UK Regulators Continue Focus on Cultural Accountability, Diversity in Financial Services Sector

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. 

Culture of Accountability

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.

Culture of Diversity

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:

• Attracting a wider pool of talent through broadening opportunities for ethnic minority groups and career returners, as the PRA recognises that diversity suffers as employees become more senior and family and caring responsibilities often lead to employees leaving the workforce.
• Ensuring the retention, development, and progression of staff to minimise turnover, and supporting their progression into senior management positions. Encouraging and supporting a more diverse range of individuals to be in a position to progress is only possible if inclusive talent management is embedded within the mindset of an organisation and its people, and is given strategic priority on the boardroom agenda.
• Developing an inclusive culture in which employees are actively encouraged to exhibit the right behaviours and to report wrongful behaviours. The BoE suggests means of encouraging such behaviours, including unconscious bias and inclusive recruitment training, flexible working at all levels, and implementing presentations, discussions, and workshops for employees to share and learn from experiences.
• Challenging existing practices rooted in the principle of “groupthink,” and taking proactive, not reactive steps, in bringing together diverse groups to create a culture that not only accepts but values differences that people from all backgrounds bring to the workplace.

Compensation as a Driver of Culture

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.

Fostering a ‘Speak Up’ 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”:

• What do employees currently find it easy or difficult to speak up about? The BSB survey found that employees were much more likely to raise concerns relating specifically to the organisation (for example, treatment of customers, policies, and market integrity) than they were in respect of personal concerns (sexual harassment, bullying, and discrimination). Organisations should tackle the challenge of employee fear that reporting personal concerns will reflect badly on them or be held against them.
• Who do you need to target to change the culture? Should the intervention target the “speakers” themselves or the “listeners”? Whilst most interventions target the speaker, the listener has been identified as the individual who ultimately rewards or penalises the behaviour of “speaking up.” Understanding the past experiences of the employee population is essential in deciding where to focus a “speaking up” strategy.
• How do you want your employees to be able to speak up? Evidence suggests that employees do think strategically in deciding who they speak to and how. Visualising to whom and how employees are likely to speak up in a specific context is crucial in designing a “speaking up” intervention.
• How will you know what you are doing is working? Whilst employers have a variety of academically validated scales at their disposal to measure speaking up behaviour and employee perceptions about the safety and efficacy of speaking up, taking, for example, a baseline measure in the target population prior to and post-intervention can prove to be a helpful method for measuring effectiveness. Alternate methods include creating a scale to ask participants to estimate how often they spoke up in the previous calendar month, and for interventions which by their very nature extend over a longer time period, an employer can simply use its existing reporting records to measure success.

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.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Simon Currie
Louise Skinner
William Yonge
Steven Lightstone