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Transforming Culture: Key Area of FCA Concern for 20/21
This week, we’ll continue to take a look at what lies ahead for firms regulated by the FCA. Whilst Covid-19 has limited the regulator’s plans for 2020/21 somewhat, some aspects of the regulatory horizon haven’t been postponed. So what do firms need to concentrate on as we head towards the end of 2020?
While ‘transforming culture’ isn’t set out as a specific focus of the FCA’s Business Plan, it is threaded throughout and will clearly play a major role in future supervision and thematic work. The 2020/21 Business Plan states that there will continue to be a focus on the four key culture drivers – purpose, leadership, approach to rewarding and managing people, and governance.
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The FCA published a paper on the subject of transforming culture in March 2020 which emphasised the importance of adopting a healthy culture, suggesting that “putting a clear, meaningful purpose at the centre of a firm’s business model” is key. It also stressed that “when aligned to positive outcomes for shareholders, employees and customers, purpose can benefit firms and play a fundamental role in reducing potential harm to consumers and markets”. This publication is in the form of a collection of essays – which the FCA points out do not necessarily reflect the regulator’s view, but should give firms some food for thought.
What is ‘purpose’ in this context, and how can we build it into business models?
Out of context, ‘purpose’ is a fairly generic term that doesn’t appear to mean much for business, but as the paper explains, creating and embedding a solid purpose can be a critical element in influencing a positive culture throughout the firm, particularly as it creates an inclusive environment. In short, it is, as Larry Fink puts it “a rallying concept for all those on whom a company depends for its success”. In business, a firm’s purpose should provide a clear framework for strategy, planning and decision-making, and help to ensure the long-term stability of the firm. The firm’s purpose should be a relatively short, simple statement by the firm about what it stands for and its role in the industry.
And it isn’t just about the benefits to customers; the paper highlights that a positive social impact is key to generating strong and consistent shareholder value, citing a Harvard study that shows that companies that fully commit to a purpose usually outperform their peers.
The FCA says firms should develop “healthy, purposeful cultures’ which ‘should lead to better outcomes for consumers and markets, and healthy and sustainable returns for shareholders”. It also follows that healthy working environments lead to less stressful environments for employees, meaning a reduction in mental health difficulties and staff retention, maintaining expertise with the firm.
How might a firm build their purpose?
The paper suggests a ‘pyramid’ framework is one option, placing profit as the bedrock, then serving customers and providing employment as the next tier, with ‘improve society’ as the capstone. This exemplar underscores that creating profit isn’t a bad thing. But healthy culture is all about ensuring that profits aren’t generated at the expense of customers, staff, or society, which is where the final tiers come in.
A strong purpose is one of the FCA’s foundation points for a healthy culture. The FCA do not and won’t ‘prescribe’ what culture or purpose should mean in practice for firms – but it is clear that there should be an emphasis on engendering a healthy and positive culture, as the regulator sees this as a fundamental ingredient to a stable industry. The flip-side, of course, are ‘unhealthy practices’ that the FCA believes are “the root cause of too many mis-selling and other conduct scandals”.
It is worth remembering that the wording the FCA uses throughout its discussions around culture is reminiscent of how it frames its aims for the Senior Managers and Certification Regime. At its core, the Regime is about preventing misconduct and its far-reaching consequences, which can often take years to unpick and sort out. However, there are four common elements of a healthy culture: a meaningful purpose, effective leadership and governance, an inclusive environment where it is safe to speak up and employees that have the necessary capabilities and are motivated by appropriate incentives.
The phrase ‘creating a healthy culture’ can seem very daunting – for firms of all sizes. It is non-specific and it can feel like there’s a lot of work to be done in figuring out what the regulator wants. But firms can use the fact that there is no set path to best advantage, aiming to work towards achieving:
A clear purpose and values. These don’t need to be, and shouldn’t be, complex. They should be based on simple ideas that are easy to understand for all employees and quickly allow anyone to understand what the business stands for. Values can be mapped to the conduct rules.
Appropriate remuneration. Rewarding (financially and otherwise) all staff at all levels based on good outcomes for customers, and ensuring that remuneration schemes don’t award poor practice or risky behaviour will go a long way to encouraging a healthy culture.
Consistent messages. The role of governing boards and senior managers is key here – ensuring senior personnel reflect a healthy culture back down the line will support good behaviours.
Fair treatment of customers. Threading the fair treatment of consumers throughout business – from product design to onboarding to customer communication means there’s nowhere for poor practices to hide.
Not confusing healthy culture with stopping bad things from happening. This is not possible, but encouraging positive behaviour and putting things right supports good ethical behaviour.
Robust monitoring. Diagnose issues where they exist, and put them right. Use a robust compliance function to monitor practices and ensure staff behaviour at all levels not only doesn’t breach regulator rules, but also works towards fair treatment.
Our range of online training covers a range of themes high on the FCA’s agenda this year. Our Fair Treatment of Vulnerable customers course covers how to identify and speak to vulnerable customers in practice, recording vulnerability and appropriate support options.
Finally, we offer two Conduct Rule Training options, one dedicated course for Senior Managers and another for certified staff and others subject to the Rules. These online courses are able to be completed at the individual’s convenience, and provide clear and comprehensive training in the Rules, including a mix of videos, small amounts of text and plenty of scenarios to demonstrate how the rules apply practically.
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