A focus on the FCA’s culture requirements and changing work patterns: The background

Across two articles we look at recent developments in the FCA’s approach to culture in the financial services industry and how this interacts with the long-term trend towards hybrid working.

In this first article we analyse the FCA’s current culture requirements for financial services firms. We look at the key drivers of the FCA’s requirements, the significance of its Conduct Questions Programme and key points for financial services firms to take into consideration.

What are the FCA’s culture requirements?

The emphasis that the FCA places on developing and promoting a healthy culture within financial service firms has been the subject of increasing focus over the last 18 months.  

The overarching aim of harm prevention continues, with an expectation that firms will remain focussed on delivering sustainable cultures that minimise the potential for inappropriate behaviours to rise to the fore, despite the employee relations difficulties that the pandemic has caused.   

An increasing number of financial services firms are moving towards long-term hybrid working arrangements which will inevitably entail a potential shift in culture.  As such, it is worth a brief recap of the FCA’s requirements in relation to culture. The four key drivers are:

• purpose (including, for example, ESG, diversity and inclusion, and acting in the best interests of customers);
• leadership (in other words, the “tone from the top”);  
• approach to rewarding and managing people; and
• governance arrangements.  

These drivers form the basis on which the FCA can assess and feedback on how well firms are shaping their culture, with the ultimate aim of wider ethical compliance in the public interest, rather than simple technical compliance as part of a box-ticking exercise. In this way, it is envisaged that consumers and markets can also gain the benefit of cultural improvements.

The relationship between culture and conduct: The Conduct Questions Programme

The Senior Managers & Certification Regime (SMCR) and FCA Conduct Rules play a pivotal role with regard to culture within firms and the FCA reinforced this in its Business Plan for 2020/21. It provides that:

“The regime (SMCR) aims to see firms across financial services foster healthy cultures where conduct and fair customer outcomes are at the forefront of their business”.

Ongoing guidance on evolving compliance, culture and regulatory expectations is regularly published, including speeches from key executives such as Mark Steward, the FCA Executive Director of Enforcement and Market Oversight.

His April 2021 speech reinforced the “virtuous circle” created by the SMCR, where the prospect of personal liability for senior managers means there is a self-interest in avoiding liability which in turn reduces the risk of non-compliance for a firm. The speech also flagged the significance of the FCA’s Five Conduct Questions Programme. The latest report for 2019/20 is available here , with full details of the current questions on the FCA’s agenda.

Diversity and Inclusion

The FCA’s CEO, Nikhil Rathi, has also stated that a sixth question is envisaged for the future, to interrogate firms on diversity and inclusion (D&I): “[I]s your management team diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up?”.

Mr Rathi has highlighted that the FCA cares about diversity because it has a role to play in reducing conduct risk. He has also queried whether firms can adequately respond to the needs of consumers from diverse communities if they do not have the necessary diversity of background and experience.

It would seem that the FCA will not shy away from using its supervisory powers to hold firms to account in the future, if diversity fails to improve. One option that has been mooted is whether diversity of management teams could feed into the FCA’s consideration of senior manager applications. The FCA’s recently published Discussion paper on Diversity and inclusion captures these themes and more.  

If implemented, the regulators’ proposals will make every firm’s chair and chief executive directly accountable for diversity and inclusion on the board; in the wider leadership team; in every customer facing team; and in every other part of their firm.

The regulators are considering new requirements for board diversity, including making a candidate’s non-financial misconduct record and the make-up of a firm’s leadership team a factor in determining whether to approve an SMF application. The proposals include possible requirements to gather, study, report and publish a wider range of diversity and inclusion data than they gather and publish today.

This will likely eventually lead to peer benchmarking by regulators, shareholders, customers and employees. Chairs, chief executives, HR directors and others may have their remuneration adjusted as diversity and inclusion becomes a more significant part of the non-financial performance metrics on which salaries and bonuses depend.

Since its initial introduction the focus of the Conduct Questions Programme has evolved from an initial “tone from the top” narrative (i.e. the overall message emanating from a firm’s c-suite executives), through to the current “tone from within”. This reflects the FCA’s recognition that for ongoing change to occur, firms need to ensure that culture awareness is integral to all levels of a business.

Key consideration points

The expected approach is for all employees to consider their individual response to conduct issues and self-reflect and self-challenge, with a view to encouraging wider corporate change. In particular, the 2019/20 Report flagged the following key points for firms to consider moving forward:

• Have staff had sufficient training to be able to identify conduct risk in their day-to-day roles beyond general awareness?
• Does the firm’s overall framework for identifying and mitigating conduct risk reflect adequate, bottom-up exercises to understand those risks?
• Do staff understand how their own roles and responsibilities can potentially create conduct risk or harm for the customers, the firm or markets?
• Are messages from the top, including corporate purpose and values, translated in a meaningful way to the specific roles and responsibilities, targets and objectives at the individual and unit level across the firm?
• Is enough being done to support line managers in their efforts to enable their teams to perform at their best?

Part two of the series here looks at the effects the pandemic has had on the FCA’s culture requirements, as well as practical actions employers can take to protect workplace culture.

Contact us

If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.