20Mar

Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA) spoke at length on the subject of firms’ culture when he addressed a non-executive directors conference in Hong Kong. Mr Bailey’s speech stressed the responsibilities of boards of directors in maintaining the right culture, and on the effects a firm’s remuneration structure can have on its culture.

In attempting to define culture, the FCA chief said that “almost everything that goes on in an institution affects its culture,” and that “good culture makes it more likely that a firm and its people will be trusted.”

He went on to say that:

“Cultural outcomes are the product of a wide range of contributory forces: the structure and effectiveness of management and governance, including the well-used phrase ‘the tone from the top’; and the incentives they create; the quality and effectiveness of risk management; and the willingness of people throughout the organisation to enthusiastically adopt and adhere to the tone from the top.”

On the subject of remuneration, Mr Bailey said that “there is no doubt that the approach towards remuneration will heavily influence the outcome of culture” and added:

“[Our] approach is not to cap the level of remuneration, but rather to act on the structure of it and the incentives created. As financial regulators, we do not seek to control the level of pay, outside its impact on our public policy objectives. But, the influence that we do have will affect the culture of firms.”

Recent mis-selling and other misconduct scandals have shown that if a firm’s employees have financial incentives to treat customers unfairly, then they are likely to do so. This leads to a corporate culture where sales and profit become more important than the interests of customers.

The next issue Mr Bailey mentioned was that, following the banking crisis, senior individuals were not held personally responsible in many cases. He commented that “with the absence of focus on responsibility, those at the top were seen to evade the consequences in a formal sense of regulatory action.” He then looked forward to that situation changing in the future, given that the Senior Managers Regime was introduced in the banking sector around one year ago, and will apply across the financial services industry from 2018.

In his concluding remarks, Mr Bailey returned to the themes of remuneration and senior management responsibility:

“Incentive structures also drive the behaviour of staff, along with other people-related practices, such as recruitment and performance management. This is where tone from the top gets turned into real practice. Finally, governance is the framework of responsibility that oversees the operations of a firm. It is essential that the leadership of firms identify what drives their culture.”

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.