FCA discussion paper on transforming culture in financial services

On 12 March 2018, the FCA published its Discussion Paper: Transforming Culture in Financial Services (DP18/2) (the “Discussion Paper”), that presents a series of views from academics and industry thought leaders. The intention behind the Discussion Paper is to provide a basis for all those interested in financial services to consider the issues and engage in further debate on what constitutes a healthy culture and how to transform culture in the sector. The Discussion Paper offers actionable insights for financial services leaders and practitioners on how to change behaviour for the better.

Chief Executive of the FCA, Andrew bailey, in his speech on conduct and culture, commented that culture in financial services is widely accepted as a key root cause of the major conduct failings over the last 10 years since the global financial crisis, causing harm to both consumers and markets. For markets to work and firms to be successful, it is imperative that they are seen as trustworthy. Therefore, given its impact and the role it plays in re-building trust in financial services, firms’ culture is a priority for the FCA, recognising that ‘… healthy cultures can also complement and support businesses’ financial performance’.

The Discussion Paper is a set of 28 essays that discuss: (i) what good culture in a firm might look like; (ii) the role of regulation and regulators; (iii) how firms might go beyond incentives; and (iv) how to create positive changes in behaviour for the better. The aim of the FCA is to raise the management of ‘culture’ from a ‘soft’ discipline to a ‘leadership’ discipline, such as the clarity level of importance of ‘strategic planning’ and ‘risk management’. Each essay offers a unique perspective on some of the core challenges in identifying, developing and managing an ethical culture.

Recognising that there is no ‘one size fits all’ approach, measuring culture is more challenging, and so the FCA have considered the drivers of behaviour that can already be assessed, such as a firm’s purpose, leadership, approach to rewarding and managing people, and governance arrangements. The introduction of the Senior Managers and Certification Regime (“SMCR”) is an example of how the FCA is trying to influence culture within regulation, as the basis for implementation was the principles of responsibility and accountability. The SMCR sets minimum standards for the behaviour of financial services staff and aims to promote a culture where senior managers take responsibility for identifying where harm might occur and take action to prevent it. The SMCR creates a formal link between the behaviour of individuals and the conduct of the firm.

The essays have been grouped into the following four themes:

  • is there a ‘right’ culture;
  • the role of regulation;
  • the role of rewards, capabilities, and environments in driving behaviours; and
  • leading culture change.

Is there a ‘right’ culture

For the FCA, measuring and managing culture means looking at the “habitual behaviours and mindsets” that characterise an organisation. Culture is inevitably interlinked with the behaviour of a firm, which means taking into consideration the norms, values and practices which are revealed by how people think and behave in an organisation. So, what is the ‘right’ culture? Arguably, there can be a “right” and ethical culture that benefits consumers, employees and even shareholders by aligning business to consumer interests. For example, delivering positive social impact has become necessary for economic success such as in the case of Uber, where it’s initial success was jeopardised in many countries as a result of alleged unethical cultures. This resulted in difficultly in sustaining their position in the market in the face of such consumer backlash.

While shifting to a more values-driven business model is not new, a range of factors can lead to a healthy culture based on principles such as adaptability, with an emphasis on quality, integrity and supportiveness. Similarly, the importance of choosing the right measures of cultural success have been highlighted, “a good culture means more than ensuring that good people don’t do bad things – it is about enabling good people to do even better things.” For example, a low rate of conduct breaches may not form a particularly high bar for firms to aspire to, and that a broader outlook on compliance is necessary.

The role of regulation

The role of regulators is to monitor the relationship between firms and their behaviour and so reduce harm in markets. Regulators, such as the FCA are increasingly recognising that the more traditional methods of reducing harm in the market such as through rules and enforcement are to narrow. They are looking instead to the motivations behind behaviour where rules and enforcement have failed. In this section, implications of the latest evidence on culture for the role of regulators and their ‘toolbox’, are discussed, as well as how to effectively approach measuring culture and what regulators are doing globally.

The Discussion Paper centred on principles versus rules, with some arguing that regulating culture means accepting people are motivated by more than just risk and reward. A system focused too narrowly on following the black letter law may mean people undercut ethical considerations. Suggestions were made for a more flexible regulatory approach that could help to re-align market failures that may lead to why firms do not always prioritise culture concerns. Examples of this include principal-agent problems, where employees’ incentives may not align with the long-term interests of other shareholders.

The FCA acknowledges that regulators can be instrumental in setting out minimum standards for firms that may otherwise have unhealthy cultures. However, at the same time the FCA have recognised that it is not enough to simply rely on rule making and enforcement alone; incorporating behavioural sciences for assessing, understanding and influencing behaviour are all needed to create a positive and lasting change.

The role of rewards, capabilities, and environments in driving behaviours

Using the classic article ‘On the folly of rewarding A while hoping for B’ (Kerr, 1975) the FCA sums up the influence of rewards on behaviour and the problems caused by faulty incentives within organisations. Industry and regulatory understanding of what drives certain behaviour, like remuneration, targets and sanctions resulting in positive/negative outcomes has advanced to using more sophisticated psychology motivators like receiving praise and status.

It is not enough to rely on traditional incentives and levers to create positive culture, as the PPI scandal demonstrates. It serves as an example of an incentive that was created by people working in a culture driven by short-term profit maximisation and has since cost firms billions in compensation and fines. TSB Bank CEO, Paul Pester, claims the banks recent award of Britain’s most recommended high street bank is as a result of the bank scrapping individual sales-driven targets and access to comparative sales data and rewarding staff based solely on service to customers.

It has been suggested that businesses tend to ‘overestimate the power of individual character and underestimate the power of the environment a person is in.’ Even individuals with a strong moral identity, can do bad things when driven by pressure to perform. For example, it is essential that goals are realistic and that employees have the power and confidence to challenge Firms should try to foster an environment where employees are not pressured into conforming or feeling excluded.

The FCA comments that strategies of wider motivation should be used, with attention given to key influencers, such as middle management, as well as creating arrangements that allow employees to raise concerns in a safe environment.

Leading culture change

Counter to popular belief, while senior leaders do play a key role in influencing culture, everyone is responsible for influencing culture from the middle manager to the most junior management, and even external factors such as monetary policies and Western culture have been argued to play a part. It is noted that senior leaders need to embody the qualities of an effective leader. For example, Credit Suisse’s senior leaders have applied Maslow’s hierarchy of needs to ensure they were meeting employees’ basic needs, this starts at an individual’s basic survival to them becoming highly engaged and motivated within the business.

Instead of a narrow focus on middle management who translate the expectations of leaders into frontline practice, leaders should encourage and empower ‘culture carriers’ who influence at all levels of an organisation.

Next steps

The FCA is not requesting formal feedback on this Discussion Paper, however, they would like all those interested in the financial services sector to engage in debate about what constitutes a healthy culture and how to promote it. Recognising and measuring culture is a challenge and there is no one quick fix, but a positive culture is imperative for business success. The Discussion Paper offers actionable insights for financial services leaders and practitioners to consider how they effect change in their organisations such as using behavioural science to guide incentives.

To access the FCA’s Discussion Paper on transforming culture in financial services, please click here.

For more information on how to improve your firm’s culture, Cleveland & Co external in-house counsel, your specialist outsourced legal team are here to help.



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