Senior figures at the Financial Conduct Authority (FCA) have repeatedly spoken in recent months about the importance of firms having the right culture, and that sometimes this requires firms to think about whether they are doing the right thing and not just consider whether they are complying with the documented FCA regulations.
Jonathan Davidson, FCA director of supervision, and Dame Jayne Anne Gadhia, former CEO of Virgin Money, spoke about culture and the Senior Managers & Certification Regime (SM&CR) in a recent FCA podcast. Dame Jayne has experience of implementing SM&CR in the banking sector – banks have been subject to the Regime for several years while it comes into force on December 9 for other firms.
Mr Davidson said he defined culture as “the characteristics, mindsets and behaviours that are typical for each organisation.” He said that when the regulator looked for the root cause of things that had caused customer detriment that either the firm’s culture or its business model was often to blame.
Dame Jayne-Anne was previously employed at one of the UK’s big four banking groups before taking her senior role with Virgin. She said that, in 2006, just before the financial crisis, the group’s priorities appeared to be “making money at all costs” and said that maximising shareholder returns over doing the right thing was likely to lead to individual employees receiving praise from their superiors.
She also criticised this large banking group for giving significant incentives to staff to sell payment protection insurance. She communicated her concerns to a senior manager but was told “of course it’s not right but we can’t be the first [bank] to pull it as it would affect our share price.”
She then spoke of an initiative at Virgin called “making everyone better off”, where the interests of all stakeholders (including customers and staff as well as shareholders) were considered when making a decision.
Mr Davidson said it was not possible for the FCA to write rules relating to a firm’s culture, even though SM&CR does include new formal written rules. He said there was a need for his organisation to communicate to firms the advantages of having the right culture.
He went on to describe the drivers of a healthy culture:
- Everyone within the firm is aware of what the firm’s culture is
- Senior management must set the right example and any incentive scheme approved by management should reward staff who conduct themselves in the right way
- The five Conduct Rules that form part of SM&CR must be the minimum standard of behaviour for staff at all levels – here he said that he often referred to SM&CR as the Accountability Regime to emphasise that even the most junior employees need to recognise they are accountable for the work they do, and that they need to observe the Conduct Rules at all times
Dame Jayne remarked that the SM&CR rules merely formalise what should already be accepted as good behaviour. She said that the right outcomes for customers might be:
- Ensuring products are appropriately designed and easy to understand
- Providing good customer service
- Ensuring products are appropriate for each individual
- Where customers have suffered detriment, the firm is willing to offer redress
Mr Davidson said that senior managers should consider whether a desire to do the right thing for customers means action is required in these areas:
- The way the firm is governed
- The training that needs to be provided to staff
- The incentive scheme the firm operates
- The design of the firm’s products
Dame Jayne urged all senior managers to embrace the Regime and not just leave it to the compliance function to implement.
SM&CR not only requires senior managers to be approved by the FCA, but it also requires anyone else who holds a position of responsibility to be approved by their firm on an annual basis – this is the Certification element of the Regime. Mr Davidson said this should encourage staff who are subject to these assessments to recognise that they need to keep doing the right thing in order to pass these annual assessments.
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