Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA), spoke on the subject of corporate culture and its relationship to regulation when he addressed the Investment Association Culture Conference at Mansion House in the City of London in November 2018.

Mr Bailey began by firstly saying that putting regulatory rules in place can lead to a good corporate culture:

“It follows – by assumption I would say – that if you can make enough rules, and of course the right ones, the culture will be good, and trust will be built and maintained.”

However, he then cautioned that this may not always be the case, by adding:

“The problem is that in practice a set of rules tends to underdetermine what needs to be done – it is unlikely that a rulebook will be able to predict and determine every situation that a regulated party can face, and in any event we want to see a world in which regulated parties are encouraged and incentivised to exercise their own judgment reliably and regularly, drawing on their own competence and honesty.”

As an example, he referred to the fact that individuals now have much greater freedoms when it comes to accessing their pension benefits. Many of these individuals will seek professional advice before making any decisions in this area, which in the words of Mr Bailey, places additional focus on the culture and behaviour of those who provide retirement advice.

Another of the FCA chief’s principal messages was to say that “the effectiveness of communication with consumers is in my experience a test of culture.” Directly addressing his audience of investment managers, he made reference to the FCA’s market study which revealed that some investment management firms were not being transparent with customers regarding fees and charges. Whilst the regulator could introduce new rules regarding information disclosure, it remains of paramount importance that the firm clearly communicates the fees and charges information to its clients.

On this subject, Mr Bailey added:

“On their own, rules alone will underdetermine what needs to be done to produce robust outcomes in the interests of users and consumers.”

So, the message to authorised firms is clear – a box ticking approach that ensures compliance with all relevant areas of the FCA Handbook may not be sufficient. Firms must have a corporate culture that promotes good outcomes for consumers, and senior management must set the right example and promote this positive culture at all times.

An earlier 2017 speech by Jonathan Davidson, Director of Supervision – Retail and Authorisations at the FCA, revealed that there are four ways that a firm’s culture can be measured, in the eyes of the regulator:

  • Whether the firm has “a clearly communicated sense of purpose and approach”
  • The ‘tone from the top’ – what example are senior management setting for their staff when it comes to conduct?
  • The governance processes firms have in place to manage conduct risk
  • The incentive schemes used by firms – are staff for example rewarded via bonuses and commission structures to act contrary to customers’ interests

The five Conduct Rules, to be introduced across the industry in December 2019 via the Senior Managers & Certification Regime are also good indicatoes of how to promote a good culture:

  • Act with integrity
  • Act with due care, skill and diligence
  • Be open and cooperative with regulators
  • Pay due regard to customer interests and treat them fairly
  • Observe proper standards of market conduct

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