FCA DP18/2: Culture in Financial Services

On 12 March 2018 the Financial Conduct Authority (FCA) published a new discussion paper on “Transforming Culture in Financial Services”. The FCA have consistently focussed on culture and the drivers for changing poor culture in various of its business plans and publications, repeatedly citing poor culture as the root cause of some of the major conduct failings that have occurred within the industry in recent history. So this discussion paper will be of interest to anyone focussing on culture in financial services and interested in different perspectives on how cultural change can be delivered.

The paper is split into four key areas:

1. is there a "right" culture?
2. the role of regulation
3. the role of reward, capabilities, and environment in driving behaviours, and
4. leading culture change.

Essays have been authored by various experts from different backgrounds including academics, leaders from firms operating in wholesale and retail markets, international regulators, change practitioners and more.

In defining culture, the FCA indicates that it does not assess behaviour and mind-sets directly, recognising that there are a number of drivers of behaviour. In its introductory remarks, the FCA focuses on assessing four main drivers of culture:

1. a firm’s purpose
2. leadership
3. approach to rewarding and managing people, and
4. Governance arrangements.

The FCA and the contributors to the discussion paper agree that there is no “one size fits all” for culture and different firms will be culturally different. However, the essayists argue that there are some characteristics that those firms with a healthy culture share. Tom Reader from the LSE argues these include adaptability, an emphasis on quality, integrity and supportiveness. Essays from those within the industry focus on the importance putting consumers first.

The FCA indicates that it wants to use regulation to promote these healthy characteristics. It sets out two fundamental concepts underpinning their thinking on culture and regulation. Firstly, the FCA should hold both the individual as well as the firm to account. The second is that leaders can manage culture even if they cannot properly measure it. The FCA points out that both of these concepts are deeply embedded in the SMCR regime, which is currently being extended beyond the banks to other firms.

There is much discussion in the paper as to the impact that regulation can have to culture in firms. The FCA concedes that regulation is only one piece of the puzzle. The essayists argue that firms need to focus on their purpose, leadership and governance. They argue that many firms are missing out on factors and incentives which can drive the change of their culture.

Although the FCA recognises that leadership plays a key role, a number of essayists argue that solely focusing on this will overlook key issues when it comes to a complex matter like culture change. It is argued that middle managers play a key role influencing cultures and even lower level employees can have an impact. As a result culture change should be taken on by everyone in the firm from the most senior to the most junior.

Three key themes from across the essays are identified by the FCA:

• Firstly, a shift from seeing culture as linear issue to seeing it from a dynamic systems perspective. This means examining the influences around an individual, rather than diagnosing one cause to one effect.
• Secondly, the importance of organisations fostering psychological safety and learning as a means for employees to speak up, collaborate, and innovate.
• Thirdly, the recognition that regulation, at least in its current form, can only go so far in improving culture.

Interestingly, Martin Wheatley, the former chief of the FCA, recently stated that while the regulator plays an important role in stressing the importance of strong cultures, there are limits to what a regulator can do given the nature of the problem, noting that culture is not about compliance: “It’s a value, not a rule”. The FCA also recognises that there is no quick fix for these issues and that changing a firm’s culture takes time, but is hoping by raising questions and facilitating discussion this can be used a springboard to effect real change.

The FCA is not expecting any responses to this paper but, are asking firms to consider the actionable insights offered in the paper to effect change. These insights include:

• using behavioural science to guide incentives and cultural change
• looking beyond the role of leadership in effecting change
• applying strategic focus to the continuous process for adapting culture
• fostering environments of trust to encourage openness and learning, and
• applying a systems perspective in assessing both internal culture and external influencers.