The chief executive of the Financial Conduct Authority (FCA), Andrew Bailey; and the Governor of the Bank of England, Mark Carney, both gave speeches on the subject of firms’ culture during March 2017. Both officials also made specific reference to the effect remuneration systems have on a firm’s culture.
Addressing the HKMA Annual Conference for Independent Non-Executive Directors in Hong Kong, Mr Bailey firstly spoke about issues that have affected the financial sector’s reputation in recent years, and opined that if a firm had a good culture, it was more likely that the firm would be trusted.
The FCA chief said that cultural outcomes within firms were affected by:
• The ‘tone from the top’ – where the firm’ senior managers set out their expectations of the firm’s employees
• The willingness of employees to adopt this tone from the top
• The firm’s management structure and the effectiveness of its governance arrangements
• The quality of the firm’s risk management systems
• The firm’s incentive scheme
Regarding the ‘tone from the top’, later in his speech Mr Bailey stressed the importance of management setting the right example, by saying:
“The tone from the top, or how the leadership (the Board, Executive, parent companies) of a firm behave and fulfil their responsibilities, drives the behaviour of staff and the outcomes they deliver.”
If for example a firm’s senior management promote a sales culture, and consider this to be more important than treating their customers fairly, more junior staff are likely to follow their lead, possibly because they fear the consequences of not achieving their sales targets.
On the subject of remuneration and other incentives, and their effect on culture, he commented that:
“It is critical that Boards and regulators think through the consequences of structures and incentives. In bank remuneration in the UK we have emphasised the importance of deferring variable remuneration consistent with the observation that the risks and returns of activities evolve over a considerable time. And, during that time of deferral and after it, variable remuneration can be cancelled where problems or poor performance materialise.”
Naturally staff are more likely to mis-sell financial products, manipulate benchmarks or engage in other improper behaviour if they were to be financially rewarded for doing so.
Mr Carney gave his speech to the Banking Standards Board Panel. He began by making reference to the recent damage to the reputation of the financial sector, by saying:
“Repeated episodes of misconduct have called the social licence of finance into question. In a system where trust is fundamental, it ought to be of grave concern that only 20% of UK citizens now think that banks are well-run, down from 90% in the late 1980s.”
The Governor then referred to the need to have “compensation rules that align better risk and reward.” Specifically, he reminded banks that they must defer a significant proportion of senior managers’ variable pay for seven years, so that it can be ‘clawed back’ if any conduct issues arise during that period.
Mr Carney also reminded the audience that under the FCA’s Senior Managers’ Regime, the chair and CEO of a firm have responsibilities to develop and embed the right culture within their firms.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.