectations.

Results from whistleblower helplines indicate that most calls report poor behaviours within the organisation, often incidents of bullying, harassment or discrimination. Why can this be happening when such incidents are almost certainly in breach of company policies?

In many cases this would be summed up as ‘How I actually behave vs expectations of how I’m supposed to behave’.

Do we then simply keep adding more and more rules to try and prevent bad behaviour? The FCA handbook already runs to nearly 9000 pages – surely more rules can’t be the answer?

It is noticeable that there has been a gradual increase in focus of the FCA approach to culture and conduct. Looking at recent speeches on behalf of the FCA, there are usually references to culture and/or purposeful leadership (e.g. Jonathan Davidson 26th Nov. 2020) and it is possible that the FCA will instigate more intrusive conversations with firms on their culture later this year.

 whilst culture has a large role to play, it isn’t the only factor and must be backed up by appropriate behaviours

Under the Senior Managers and Certification Regime (SM&CR), the leaders of our firms are charged with the responsibility to set the tone of the organisation. They don’t always get it right as a check of Decision Notices issued by the FCA will testify but firms can use the examples contained in these Notices to educate their teams on what is expected and ensure that the problems in the firms that were censured are not replicated in their own firm.

At the start of 2020 a Dear CEO letter was issued for wholesale general insurance firms referring to non-financial misconduct and the expectation that CEOs should be proactively tackling such issues. It went on to set out that, whilst principles and rules can help shape a firm’s culture, it is down to all those who work in financial services to embrace the substance of what the FCA are trying to achieve.

The four key drivers of culture were listed as:

– leadership;

– purpose;

– approach to rewarding and managing people; and

– governance systems and controls.

Another letter at the start of September 2020 to personal and commercial lines insurance intermediaries indicated that new FCA supervisory strategies for different portfolios would allow them to monitor all firms effectively, and target those firms that pose the greatest risk of harm. Where the FCA conclude that firms, and/or individuals are not meeting their expectations, they will act.

The FCA see the three key drivers of harm as being:

– ineffective governance and oversight of the business;

– incentive arrangements that do not support a positive conduct culture; and

– business models which provide poor control over sales and renewals and conflicts of interest including through Appointed Representatives.

However, perhaps as a reflection of FCA frustration at a perceived lack of action, this has now been strengthened with the recent consultation CP21/13: A New Consumer Duty, which proposes to expand the existing rules to ensure firms provide a “higher level of consumer protection consistently, which will enable consumers to get good outcomes”.

The paper explains the areas of consumer harm the financial advice sector should address, and the new rules the FCA believes should do just that.

All of this puts a lot of pressure, focus and responsibility on senior managers. How should they best respond?

We talk about the culture of organisations but this, in itself, may not be enough to stop the bad behaviour. Why don’t rules and culture always prevent the problems?

I’d propose that, whilst culture has a large role to play, it isn’t the only factor and must be backed up by appropriate behaviours.  The big banks spring to mind. Aggressive sales cultures in branches were still evident after executives were telling the FCA that these cultures had been stamped out. This is where the FCA talk about the ‘permafrost’ layer of middle management who continue with the old regime despite the ‘tone from the top’. Here, the firm must be determined to change staff behaviours and make sure this happens with executives remaining visible throughout the business.

It would be difficult for leaders to do all this on their own. They need to engender a culture where everyone takes responsibility for compliance. Everyone in the firm must live the correct culture.

This can make a huge difference to spotting errors early in any process and taking steps to remedy them and prevent them happening in future.

Culture is important in determining the success of a business and a firm’s culture is mostly a reflection of the character of its leader. In short, a good boss breeds good culture.

A purposeful leadership of the firm, with quality staff understanding their responsibilities under the Conduct Rules will go a long way to addressing issues. These staff would be expected to consistently do the right thing for the customer, even when no-one was looking.

One view might be to adopt the Branson way. The HR Digest stated that “Richard Branson’s corporate philosophy is that ‘People are our greatest asset’. ‘Clients Do Not Come First. Employees Come First.’ His opinion is that employees should be given top-priority, creating a family-like culture in all of his companies where people set their own standards and rewards, are eager to learn and know how to adapt. They go to great lengths to change the mindset of people who aren’t committed to the organisation to achieve common goals.” Branson sees the wonders that engaged employees can make in an organisation.

It’s clear that the success of many firms in integrating changes to regulation and customer expectations over recent years is supported by their people.

And to achieve this there needs to be openness, visibility of senior management, trust, a customer-centric culture, genuine care of staff and now, control of remote working. We also need to provide a ‘speak up’ environment where people feel comfortable in challenging senior management when they believe something is wrong.

Quality MI should not be ignored to ensure good outcomes and to spot poor conduct.

I think T&C can be a differentiator for many firms. If quality T&C is in place, staff will be less likely to leave as they will experience personal development. They will see that the firm cares about spending on training to ensure staff understand why certain things have to be done and they will then be less likely to make errors.

I’ve seen examples of staff who have moved firms ‘because the grass is greener’, only to return shortly afterwards when they’ve realised how poorly their new firm deals with T&C.

How do we help people review culture? It will depend on the level of the individual within the firm but here are ten to start:

  • When was the last time the Board had a discussion about the culture of the firm? Are ethical issues discussed openly throughout the company, constantly reminding employees that good behaviours are essential?
  • How are the company’s values relating to diversity and inclusion explained, including neurodiversity? The FCA will increase its focus on this in the coming months.
  • How do we ensure that the positive culture led by senior management is alive and working well within other levels of the firm (e.g. middle management)? Is the tone from the top delivering a clear message and is the leader setting the right example by their own conduct?
  • How often does the senior team engage with other employees within the business? And improve engagement between teams / silos / business functions?
  • How does the firm promote psychological safety? What do staff understand by this?  How easy is it for them to highlight concerns relating to conduct risk to the senior team?
  • Is there adequate training in place that is relevant to, and understood by, those being trained?
  • Is there a strong disciplinary process in place where those who demonstrate bad behaviour will be sanctioned? Is bad behaviour and its consequences openly communicated to the staff?
  • How are employees remunerated? Does this fit with company stated values and purpose, including a qualitative assessment of customer care?
  • Do we undertake employee exit interviews – or have a chat with them about their experience working at the firm?
  • Recruitment – Do we consider ‘social fit’? If so, do we only look for ‘people like us’?  How do we appraise this?

As James Timpson (CEO of Timpson Group) recently said “Never be surprised by the power of training, and the joy it gives someone coming home to tell their family what they have achieved. Despite the barriers put in our way (by the Government’s apprenticeship levy), the money spent in helping someone be the best they can be is the most important investment a company can ever make”.

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David Thompson is Senior Consultant at Branko Ltd. Branko Ltd can offer FCA compliance solutions, project management, general business consultancy & technical or soft skills training, all at competitive prices.

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