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Core foundation

07 March 2017 by Phil Deeks

Financial services: Core foundation - read more

A firm’s culture is crucial to the FCA’s regulatory regime and authorisation process

When the issue of culture is raised, most financial services firms would claim they have a great culture in place. However, the challenge facing most firms is evidencing that this conclusion is correct. Put simply, if a company is not formally assessing and measuring its culture, it cannot be sure that this is the case.

The impact of a firm’s culture is a fundamental component of the FCA’s regulatory regime and forms a crucial part of its authorisation process, thematic work and supervision at an individual level. The FCA expects all firms to have the interests of their customers at the heart of every business decision, which feed into all three of the FCA’s strategic objectives: ensuring consumer protection, market integrity and promoting effective competition.

The FCA’s intentions

The FCA is unlikely to conduct specific cultural investigations or thematic work on the issue and instead is expected to pursue the culture agenda through its existing programme of supervisory work.

As part of this, the regulator will examine seven ‘culture clusters’ and corresponding cultural signifiers, deemed to be key areas that play a significant role in shaping or illustrating culture. These include purpose and values, leadership, stakeholders, business model and strategy, staff management, process and procedures, as well as intangibles.

“Ultimately, culture is hard to fake or reverse-engineer. True culture will manifest itself in many ways across the business”

In order to develop a holistic view of a firm’s culture, the FCA will gather information from each of these areas to join the dots between the cultural indicators and provide supervisors with a consistent framework for making cultural assessments. The regulator is also likely to form a view using existing intelligence on firms and publicly available information, such as websites, social media and marketing communications.

Overall, this shows the FCA is moving away from promoting the theoretical virtues of a positive culture, towards practical assessments and providing real-life examples of good and poor practice.

With the FCA’s approach involving information from such a wide range of sources and business areas, firms will only be able to influence the regulator’s view, rather than control it. Ultimately, culture is hard to fake or reverse-engineer. True culture will manifest itself in many ways across the business and it is these signals and indicators that the FCA is looking for during its assessment.

Cultural assessment

A top-down, holistic cultural assessment is the first step in gaining a thorough understanding of internal culture and also provides a comprehensive benchmark for measuring, and demonstrating, progress towards a positive, customer-centric culture.

There are three core business areas on which a cultural assessment should focus: leadership culture, operational conduct and cultural influencers. The behaviours and attitudes within these three areas, both individually and collectively, influence culture.

Leadership culture

Increasing the personal accountability of key individuals within the financial services sector is an important focus for the FCA in the wake of the financial crisis. The Senior Managers Regime (SMR) is one of the core tools the FCA will utilise to ensure individuals in leadership roles are accountable for due regard and fair treatment of customers. It is clear from the FCA’s focus in this area that the regulator recognises the direct impact leadership can have on the overall business culture.

The senior management team is expected to set the tone from the top and demonstrate the desired culture in their everyday actions and attitudes. The FCA also expects the leadership team to set corporate values which are aligned to a positive culture and are focused on treating customers fairly.

It is also important that effective internal communication mechanisms are put in place to ensure that staff at all levels feel genuinely responsible and accountable for driving positive outcomes.

The decisions taken by senior individuals when things go wrong are often the most telling indicators of a firm’s culture. For example, many firms focus only on tackling the symptoms rather than the root causes of non-compliance, despite there being clear signs of systemic issues. This is a clear demonstration that there is a culture of sweeping issues under the carpet and not putting the needs of customers first.

Operational conduct

Leadership culture and operational conduct should be joined up, or firms run the risk that the good intentions and positive practices put in place at the top aren’t being delivered in practice.

Operational procedures must be designed with customers in mind. This means they should be sufficiently flexible to enable staff to deviate from standard procedures where it is necessary to ensure customers are treated fairly and receive the right outcomes, with clear communication at all stages of the process.

The FCA also expects firms to take steps to ensure that its processes and procedures don’t present any unreasonable barriers to making a complaint, a claim, or switching products. This has been a recent area of regulatory scrutiny, particularly in the credit card, retail banking and pensions arenas.

The way customer disputes are handled can also reveal a lot about culture. The FCA is clear on its dispute resolution expectations and meeting them requires robust governance of the complaints management process and an ingrained culture of doing the right thing for the customer. There should also be a clear appetite to learn from disputes and make changes to prevent or reduce the likelihood of them reoccurring in the future.

Analysis of the complaints process can raise a number of cultural red flags, from inappropriate resolution targets (for example based on volume rather than outcome) to onerous procedures designed to deter customers from complaining.

It is not just internal operations that can have an impact on culture. For firms that outsource parts of their operation it is also important to consider the impact these relationships have on culture and whether third parties have the same commitment to prioritising positive customer outcomes and maintaining an effective culture.

Cultural influencers

Cultural influencers relate to the policies and procedures which, if designed correctly, create an environment where all of a firm’s actions are geared towards the customer’s needs and a positive culture is consistently demonstrated.

Performance management is one area that has significant influence on staff behaviour. Having clear, customer-focused objectives as a key performance measure drives the right behaviours and ensures staff feel that doing right by the customer is an important part of achieving success in their role. This can be reinforced by an incentives and reward framework.

“Poor culture can often lead to poor outcomes and market behaviours, which in turn, lead to costly review and remediation exercises”

There has been significant progress in refocusing incentive schemes towards more than just meeting sales targets, but this is not enough – firms need regularly to ensure and evidence that their incentive schemes are delivering the intended outcomes.

This can be done through the frequent communication of real customer stories, as well as ‘staff heroes’ to demonstrate that staff who go the extra mile for the customer are the ones that the business values, as opposed to the strongest salesperson.

Another area that can influence a firm’s culture is the resources and controls dedicated to identifying and mitigating conflicts of interests. At their worst, conflicts of interest can lead staff to act against customers’ best interests and can seriously undermine all other efforts to ensure the whole company is geared towards a positive culture.

Significant benefits

Aside from forming part of a firm’s regulatory obligations, there are other significant benefits to gaining a good understanding of internal culture and working towards making positive changes.

Poor culture can often lead to poor outcomes and market behaviours, which in turn, lead to costly review and remediation exercises. A positive, culture can deliver long-term business sustainability by reducing the risk of legacy issues requiring investigation, remediation or regulatory intervention.

It also meets the needs of customers, who want to purchase suitable products and services at the right price, with good levels of service. Wider commercial benefits also include a positive reputation and competitive edge, as well as greater customer retention and loyalty as a result of the positive customer experience.

A positive culture is one of the core foundations of meeting the FCA’s expectations. Devoting adequate resources and consideration to cultural issues will benefit firms’ relationship with the regulator and positively influence its supervision.

Lastly, culture has an impact on all business areas and can help fix other common areas of non-compliance, including suitability, product design and customer service levels. Having a detailed cultural overview also improves the efficiency and accuracy of conduct risk management, enabling firms to view the business as a whole, rather than in silos.

Phil Deeks is Technical Director at TCC

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