Posted: 22nd November 2016

First published in the WMA Journal, November 2016

Andrew Bailey asserted that “it is not the job of regulators to enforce and to change culture” at May’s City Week conference, prior to him assuming the role of FCA Chief Executive.

However, with the FCA’s press release in September detailing the regulator’s ‘new measures to maintain firms’ focus on culture’, some may feel there is a dichotomy here, especially given that the announcement almost exclusively addresses upcoming changes to the Senior Managers and Certification Regime (SM&CR). Following this latest announcement, is the regulator saying something different about its role in supervising firms’ culture?

With senior leaders of many wealth firms soon to be affected by SM&CR, firms in this sector will need to reconcile this and previous FCA announcements on senior management responsibility, and ensure they’re confident about how they embed an effective culture, and who is responsible for overseeing this and ensuring it is performing.

The nature of culture  

The internal culture of firms has often seemed nebulous and difficult to assess, as it’s the sum of many composite parts. It has long been clear that the influence of senior leaders’ ‘tone from the top’ is an important factor in fostering good culture in a firm, and that it is incumbent on a firm’s culture to protect customers from detriment.

It’s perhaps not surprising then, that much of the culture discussion exists in the SM&CR space. Despite the fact the regulator states it does not directly govern culture, it acts when the implications of poor culture manifest themselves in customer detriment. SM&CR provides far greater impetus for decision makers to act to protect customers.

In a regulatory landscape where customer outcomes are the primary metric for assessing performance, wealth firms seeking simply to discharge regulatory obligations can find themselves disadvantaged. Approaching regulation in this way fails to turn spend on compliance into tangible benefits, such as increased customer advocacy and being able to produce effective evidence in case of regulatory scrutiny to avoid censure.

The regulator has noted that firms across financial services, particularly banking, have made great strides to improve their culture in recent years, and initiatives such as SM&CR have made a contribution to this culture shift. So how can senior leaders in wealth firms ensure cultural success following their inclusion in SM&CR?

Six areas for cultural success        

It’s a challenge for firms to measure their own internal culture against a rigid set of metrics. However, it is possible to gain a clearer view of whether the culture in your firm enables commerciality, compliance and good customer outcomes by thinking about culture in terms of six key areas.

1. Business model and strategy

You can examine whether business model and strategy contributes to good culture by looking at it through three ‘lenses’:

  • Commercial – does your business model and strategy contribute to achieving your commercial aims?
  • Customer – does your business model and strategy support (or detract from) the delivery of the right customer experience and outcomes?
  • Conduct – can you provide the regulator with assurance that your strategy is appropriate and effective (especially in regards to the outcomes you are providing)?

Ensuring your business model works for these three stakeholders (shareholders, customers and the regulator) will be seen by the regulator an exponent of good internal culture.

2. Leadership

A key task for business leaders is creating and maintaining a culture which reflects their vision, ethics and values while allowing a 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
  • Project a ‘tone from the top’ that promotes customer-centricity and demonstrates the values you hold for your organisation

The values business leaders endorse can have far-reaching effects within a firm, for example, in ensuring a customer-centric culture proliferates downwards, and that commercial success is built on high-quality customer experience. Is this the case in your firm? Can you evidence it?

3. People and employee lifecycle

Doing a great job is a key motivating factor for employees of any firm. However, the financial and performance management-based incentives available in a firm will always have some effect on its peoples’ behaviours.

Of course, incentives are no bad thing; however firms have a responsibility to ensure the incentives they offer enable good outcomes for their customers. Incentives that cause staff to prioritise profit ahead of suitability, for example, can result in undue detriment and future remediation costs for the business. Do you have a clear view of the effects of incentives and targets in your firm?

4. Behavioural norms

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.

Firms should ensure that they have formal processes in place to help them embrace internal challenge in a way that takes concerns seriously but is not disproportionate and a burden on commerciality. Senior leaders should challenge their own assumptions about decisions, and leave themselves open to be challenged by their peers, also.

5. Customer focus

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 post-financial crisis, there still exists, in some areas, a public mistrust of financial services.

Connecting with consumers though their channels of choice, letting customers know they are protected from the threat of financial crime, raising awareness of the benefits of financial advice and successfully dealing with vulnerable customers will help you garner advocacy, and will likely be the key to success in this area.

6. Monitoring and controlling

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, outcomes testing can help you gain 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.

Dealing with SM&CR in wealth

By satisfying themselves that they operate in line with the principles above, firms can take full control of their internal culture. Although the regulator is more concerned with the effects of poor culture on customers than the setup of internal culture itself, presiding over a firm that understands its responsibility to its customers and constantly tries to assess and improve their experience is certainly the best option for senior leaders in wealth, given the imminence of the SM&CR. Consequently, the FCA does think getting culture right is firms’ responsibility.

Huntswood has developed the Culture Conduct Model to measure Culture across financial services and will be helping facilitate the WMA’s Insight 360 on Culture on 24th November 2016.

Matt drage

Matthew Drage

Director of Advisory Services