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Look who’s back, back again!

When firms first started the long road to fixing and improving conduct in financial services the focus around change efforts was the importance of ‘Tone from the Top’. The Board, Senior Managers, Business Heads etc were deemed hugely influential in terms of what they say and do – or don’t.

Over time for firms this has cascaded down the organisation, driven more from direct line management than simply from above, queue the term ‘Tone from Above’.

But wait, there is more…in the ever-evolving battle to improve conduct, the FCA has now introduced ‘Tone from within’ as an important new phrase to consider when issues of conduct arise. This represents one’s individual mindset, preferences, beliefs, habits, and pre-dispositions.

You may recall back in 2015 the FCA introduced 5 Conduct Questions as part of their strategy for supervising wholesale banks.

Since then they have shared the experiences of firms (both good and bad) providing examples of what did and didn’t work well. They published feedback reports in 20172018, and 2019 playing back to industry what they were told, together with some of their own observations.

The most recent of these in late 2019 took a slightly different approach hosting Conduct Roundtable sessions with 18 wholesale banks. Each was represented by a group of 10 staff at a ‘Vice President’ (VP) level of seniority or similar. They came to refer to this group as ‘the Engine Room’, acknowledging their importance to firms.

It’s a good read and I thoroughly recommend it but if you don’t have time to sift through the 34 pages I’ve picked out some key highlights and comments for you to ponder over.

Identification of conduct risk remains weak

  • ‘Firms have a clear regulatory obligation to identify, assess and manage risks that could harm their customers, markets or competition’
  • Training faces the same old challenge here of not only creating awareness – like being told to read the same book again and again but also making it engaging. What this really means, is relevant, why it matters to me examples and lessons learned.
  • For topics such as conflicts of interest, material non-public information, suitability, fairness to customers, diversity and inclusion, and non-financial misconduct this seems sound, but the FCA indicated a worrying lack of awareness or depth in the wider range of conduct issues.
  • For example, the new risks arising from automation (robots or artificial intelligence) or indeed issued posed by a prolonged work from home period.
  • Those firms that are looking broader still remain narrow – what?! Yes, self-selecting some that look most relevant. Of course, firms cannot be omnipresent across every detail but as always must take reasonable steps to assess proportionally how it impacts them.
  • Joining the dots – how many really walk away from a session/programme/discussion and can say they have the ability to identify conduct risk in day-to-day working life?
  • The key output is therefore how to improve the identification of new sources of conduct risk. We need to be trained to better detect, and then better equipped to critically think through how to mitigate.
  • But..this is not a once a year or one-off workshop discussion, you must drive ongoing engagement, checking in regularly to understand the detail from those at the heart of your business.
  • The FCA to quote says this ‘remains unacceptably weak’

Remuneration and performance assessments

  • The regulator has long since made this a priority to ensure personal conduct is a key contributor to achieving objectives and targets.
  • However, they also note some firms have taken insufficient steps to ensure substantive feedback discussions with staff, keep future-oriented records, analyse trends and develop a governance feedback loop.
  • Perhaps, this could also be a question of MI. Many clients we speak with are looking to formalise conduct data, be that into a dashboard or a more cohesive way of bringing together.
  • Trend data can be insightful and not just to punish those whose conduct falls below the necessary standards but more importantly to learn from. What was the root cause? Poor policy, lack of training…bad egg? AND what will you do about this? We live in the era of TikTok, you have a wealth of knowledge, why not drive some user generate content from the SMEs, or those that know best. It need not be carrot or stick, what about a different way. Use knowledge, fix issues drive better conduct.
  • Some of the participants noted feedback or rather a lack of as important here too, are they modelling the right behaviours or are they simply informed when not.
  • How do you reward good conduct? Are firms truly modern enough for this to be a key driver of comp? How transparent is it within promotion decisions?
  • I came across one client who was introducing conduct awards, highlighting role models and bastions of corporate culture in all parts of the firm. In learning the often over used phrase is gamification. Perhaps something to borrow from here.
  • I like this idea and think it has legs, especially if those selected are from all parts and crucially all levels of the firm. Why should we always look to those above when the best role model might be those sat right next to us? Ok, or at least someone already in our team zoom!

Culture, Safety and Leadership

  • ‘Culture can be defined as the habitual mindsets and behaviours that characterise an organisation’
  • For many firms this is likely not to be a one size fits all, particularly for global firms where multiple cultures may be present and necessary for local regions and clients.
  • However, overarching themes for the FCA are that drivers of culture are Purpose, Leadership, Governance, and People policies.
  • A key finding was that most still look above for culture guidance, and whilst conduct is something we should all live and breathe, culture is still driven by the tone from the top.
  • Speaking Up remains high on the priority list for the FCA. They want to encourage financial services professionals to challenge day-to-day business decisions that are or could impact culture. Too often the whistleblowing procedures in place seems only appropriate for the most serious cases and so firms should ask themselves how they create an environment for more granular issues, perhaps those that if left untouched could become a big issue, or even better provide insight into how to avoid such cases in the first place.
  • It was noted that some middle managers were seen to have difficulty in cascading organisational purpose, values, and strategic objectives down the line. If that is lost in translation it poses potentially significant challenges to get employees on board with the culture.

Purpose, Principles and Values

  • ‘A firm’s purpose sits at the heart of its business model, strategy and culture and can play a fundamental role in reducing potential harm to consumers and markets’
  • However, how many people really know the difference between purpose and say principles. Or values vs mission statements? Is it something on a wall emblazoned with the corporate crest, sitting pretty on the website, or something that actually resonates in the DNA of all employees?
  • It begs the question that without a solid understanding how can an employee be expected to uphold the firm’s corporate purpose.
  • Once again this comes back to basics, clarity – these are terms often used externally with clients about why you should do business, yet what does it say about a firm if the employees raise a concerned eyebrow to it. Maybe they could borrow one of our favourite sayings at META: Keep it simple, make it matter.

Whilst there is much more to digest from this report the FCA did include some key thoughts for further considerations, those best suited to employees, managers and in some cases those further up the tree.

I will leave you with these as your conduct homework – enjoy!

  1. Have staff had sufficient training to be able to identify conduct risk in their day-to-day roles beyond general awareness?

2. Does the firm’s overall framework for identifying and mitigating conduct risk reflect adequate, bottom-up exercises to understand those risks?

3. Do staff understand how their own roles and responsibilities can potentially create conduct risk or harm for the customers, the firm, or markets?

4. Are messages from the top, including corporate purpose and values, translated in a meaningful way to the specific roles and responsibilities, targets, and objectives at the individual and unit level across the firm?

5. Is enough being done to support line managers in their efforts to enable their teams to perform at their best?

If you’d like to read even more check out this post on Conduct.

Stay safe, stay curious and keep learning

About this author

Matt Fotherby

Financial Markets, Compliance & Regulations

Matt Fotherby

Matt is our Founder and a passionate trainer.

His interest in education stems from his 10 years as an Account Executive looking after Global Hedge Fund and Asset Management clients. This led Matt to join the coveted Financial Markets Education team at UBS, a unique in-house education team that specialised in running a curriculum of financial market and product classes for both UBS employees and clients. Matt was responsible for building out the client offering; managing programs, creating content and teaching courses.

As financial markets entered a significant period of regulatory change Matt pivoted to take his client experience and market knowledge to focus on Regulations and Compliance topics.

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