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What is Culture and is it still important in Financial Services?

“Fortunately, most human behaviour is learned observationally through modelling from others” – Albert Bandura

Culture and conduct are terms that we have long since heard about in financial services. It could even be argued that like video calls, there’s a fatigue element whenever these terms are yet again rolled out.

What this means to us and why we should care is very easy. Behaviour, and not just words on a website or emblazoned across a corporate wall will impact everyone; colleagues, clients and potentially the market as a whole.

The FCA published a useful document on “Transforming Culture in Financial Services” back in 2018. In essence it is a collection of 28 essays from thought leading academics, industry leaders, international regulators, and change practitioners. It is intended to provide a basis for stimulating further debate on transforming culture in the sector.

Within this the FCA define the main drivers of culture as:

1) A firm’s purpose;

2) The firm’s leadership;

3) The firm’s approach to rewarding and managing people; and

4) Governance arrangements.  

The question therefore is how to do firm execute on this and how and where do we fit in?

And more pressing, what is culture?

Culture

William Dudley, former chief executive of the Federal Reserve Bank of New York described culture as “the implicit norms that guide behaviour in the absence of regulations or compliance rules.”

Andrew Bailey, the governor of the Bank of England, noted that culture is “everywhere and nowhere.” In some part he was acknowledging the elusive nature of culture, how on one hand everything that happens within a firm affects its culture and yet on the other hand there is no one distinctive thing that defines culture.

More interestingly he states that culture is an outcome rather than an input and that good culture will elicit good behaviour.

WFH

The current working from home landscape has put this firmly back on the global regulatory watch list and in September, the Monetary Authority of Singapore, published two papers that reinforce the importance of organisational culture.

The first paper focuses on 9 outcomes the authority believes all financial institutions (FIs) should work toward. The second paper outlines 5 outcomes financial institutions should achieve to strengthen accountability and promote ethical behaviour.

The 9 Outcomes

  1. Governance – The FI’s board and senior management have a holistic view of and proactively shape the FI’s culture
  2. Governance – The FI identifies and empowers staff who are responsible for driving the FI’s culture and conduct
  3. Hiring & On-boarding – The FI incorporates culture and conduct considerations in its hiring process and training programmes
  4. Communication & Feedback Channels – The FI cultivates psychological safety to foster a safe environment for staff to provide feedback and raise concerns
  5. Communication & Feedback Channels – The FI’s board and senior management communicate tone from-the-top and walk the talk
  6. Monitoring & Assessment – The FI considers culture drivers and conduct risk as part of its risk management framework
  7. Internal Audit – The FI incorporates assessments of behaviour and culture as part of internal audit
  8. Performance Management & Incentive Systems – The FI has incentive structures that promote prudent risk-taking and ethical behaviour
  9. Individual Accountability – The FI holds senior managers accountable and ensures proper conduct among all employees

Keep it simple, make it matter

The tangible aspects of this approach are that it is focused firmly on outcomes. For example, if we examine outcome 1, strong governance structures will enable clear direction and oversight of culture and conduct across the FI.

To take it a step further what can FIs do to achieve this?

The aim is to drive culture and conduct at the top of the tree. Culture is synonymous with tone from the top after all, and whilst we have seen a gentle cascade of this throughout firms it is clear it must firmly remain on the board agenda at all times.

The board need to:

  • Oversee and shape the culture
  • Drive the initiatives that pertain to culture
  • And crucially review the effectiveness of the culture and conduct efforts

Just like any other risk, conduct needs to be considered as part of a firm’s risk appetite. A conduct risk appetite statement should be:

  • Established and used to guide strategic decision-making and internal processes
  • Cascaded to business units, and it’s application monitored and reported to board and senior management committees regularly

And there we have it top down as well as bottom up.

Benchmarking

Thinking through this lens then allows regulators to cast their nets and observe good practice, so that others can learn from the same.

What does good look like here?

  • Effectiveness of stakeholder engagement on ethics and conduct
  • Standards for staff to cultivate responsible conduct and fair dealing
  • Identify and manage conduct risks
  • Zero tolerance policy for misconduct

The Conduct risk appetite should be:

  • Used to influence its strategic decision making (e.g. new product approval process)
  • Monitored across geographical location and reported to management regularly

What this demonstrates is that starting with the outcome allows an element of reverse engineering. Too often in the past we have seen over reliance on principles (and look where that ended up!) and as the FCA are keen to stress outcomes based regulations is the key to delivering on their operational objectives. Simply taking this outcome, breaking it down into what and how gives a blueprint for making culture something to be managed alongside all other risks, and less of a nebulous, yes ‘I think we are ok’ term.

5 outcomes to strengthen accountability and promote ethical behaviour

Keeping on the theme of outcomes let’s now consider the second paper that looks at how to improve accountability and ethical behaviour.

This is certainly in line with the Senior Managers and Certification Regime (SMCR) championed by the FCA, and often referred to as the individual accountability regime.

Again, let’s first lay down the outcomes:

Outcome 1: Senior managers responsible for managing and conducting the FI’s core functions are clearly identified

Outcome 2: Senior managers are fit and proper for their roles, and held responsible for the actions of their employees and the conduct of the business under their purview

Outcome 3: The FI’s governance framework supports senior managers’ performance of their roles and responsibilities, with a clear and transparent management structure and reporting relationship

Outcome 4: Material risk personnel are fit and proper for their roles, and subject to effective risk governance, and appropriate incentive structures and standards of conduct.

Outcome 5: The FI has a framework that promotes and sustains among all employees the desired conduct

If we look at these it is of course no surprise as to how similar it is to SMCR in the UK.

For instance, outcome 1 and 2 are certainly singing from the same hymn sheet. Under SMCR we should all be familiar with the term SMF – senior manager function. This focuses on the most senior individuals holding key roles or having overall responsibility of an area of the firm, and provides for greater precision around accountability and responsibilities. Precisely what the MAS is looking to achieve. Identify and where necessary hold to account. Furthermore, outcome 3 is very much aligned to statement of responsibilities and prescribed responsibilities that are a key component of SMCR. Together these not only formally set the who and what but also enable firms to assess their front to back coverage when combining these across their SMFs.

Outcome 5 is also key to culture and within SMCR the desired outcome is to level the playing field and set a standard of conduct that applies more broadly to all working within financial services. Recall with SMCR, aside from a sub-set of ‘ancillary staff’ more or less everyone is in scope of the same 5 conduct rules.

Whilst we will all naturally gravitate to the local regulator in the location that we operate it is clear culture and conduct know no boundaries, so if we revert back to where we began this discussion are we any clearer on why culture is important?

Why culture is important for a financial institution?

A positive culture will enhance a firm’s reputation with its customers, its employees, and its regulators.

In effect this creates a virtuous circle. Happy clients should mean more business, better relationships, an ability to attract the right employees, in turn reducing the likelihood of conduct issues which should keep the regulators at bay.

Successful firms should provide their services whilst preventing harm to their clients. After all, what is a firm there for if not to service its clients? 

Here is a quote for us to take forward and ponder:

“There’s no magic bullet for great corporate culture. The key is just to treat your staff how you would like to be treated.” Richard Branson

What other success factors to driving culture can you think of?

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.