CULTURE – FCA SPEECH - From Zeroes to Heroes: How culture in financial services can change for everyone’s benefit
- FCA cares about culture because this drives conduct: The Consumer Duty will encourage firms to analyse their culture and how that affects their conduct.
- Firms should offer the right environment for employees of all backgrounds to feel safe in challenging and speaking out.
- Just 5% of crypto firms who applied to the FCA for registration showed that they understood anti-money laundering rules but half of those who engaged seriously with us were registered.
Facing up to our image problem
- The culture of financial services organisations is often depicted in binary terms: it is either dull and Jurassic or reckless and scandalous.
- The world of film and television focuses on the reckless and scandalous trope as – frankly – it makes for more exciting viewing. Before I came to the City, I thought I was entering a mystical world where Porsches were delivered every February, there was no-expense spared technology, and that if you work hard, success was guaranteed.
- Even today, any aspiring banker watching
- The BBC’s series Industry would be left with the impression that graduates spend more time partying and plotting than working.
- In the Wolf of Wall Street, the main protagonist is a hedonistic stockbroker in his 20s whose main purpose is to con wealthy clients with a ‘pump and dump’ strategy before he is eventually jailed.
- In The Big Short, an eccentric hedge fund manager discovers that the US housing market is based on sub-prime mortgages so he sets up a credit default swap market to allow himself to short the property market.
Mind your language
- It has been said that culture is what you do when no one is looking.
- But to be a leader means to shape your organisations’ culture rather than hiding behind HR.
- I attended an event recently, where Rebecca Achieng Ajulu-Bushell, Chief Executive of 10,000 Black Interns, spoke about the importance of senior people not imposing an inherited culture that can create barriers to progress, even when they rose through the ranks in that culture. She’s a very impressive 28 year old and I would encourage you to look for her website.
- The FCA expects senior leaders to nurture healthy cultures in the firms they lead.
- Cultures that are purposeful.
- That have sound controls and good governance.
- Where employees feel psychologically safe to speak up and challenge.
- Where remuneration does not encourage irresponsible behaviour that can ultimately damage the business and wider markets.
- The name given to graphs to track the speeding up of authorisations decisions and reduce our backlog was called Glide Path. So I changed it to make it a Burn Down Plan.
- I found the custom of asking a question and having to wait for the answer to be fact checked by several people too slow – although I appreciate that accuracy is crucial.
- I found that deploying the revolutionary technique of cutting down on emails and walking around and talking to people more effective and immediate.
THE CONSUMER DUTY WILL FOCUS MINDS ON CULTURE
- Perhaps one of the biggest policies we have unveiled in recent years is one that will do the most to address conduct – and therefore culture: the Consumer Duty.
- We have asked firms to think about what a good outcome would be for their customers and to apply that consideration at every stage of producing and delivering a product or service.
- We have also asked that the thinking starts at board level and have requested that there is a consumer duty champion on every board.
- The reason is simple:
- The Duty challenges you to ask significant questions about your purpose.
- Diverting consumer funds which should have been invested via an independent trust for their future funeral plans, to investing in other short term business interests, in the hope those interests would produce profits for directors.
- A case of prioritising personal gain over the safety of customers’ funds.
- This meant making some difficult decisions, which we knew would impact consumers.
- But we had to weigh our options against a high risk of more significant and widespread harm later on.
- While we cannot guard against all failures, and we don’t always get it right, we want to set clear expectations in terms of what it means to be regulated by the FCA.
OTHER TOOLS TO EMBED POSITIVE CULTURE
- Another tool is our Early and High Growth Oversight support.
- This helps new firms to embed the right steps from the start, soon after they have gained authorisation and long after the consultants have abandoned them.
- It also provides support to those new firms that are looking to scale up.
- Diversity and inclusion is also critical to culture as it can prevent group think.
FOSTERING AN INNOVATIVE CULTURE
- Perhaps the biggest cultural shift we have seen inside the FCA since it was created has been its growing commitment to innovation.
- We want to support industry as it draws on new tools, like artificial intelligence (AI), to analyse the colossal amount of data they hold.
- With the Bank of England, therefore, we’re talking to industry and consumer groups about how firms can use AI safely.
- Done well, it can mean better, more accurate pricing and products better suited to consumer needs.
- But there are risks, too.
- We know that many in industry are worried about how AI will be governed and we agree that more guidance in this space will be needed.
- However we also believe many of the rules to cover this are already in place or on the way, not least the Senior Managers and Certification Regime (SM&CR) and the upcoming Consumer Duty.
- SM&CR embeds and codifies good practices across a broader group of firms to support accountability and transparency.
- Likewise, there is a debate around crypto and its regulation – or lack of. At present, the FCA’s role is largely limited to making sure that crypto firms that want to register in the UK are abiding by anti-money laundering rules.
- Few firms have been authorised because our standards are high.
- We make every effort to support innovation but not at the cost of consumers or market integrity.
- The CryptoSprints we have held have been fascinating and have highlighted the potential cultural clashes between those entrepreneurs who think the best way of dealing with rules is to smash them and regulators, who are busy pointing out why they cannot skim over these steps.
- The collaborative approach has helped both sides: for us to understand how the crypto sector works and where the future opportunities lie and for the sector to see why we have regulations and what is expected of them.
- We found that only 5% of the applications we received were of high quality and could demonstrate that they had understood the regulations, and how they would meet these.
- A further 30% needed material extra work, and we engaged with the firms to address concerns about capability, business models and controls. Almost half were subsequently registered.
- The remaining 65% of applications were very poor, and none of the firms were registered.
- Many couldn’t explain how the Money Laundering Regulations (MLRs) would be satisfied in the business model proposed – some of them even struggled to explain their business models.
DOING THE RIGHT THING LEADS TO THE RIGHT RESULTS
- Finally, one of the issues we get the most questions about is the future rules around environmental, social and governance (ESG) products and promotions.
- There is – rightly – always a major focus on the E and S part of ESG.
- But perhaps less so on the g – or governance.
- We are looking closely at what support firms offer to employees to improve their culture so that it boosts the conduct of their business or function.
- If more firms can get this right, we might see fewer films about rogue traders and more films about the plucky banker who saved the economy and consumers from harm by doing the right thing. It might be an initial box office flop, but I am confident in time it will become an enduring classic success.
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