In a business context, ‘culture’ can be difficult to define. The Harvard Business Review defines culture as “the ways people in [an] organization behave and the attitudes and beliefs that inform those behaviors … including formal, stated norms as well as implicit ways people work and interact”. For some organizations, culture is something that HR does – recognizing employee birthdays, providing perks like a snack bar, or an intangible summary of ‘values’ on the company website.
For the Financial Conduct Authority (FCA), “culture is not just the slogan on your website. It is the very essence of what your organization stands for, embodied by how it conducts itself”. A recent speech by Emily Shepperd, Chief Operating Officer (COO) and Executive Director of Authorizations, has reaffirmed culture as a key focus for the FCA – and may suggest the direction of regulatory travel for the immediate future.
In a speech delivered to the Westminster Business Forum on 26 June, 2023, Shepperd outlined the importance of culture to the FCA.
“Culture remains central to our supervisory model. It is what underpins outcomes – firms with healthy cultures will be best equipped to adapt to a changing world and to consumers with changing expectations.”
Interestingly, Shepperd contextualizes the “changing world and expectations” through generational viewpoints, stating that “the culture across some of today’s organizations … can be found lacking when applied through the prism of a Millennial … [or] Gen Z lens”. This theme of the culture of the financial space being out of step with fast-paced change has been illustrated by several high-profile shifts over the last few months alone, including the impact social media channels had on the collapse of Silicon Valley Bank, and discussions around whether regulatory frameworks are able to keep pace with emergent technologies like Artificial Intelligence and cryptocurrencies.
“Our role as a regulator is to lead by example.”
It is easy for regulators to write the rules they will hold organizations to, but it is much more impactful (and more important) for them to practice what they preach. Part of leading by example requires that organizations begin with introspection, examining where their own areas for improvement may lie:
“We at the FCA have undergone our own cultural shift in recent years. We acknowledged the criticisms about the time taken in authorizations and we have moved to slash our queues by 60 per cent … without diminishing the thoroughness of our checks.”
While the FCA may have evidenced looking inward at their own practices and culture, a key example of them ‘looking outward’ is the incipient Consumer Duty, which will come into force on 31 July, 2023. The principle of the duty will require that “firms act to deliver good outcomes for retail customers”, introducing a burden that firms ‘put the customer first’ and implement the relevant processes and protections to ensure this happens. Shepperd expects that:
“The higher standard of the Duty and the shift to focusing on customer outcomes will require a significant change in many firms’ cultures.”
Other emerging regulatory trends and focuses, such as the Securities and Exchange Commission’s (SEC) consolidated Marketing Rule, which is aimed at ensuring clarity and fairness around the advertising and marketing of financial products, are making the prevailing regulatory expectation abundantly clear – firms need to follow where regulators are leading on prioritizing positive, professional culture and conduct.
“Culture is what you do when no one is looking”
The wider shift towards regulatory focus on culture and conduct is aimed at addressing the ‘Jurassic or scandalous’ binary that Shepperd identified in her speech. The ideal of having a positive and professional culture would have regulation act as a form of panopticon, where people can be trusted to do the right thing when not observed lest they fall foul of regulatory outcomes. Sadly, the recent reality has been the inverse, as Shepperd notes:
“Even as recently as 2018, not long after the Harvey Weinstein scandal emerged, the FT did an exposé on how sexual harassment was rife at a male-only dinner in the City. From board rooms to parliament and even to TV studios, it seems that the abuse of power is still all too prevalent.”
With examples of these abuses of power unfolding in real-time, within the financial space itself and in other high profile instances, the need for organizations to take affirmative steps to ensure that the people that work for them – no matter their status, rank, or role – conduct themselves with the highest possible standards. The FCA’s extant Fitness and Propriety requirements set out that correct conduct is built on a foundation of “honesty, integrity, and reputation”, and that organizations ensure that those working for them are assessed against these standards continuously – even those at the highest levels, as seniority is no barrier to exhibiting poor conduct.
Shepperd’s speech makes the FCA’s expectations around firms instilling and policing culture abundantly clear. Echoing the updated vetting guidance put in place by the New York Department of Financial Services earlier this year, the regulator expects firms to instil additional controls and steps to ensure they avoid hiring unscrupulous recruits with prior disciplinary and conduct issues; what Shepperd deems “rolling bad apples”:
“We want firms to take their regulatory referencing far more seriously. If necessary, they should extend probationary periods, add extra monitoring or restrict activity … We found some firms were willing to turn a blind eye to their new recruits being dismissed for market abuse, expense fraud and sexual harassment. They failed to put in place additional controls to prevent the individual repeating their behavior.”
‘Do the right thing’
To distil the core message of Shepperd’s speech, we can look to another, given by Therese Chambers, FCA Joint Executive Director of Enforcement and Market Oversight. The title of that speech, ‘do the right thing’ suggests the ethos of the FCA’s focus going forward. Chambers said that:
“You can expect to see a strong alignment between our enforcement work and the FCA strategy … There must be real and meaningful consequences for breaches by firms and individuals … Doing the right thing is at the very heart of our Consumer Duty, which comes into force at the end of July.”
If the enforcement directorship has put such a clear focus on ‘doing the right thing’, then it seems inevitable that enforcement action will follow this course. Chambers explicitly said the Consumer Duty carries this ethos forward, building actionable regulation around it. Voices from across the industry have predicted this direction of travel, and this increasing emphasis shows that the FCA is broadening its scrutiny to include all conduct – not just market conduct. Shepperd’s speech summarizes this link between, and expectation around, culture and conduct well:
“We do care about culture as it informs conduct and that is what we regulate.”
For organizations wishing to avoid the regulatory arm of the FCA, the message is clear – you know what the right thing is. You’d better get doing it.