In a global environment of heightened regulatory accountability and scrutiny, the Bank of England, UK Financial Conduct Authority, and Financial Stability Board have signalled their continued interest in promoting the need for improvement in culture, conduct, and diversity in the financial services sector. Against the backdrop of the Senior Managers and Certification Regime, and following recent commentary from these regulators, expectations relating to culture in the financial services sector are evolving.
First introduced in the banking sector in 2016 in response to significant conduct failings and the 2008 financial crisis, the Senior Managers and Certification Regime (SMCR) replaces the Approved Persons Regime and aims to improve governance, culture, and personal accountability in financial services. The SMCR’s aim is to promote a culture in which employees at all levels take personal responsibility for their actions, with good regulatory compliance practices central to its requirements.
In embedding the SMCR, firms are presented with a unique opportunity to evaluate the current cultural norms and attitudes that form part of company culture. When reviewing and updating the corporate governance structure and reporting lines, firms should consider the most effective way for people to be managed and for the various support and control functions to interact. Compliance, human resources, and legal departments will be required to work together seamlessly, and establishing robust systems for communication and transfer of information will be key. Particular regard should be given to the assessment of fitness and propriety of individuals within the scope of the SMCR, which will require input from across the firm’s functions. Systems should be implemented to ensure that decisions are recorded and stored centrally and applied consistently. Promoting the right behaviours should also be a key priority when designing and implementing compensation practices.
As set out further below, an important factor in promoting a positive culture is ensuring that workers feel able to speak up where they identify any concerns, that they know what channels are available to them to do so, and that they are not subjected to any detriment as a result of having raised any such concerns. The Bank of England (BoE) recently stated that it needs “all regulated firms to have a culture which allows staff to speak up where they see things going wrong or the potential for things to go wrong which could affect the financial soundness of firms.” Cultivating openness and transparency as part of firm culture remains a key regulatory priority.
The BoE published on 19 June a speech by Anna Sweeney, director of insurance supervision, on making impactful change on diversity across the financial services sector. While the speech focused on demonstrating the BoE’s commitment to promoting the case for diversity through encouraging an inclusive culture from within, it identified mechanisms by which firms and regulators could meet Prudential Regulation Authority (PRA) expectations on diversified workplace culture, including implementing a blended approach of the following:
In recent years, references to compensation practices as part of ongoing supervisory review processes have become ever more prevalent, with both the Financial Stability Board (FSB) and banks recognising that compensation has an important role to play in improving conduct standards. The FSB’s sixth progress report on the implementation of principles and standards for sound compensation practices in financial institutions, published on 17 June, suggests that while most banks have put in place various practices and procedures to reduce the risk of potential misconduct and inappropriate risk taking, there is need for further work to validate and ensure the effective operation of those practices and procedures.
The FSB’s report states that the key challenge in developing frameworks for assessing the effectiveness of compensation policies and practices lies in balancing risk and reward, underpinning the wider message that compensation practices should not encourage short-term risk taking. Rather, such practices should promote long-term prudent risk taking. The utilisation of nonfinancial metrics to ensure compensation remains aligned with prudent risk taking is a further method now used across the industry to promote positive results and good culture, including metrics such as customer outcomes, market integrity objectives, and alignment with firms’ strategies and values. The report also highlights the growing use of compensation adjustment tools such as in-year adjustments and malus and clawback provisions, albeit recognizing the legal challenges in using these tools in certain jurisdictions. Against an industry backdrop of shifting cultural norms, the key message for firms remains strong: Compensation is a key driver of culture.
Building on the Banking Standards Board’s (BSB’s) “speaking up and listening” survey of 2018, the Financial Conduct Authority’s (FCA’s) article of 24 July identifies four key questions that organisations should consider in developing a successful strategy for fostering a culture of “speaking up”:
It is clear that promoting individual accountability and positive firm culture is a complex and multifaceted issue. While employers, employees, and regulators continue to grapple with the shifting tide of regulatory best practices, the importance of continuity and consistency in creating real and lasting cultural change should not be underestimated.
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