Posted: 17th December 2015
Leaders hold a critical role in every organisation. Their ability to direct, lead, coach, communicate, inspire, and react to ever-changing conditions and situations ultimately ‘sets the tone’ for the entire business.
When we ask our clients to define the word ‘culture’, they often describe it along the lines of ‘the way things are done around here’. So, how do you know that the way things are done in your firm is aligned to the expectations of the Financial Conduct Authority?
Consumer credit firms are clearly going through a time of transition. Some will have been recently authorised by the FCA and will be wondering what to expect in terms regulatory supervision. Others will just be starting on the ‘road to authorisation’ and will be more concerned with drafting detailed business plans to articulate their strategy and future intentions.
Whatever stage your organisation is at, what you do and the way you behave as business leaders is of critical importance.
Naturally, transition brings challenges for organisations, but it also brings an opportunity to examine a business through a ‘fresh pair of eyes’. In our view, applying for authorisation provides the chance to take a detached look at your organisation and ask some searching questions, such as:
- Do we have a ‘proper’ business plan? Could we articulate it to a third party (such as the FCA)?
- What’s our business model and how do we make money?
- What are the main risks in our business? What challenges will we face in the next 3 years?
- How do we induct new people into our firm? What training and development do we provide?
- Do we have a Training and Competence (T&C) scheme? How is it monitored?
- What is the leadership style in our business? How would we describe, measure and report on the culture in our firm?
At a high level, any cultural assessment takes into account the following areas:
'TONE FROM THE TOP’
The Senior Managers Regime (SMR) clearly signals the FCA’s intent to ‘drill down’ further into the roles of key individuals. The message is that leaders and managers must ‘shoulder the responsibility’ when issues or failings arise, and will be held to account for how the firm is run and whether their approach is effective. Consequently, senior managers must implement proportionate controls to ensure safety in the business area for which they are responsible.
Whilst SMR is indicative of the general ‘direction of travel’ for all businesses, including newly regulated consumer credit firms, this is not really a new idea, and is ultimately about good governance as articulated in the FCA’s Principles for Business.
In a recent statement relating to a fine issued to a high street insurer, the FCA’s Director of Enforcement and Financial Crime, Tracey McDermott, commented that:
“A culture was allowed to develop…that pushed for high sales and increased profit without regard to the impact on the firm’s customers. Those with significant influence within firms are responsible for setting the tone and the culture; they set the example that others will follow.”
Putting the specifics of the fine aside, few would dispute the points made by the FCA about how a firm conducts its business and that treating its customers fairly must be at the core of its operation. Clearly, this focus needs to start at the top.
'MESSAGE FROM THE SHOP FLOOR'
Another element in evaluating the leadership effectiveness and determining the culture of your organisation is to look at how your staff behave in performing their roles on a daily basis (including when you are not there!).
Aside from the impact of the ‘tone from the top’ and ‘pay and rations’ (see below), the way people are likely to behave in the workplace can be predicted accurately by using psychometric inventories. Behavioural questionnaires can help firms recruit people who are a strong ‘cultural fit’, helping avoid the cost of ‘bad hires’, which research indicates can cost five-to-seven times a person’s salary to put right.
Some companies also assess emotional intelligence (EQ), aptitude and ability (IQ), and even values. Some of the ‘challenger’ banks (such as Tesco Bank) deploy ‘values questionnaires’, which ask candidates to respond to a range of scenarios to evaluate their approach to customer service, internal cohesion or building strong relationships. Individual values can then be matched to the organisation’s values to ascertain whether a candidate will be a good fit.
R.W. Baird, an employee-owned wealth management, capital markets, asset management and private equity firm are a great example of an organisation that puts people at the centre of all they do. Their mission is: ‘to provide the best financial advice service to our clients and be the best place to work for our associates’.
Baird has been in the Fortune’s ‘Best 100 Companies to Work For’ since 2004. It describes its people as ‘talented professionals’ who ‘share our values, our beliefs and an owner’s interest in our clients’ success’, which combines to create what it describes as ‘a unique culture’. A look at Baird’s website is a worthwhile exercise for anyone interested in creating a positive culture at all levels.
'PAY AND RATIONS'
Your remuneration and reward strategy is also a critical element in the cultural mix.
In 2014, Clive Adamson, former FCA Director of Supervision, made comments about ‘pay and rations’ which still resonate today:
“…I mentioned remuneration as being an important lever, but so too are effective recruitment and promotion policies, development and performance management of employees – so, if by advancing someone you are essentially telling them that their behaviour within the workplace is appropriate, or even outstanding, then you need to ensure, and be able to demonstrate, that they are reinforcing the right values before making that decision and embedding that behaviour.”
We all know that ‘what gets rewarded and measured gets done’, and understandably, businesses have historically focused on sales.
Whilst successful businesses will always need to deliver top line results, and there is clearly nothing wrong with rewarding good sales performance, increasingly firms are using measures of quality to help demonstrate that they are delivering fair outcomes. So, the question is: “what tangible measures should I use to evidence the type of culture that exists in my organisation?”
The perennial need for processes, governance, controls and measures which are proportionate to the nature and scale of a business is well established. These systems would naturally include measuring what is strategically important, but what about culture?
The fact is that you are probably measuring elements of culture already in your business and governance monitoring and KPIs.
Many of the clients we work with use elements of the following to provide a view on the culture in their businesses;
- Employee measures, e.g. recruitment data (such as values and behaviours), staff engagement surveys, HR data (including length of service, attrition, sickness)
- Customer measures, e.g. customer feedback, engagement surveys, mystery shopping, customer insight programmes, market data
- Business data, e.g. performance KPIs (sales, persistency, product spread etc.), Treating Customers Fairly (TCF) MI, complaints MI, customer outcomes testing
In the same way that banks’ reporting of TCF MI in monthly board packs is now an embedded BAU activity, measuring and reporting on culture will eventually become a core element of your strategic monitoring.
At Huntswood, we have developed a model which measures culture by looking at four distinct core areas; Purpose, People, Infrastructure and Feedback. Each core area will delve deeper into the detail to explore leadership, employees, strategy, vision and values, behaviours, core policies and processes, and business measures.
Using this model, we can develop the critical questions executives must be able to answer about their company and the performance measures that apply to each question. Ultimately, the model can help organisations to embed a positive culture.
Huntswood can then produce a report against the key areas (Purpose, People, Infrastructure and Feedback), showing;
- ‘Current state’ diagram for each area
- Challenges / issues / weaknesses in a firm’s approach
- Suggested interventions to address issues
In conclusion, it is vital that leaders of organisations of all types take steps to evaluate the ‘tone from the top’ and ‘message from the shop floor’, their ‘pay and rations’, and also look at the tangible measures they need to have in place to enable regular ‘temperature checks’ of their culture as a BAU activity.
Moreover, the reports that firms would be well advised to produce on the culture of their businesses should be seen as an integral way of measuring the true extent to which the customer is at the heart of their business.
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