Posted: 23rd June 2016

With a short time to go before Andrew Bailey takes the reigns at the FCA, many firms will be wondering what impact his appointment will have on regulation and industry culture.

With this in mind, we can take his last major speaking engagement – his speech at the City Week Conference last month, as an indicator of the supervisory approach that he envisions during his tenure.

“I want to start with what I intend as an unambiguous statement; namely that the culture of firms and the people that make them up – and of course therefore the culture of industries insofar as it can be generalised – is of the utmost importance to financial regulators” (Andrew Bailey, 9th May 2016)"

Whether you’re looking at the regulator’s supervisory approach in the last few years – or indeed firms’ own strategic direction as they seek to bridge trust gaps with consumers post-financial crisis – it’s hard to disagree with the above statement, made by Bailey in his speech at last month’s City Week Conference.

Here, we examine six key messages from the speech in order to give firms some food for thought with regards to the regulator’s continuing supervisory approach. After all, the most successful firms of the future will be those that deliver good customer outcomes (thus strengthening advocacy and brand) while embedding the requirements of regulation in a way that is commerciality efficient.

1. Business model and strategy

“My assessment of recent history is that there has not been a case of a major prudential or conduct failing in a firm which did not have among its root causes a failure of culture as manifested in governance, remuneration, risk management or tone from the top.”

With this in mind, if you’re assessing your internal culture, consider the methods you use to examine it. It can be advantageous to look at the contribution of culture in the context three drivers:

  • Commercial – how closely aligned organisational culture is to your strategic and commercial aims
  • Customer – how culture supports (or detracts) from delivering the right customer experience and outcomes 
  • Conduct – whether you can provide the regulator with assurance that culture is both appropriate and effective

How you balance these factors in your firm is the key to both commercial and customer outcomes success. With the regulator now recommending a risk-based approach in many areas, breaking culture down into these elements will help you strike the right balance; for example, do you examine the success of your financial incentives against the customer outcomes you are providing? They might help you deliver on your sales goals, but what effect do they have on the suitability of recommendations? Will they drive customer detriment?

This kind of thinking can be applied in many areas in exactly the same way: your processes; promotions; the MI you receive; and the activity of intermediaries – all can be examined through these ‘lenses’ to ensure good outcomes, compliance and commerciality.

Remember, also, that being able evidence your considerations will be the key in satisfying regulatory scrutiny.

2. Leadership

“We do want senior managers to feel this responsibility in all that they do, and that includes a responsibility for forming and implementing a positive culture throughout the organisation. In this respect, culture is no different to strategy; where are we today, where do we aspire to be tomorrow, how will we get there and what risks must we mitigate along the way.”

A key task for business leaders is creating and maintaining a culture which reflects the vision, ethics, values and degree of individual empowerment within an organisation. If you’re a senior decision maker, consider whether you are able to:

  • Articulate the ‘strategic purpose’ of your organisation; that is, “why do we do what we do?”
  • Obtain a clear and ongoing view of customer outcomes within your firm, as well as the commercials
  • Articulate (perhaps to the regulator) how your firm’s strategy ensures the delivery of good customer outcomes

The values business leaders support can have far-reaching effects within a firm; open endorsement of a customer-centric approach can proliferate downwards to ensure that commercial success is built on high-quality customer experience.

Conversely, leaders who do not understand their ability to influence attitudes and behaviours can place a firm at considerable risk. Ask yourself, how does your decision making reflect the desired values and attitudes of your organisation? This is even more important given the Senior Managers and Certification Regimes, under which ultimate accountability falls to business leaders.

3. People and employee lifecycle

“One of the most important elements of the regulatory changes since the crisis is that we have adopted an approach of seeking to align those incentives with our public interest objectives, as well as the private interest of the firm.” 

Doing a great job is a key motivating factor for employees of any firm. However, the financial incentives available in a firm will always have some effect on its peoples’ behaviours. This is not to say that incentives are a bad thing – quite the opposite is true in many cases, but nonetheless, firms have a responsibility to ensure the incentives they offer to their people enable good outcomes for their customers.

Incentives that prioritise profit ahead of customer outcomes can easily result in undue detriment. Does your firm design its incentive schemes and employee remuneration with this in mind? How often are the outcomes of incentivised selling tested? Firms should be looking to do this regularly to assure themselves and prove to the regulator – if necessary – that customer outcomes are a key part of the discussion in relation to financial incentives. Evidencing your work here is advisable.

Given Bailey cited the regulator’s public interest objectives and the past regulatory successes in this area, firms can expect that the FCA’s approach will remain consistent under his tenure. 

4. Behavioural norms

“Healthy scepticism channelled into intelligent and forceful questioning of the self-confident can be a good thing.”

Where decisions are being made within a firm, it’s fairly common to see ‘behavioural norms’ influencing the process. “That’s just the way we do things here” type-thinking can sometimes coincide with decision makers’ overconfidence, resulting in decisions being based on presumption – not a reliable basis for providing good customer outcomes.

Bailey’s assertion is that firms have an obligation to question the status quo within their organisation on a regular basis. Ensuring robust challenge in a firm can make decision making more methodical and self-reflective, and causes the business to have to justify its choices more thoroughly. Does your firm embrace internal challenge as a means of business assurance?

Again, retaining evidence of this type of work taking place in your firm will be instrumental in the event that the FCA does examine your work more closely.

5. Customer focus

“Major changes have occurred since the crisis which have improved behaviour in firms, but public opinion broadly does not recognise these developments and tends to think that nothing has changed. Culture is an important part of demonstrating that change.”

Ensuring firms place the customer at the centre of everything they do is the ultimate aim of the regulator. However, as well as some of the great work taking place within firms to provide good outcomes post-financial crisis, there still exists, in some areas, a public mistrust of financial services.

Engaging with consumers and starting to bridge this trust gap will be the next significant challenge for firms. But how do you do this?

Much has been written about financial advice and access to financial services recently – consider whether your firm can treat this discussion as a catalyst for connecting better with consumers. Building trust and advocacy in your brand and outcome-centric services will be every firm’s goal, and it’s those firms who have been most effective in bridging the trust gap who will be able to take advantage here.

Connecting with consumers though their channels of choice, raising awareness of the benefits of financial advice, promoting your proportional advice offering and successfully dealing with vulnerability will help you garner advocacy, and will likely be the key to success in this area.

FCA focus on customer outcomes will of course continue, but the most competitive firms will begin to move towards a better level of engagement with their customers as a means of breaking down trust barriers and easing access to products and information.

6. Monitoring and controlling

“We require that risk management and internal audit in firms are effective and act to root out poor incentives and weak controls.”

The shift towards a customer-centric culture in financial services means that firms periodically ‘taking the temperature’ of products, processes and the outcomes they provide now features heavily in the regulatory discussion.

When it comes to continually improving the customer experience, nothing beats regular outcomes testing for gaining an accurate view of how products and processes are performing. Not only this, but if your firm experiences regulatory scrutiny, being able to evidence that you have regularly assessed the outcomes you’re providing will assist you in satisfying the regulator.

The future of regulation

“As regulators, we are not able, and should not try, to determine the culture of firms. We cannot write a regulatory rule that settles culture. Rather, it is the product of many things, which regulators can influence, but much more directly which firms themselves can shape.”

Firms seeking to discern what the future of regulation holds for them can examine, with some accuracy, Bailey’s appearance at City Week.

Following his speech last month, it appears Andrew Bailey’s FCA tenure will see culture remain at the forefront of discussion. Despite its intangibility, culture can (and will) continue to be examined as the sum of many constituent parts; from values and attitudes to the tone from the top of the business, and from the way firms’ people are incentivised to the way products and processes are designed and improved. Firms who embrace this by shaping their work around the needs of the consumer will fare well in the long term. 

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