Culture remains central to how the FCA supervises regulated firms, as highlighted by Sheldon Mills, Executive Director, during his keynote speech to the Investment Association on 22 September 2021 – see here.
The FCA sees a healthy culture as critical both to consumer protection and well-functioning markets. In almost every instance of poor conduct, unhealthy cultural issues have been present. Firms with healthy cultures are less likely to experience misconduct and there’s an increasing body of evidence to show that healthy cultures deliver high-performing teams and businesses.
How does the FCA assess culture?
The answer lies in the FCA’s Approach to Supervision and the framework it uses to supervise regulated firms: The Firm and Portfolio Assessment Models, which focus on business models and culture as the key causes of harm in firms.
There are four drivers of culture which are assessed by the FCA:
· Purpose
· Leadership
· People
· Governance
Through the FCA’s supervision of firms, supervisors determine how effective each of these drivers of behaviour are in reducing the potential harm arising from a firm’s business model and strategy. These drivers cover a wide range of areas, for example: approach to remuneration, speak-up/listen-up culture, Board and Exco composition, diversity, SM&CR and firms’ governance structures and systems and controls, to name a few.
What is the standard?
In our experience, firms still have work to do to meet the regulator’s expectations. Helpfully, the regulator does not believe that there should be a ‘one size fits all’ approach, it recognises that each firm’s culture is different, allowing flexibility, but expects leaders in firms to manage the drivers of behaviour in their firms to create and maintain cultures which reduce the potential for harm. The FCA would like leaders to pay as much attention to culture as they do to their business models and strategies.
What are the next steps?
It’s clear that the four drivers of culture are as important as ever, especially in the wake of the pandemic. Diversity and inclusion (D&I) are now key priorities for the FCA and they plan to take action to raise standards. They published a Discussion Paper (DP21/2: Diversity and inclusion in the financial sector – working together to drive change) in July 2021.
Further, they have also built into their culture assessment framework their approach to vulnerable customers and have issued guidance in this regard: Vulnerability Guidance (FG21/1). Climate change and other Environmental, Social and Governance (ESG) matters are also on their agenda and will increasingly form part of the FCA’s supervision engagement strategy.
Firms should ensure they take steps to maintain positive cultures which reduce the potential for harm. At the FCA’s Annual Public Meeting (September 2021), they stated there would be more ‘feet on the ground’ as part of their more assertive approach to supervision.
We would encourage firms to be prepared for challenge on these issues to ensure they meet regulatory standards.
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