The Joint European Supervisory Authorities (ESA) Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector come into force on 1 October 2017. The FCA and PRA have notified the ESAs th...

Speaker: Jonathan Davidson, Director of Supervision - Retail and Authorisations
Location: City and Financial Summit, London
Delivered on: 20 September 2017

Note: This is the text of the speech as drafted, which may differ from the delivered version.

Key points

  • Cultural change requires individual engagement and accountability.
  • Culture may not be measurable, but it is manageable, for example through incentives and governance.
  • We want consumers to understand the FCA’s expectations around culture in firms and feel able to speak up when standards aren’t met.
  • An ethical culture can be more powerful than one based solely on financial incentives.

Introduction

Thank you. I’m here today to talk about culture and conduct in financial services through the lens of the Senior Managers and Certification Regime or, as I like to call it, the Accountability Regime. The first phase of the Accountability Regime was introduced for about 900 banks and deposit takers in March 2016. Now we are consulting on how to extend the Accountability Regime to over 47,000 other firms.

I was actually here a year ago and made a speech about culture in financial services. 

In that speech, I set out a definition of culture as being the mindsets and behaviours that are typical for staff in each firm. 

These tiny, everyday acts by individuals are what make up the overarching culture of the firm in which they take place.

A year has gone by so I first want to talk to you about the progress we have made on the FCA’s mission as a conduct and competition regulator and why and how that has shaped our continuing focus on culture. 

The Accountability Regime is directly targeted at the culture of firms. So my second objective today is to talk about the design of the Accountability Regime.

Finally, and most importantly, I want to enlist your support in thinking about a potential cultural transformation of the financial services industry.

Why culture is important

Culture may not be measurable but it is manageable

So why is culture so important to us?

It’s now ten years since the financial crisis; a crisis that was a generation defining event. The regulatory response to the prudential crisis has been profound. It has redefined and reshaped the banking industry. Ringfencing is a clear example of this.

But the crisis was as much a conduct crisis as it was a prudential one. So at the FCA we have also reflected profoundly on how we regulate the financial sector. Earlier this year we consulted and published our thoughts on this in a Mission publication and we will publish a follow up on how we approach supervision early next year. In this we will address the challenge of how to approach supervising around 56,000 firms with huge variation in size and business type, for example ranging from a dentist providing credit for orthodontic work to a multi-national financial conglomerate. We cannot continuously and closely supervise outcomes in every one of these firms. Our ambition is to be forward looking and pre-emptive by addressing root causes. What are the root causes that we see as important?

We see two: first, the strategy and business models of firms and second, the culture of firms. And the two are closely interlinked.

It is very clear that business models often create commercial incentives for behaviours that lead to poor outcomes for consumers. For example, we have found repeatedly in several sub-sectors of consumer credit that firms were making profits on the back of irresponsible lending to consumers who could not afford to repay the debt.

You will appreciate that keeping on top of business models is a considerable challenge given the diversity of the sectors that we cover and that over the last ten years the strategy and business models of firms have evolved and changed at a staggering pace.

Of course, your strategy is your affair and we do not seek to prescribe your strategy and business model… Up to a point. We do aim to understand pre-emptively how business models are evolving to anticipate where there are risks of harm that might emerge and then use the most effective regulatory tools to ensure that the risks are mitigated. We will talk more about this when we publish our approach to supervision.

But what about culture? Isn’t it enough that the costs of misconduct in fines and redress are now a very significant disincentive to misconduct? We don’t think so. 

Our view is that it can’t just be business – it has to be personal too.

Having individuals within firms being held personally accountable for their work has been shown to affect outcomes positively in a number of sectors. For example, there is evidence from research into accounting practices which shows that increasing perceived individual accountability by requiring the audit engagement partner to sign the audit report with their own name rather than the company name, improves both the quality of the audit and decreases manipulative practices.

Firms are focusing on culture too. Indeed, I hear in boardrooms relentless discussion of culture and am often asked how senior managers should measure their culture and how we, the FCA, measure and set targets for their culture.

My response is that culture may not be measurable but it is manageable.

We look to assess what management is doing to manage culture using four types of lever.

The first lever is a clearly communicated sense of purpose and approach. Clearly communicating the ‘what’ and the ‘how’ are very important to getting a firm to work effectively and efficiently. But they pale into the background when contemplating the power and effect of a well communicated and resonant ‘why’. It is the tacit understanding, shared by employees, of a company’s true purpose. This is not necessarily what is articulated formally in a company’s mission statement and values. I often learn more about a firm’s sense of meaning by reading the strategic plans. And I suspect that employees do too. 

The second lever available to senior managers is ‘tone from the top’ – what staff hear and see from senior management. What are the behaviours that senior managers role model to their employees? 

The third lever is the formal governance processes and structures, the policies and systems that specify expected behaviours and decisions. From a conduct culture point of view, we look for a well thought through conduct risk framework: is there a clear exposition of conduct risks, the systems and controls for mitigating them and risk indicators for monitoring them?

Finally, there are people related practices, including incentives and capabilities. Remuneration, promotion and recognition criteria all matter. Does a firm’s pay structure reward misconduct? Is the pressure to turn a profit driving employees to act against consumers’ interests? 

People capabilities are becoming more and more important to having the right culture. It’s not enough to be motivated to behave in a new way; people also need to understand how to be successful with the new behaviours.

The accountability regime reinforces this view of culture and its key drivers. It sets a standard for the outcomes of culture and has an important impact on senior managers, on how a firm is governed and on people’s capabilities. How does it do this?

What the accountability regime aims to achieve

Every customer should know these rules and what they are legally entitled to

The accountability regime has three essential components.

First, the conduct rules which are at the heart of the regime are a set of minimum standards for every individual’s behaviours. There are only five of them. They are: 

  • You must act with integrity
  • You must act with due care, skill and diligence
  • You must be open and cooperative with the FCA, the PRA and other regulators
  • You must pay due regard to the interests of customers and treat them fairly
  • You must observe proper standards of market conduct

These apply to all employees within a firm that do financial services. 

When my team was in York last week, a member of the audience raised the issue of whether it would cause worries and stress if these rules were applied to junior employees. But before the team could respond, a Building Society executive said that when they had implemented it their employees read the rules and said – “well this is what we should be doing already!”

Of course, the rules look like common sense, so it is easy to skate over them without thinking how they apply to each job. So we have introduced a requirement to train all employees about what they might mean for them.

Ideally, every customer should know these rules and what they are legally entitled to, so that they can say “That must be against the conduct rules” in the same way that they often say “That must be against the trade descriptions act”.

The second component of the regime is the rules for senior managers.

The conduct rules apply to pretty much everyone. But senior managers have a special role to play, either because they make important decisions, for example on the strategy and business model; or because they oversee the decision making of others. That’s not all: they lead the organisation and shape the culture through the tone from the top and the other cultural levers I discussed earlier. 

It is therefore particularly important that they are fit and proper – that they act with integrity and can act with appropriate skill. We at the FCA will therefore continue to approve the appointment of senior managers.

It is also important that there are clear lines of accountability between a decision made and the senior manager who made it or oversaw it. The Accountability Regime therefore requires that each and every senior manager has clear accountabilities set out in an individual Statement of Responsibility. Talking about ‘responsibilities’ here can be seen as a bit of a misnomer – your statement of responsibility is first and foremost the areas for which you are accountable, not the day-to-day tasks you are responsible for. To be precise, you are responsible for taking reasonable steps to ensure that the decisions made by the people that you lead are appropriate.

Of course, we’re aware of the huge diversity of the firms we regulate. That’s why our proposal is that the number and types of senior manager roles that a firm should have should reflect the size and complexity of the firms and the way that they are run.

The final major component of the regime is the certification rules. As I pointed out earlier, good conduct culture is about having the right capabilities as well as the right motivation. Indeed, under our conduct rules, we emphasise that employees need to act not only with integrity but with due skill, care and diligence. So while the FCA continues to approve senior managers, firms have a special responsibility to ensure that people in positions that significantly affect conduct outcomes can do their job well. We have made it the responsibility of firms to ensure that people who are in significant positions of conduct can do their job well. Most of these roles would have been approved by the FCA in the approved person regime. Going forward, this will be an on-going responsibility, which is why we propose requiring firms to do an annual assessment.

Moving beyond a ‘fear based’ culture

there is no off-the-shelf FCA approved culture package that you can download and install in your business

Many people fear that the accountability regime is all about enforcement. We will be upholding the standards through enforcement. But just because something goes wrong in your area of responsibility doesn’t mean you are automatically liable. Our approach will be to assess whether you took reasonable, and I mean reasonable, steps to prevent other people breaching the conduct rules.

That being said, I sense that the ‘why’ in some areas in financial services is still about the money and about fear – including fear of the regulator. I talked recently to a senior executive who told me that fear had driven them to make radical and rapid change for the better. However, she told me that it was a very effective source of motivation but it wasn’t personally sustainable for the long term. So fear can’t be the only source of motivation.

The emerging field of behavioural economics also has important implications for how financial services culture can embody and deliver on the conduct rules.

A few examples, starting with an unlikely parallel: consider the case of day nurseries and tardy parents.

Nurseries rely on the conscientiousness of parents to collect their kids on time so they can close facilities at the end of the day.

As many nurseries will tell you, there is always the odd outlier who arrives late to pick up their child and has to beg forgiveness from staff. But on the whole the system works.

Some curious economists wondered what would happen if a financial incentive was involved. So a few select nurseries began fining parents who failed to arrive on time.

Immediately, more parents started showing up late.

Why? Because the nurseries had reduced the decision to a commercial one and had defined the ‘cost’ of tardiness. And parents decided they were prepared to spend the extra money for the convenience of being able to arrive half an hour late.

I take away from this and other similar examples that an ethical culture can be more powerful than one based solely on financial incentives.

In another example, an experiment was conducted where the wording at the start of a test was changed from ‘please don’t cheat’ to ‘please don’t be a cheater’. This simple change in wording cut cheating in half. I take away from this that a culture which builds on people’s desire to see themselves as good people, rather than simply just having a compliance culture that punishes transgressions, is likely to be more effective.

A final example: people’s perceptions of what is the right thing to do are greatly influenced by what they see around them. We don’t need the results of academic research to know this. All parents recognise the situation in which a child who has misbehaved will defend themselves by saying ‘but everyone else does it’. Unfortunately, it’s not only children who rely on this argument – this has in the past been the basis of defence for many individuals involved in a range of misbehaviours.

Working with the levers of culture that I described at the beginning of my remarks, is it possible to move from a compliance culture to an ethical culture?

The answer to that is I think it is. Twenty years ago if someone had too much to drink at a party the disincentive for them driving might have been the fear of getting breathalysed and losing their licence. Today, friends may well intervene to take away their keys because they felt this was the right thing to do.

However much compliance officers may wish it, there is no off-the-shelf FCA approved culture package that you can download and install in your business (‘click here for good culture’).

Each firm will have a different culture. And that’s fine – it is not the FCA’s role to dictate a firm’s culture any more than it would dictate its business model or strategy.

Whether you conduct meetings sat on beanbags and funky sofas or enforce a ‘top hat and tails’ dress code, it doesn’t matter to us. 

However, I think that an ethical culture could be a sound business proposition. A sense of inspiration not only enables some firms to deliver the right customer and conduct outcomes, it also leads to greater employee engagement, better teamwork and more innovation. By the way, it also delivers lower sickness, absentee and turnover rates.

So we have higher aspirations for financial services culture than one that is purely fear based. In other words, being good could be good for business.

Closing remarks/looking to the future

I started my speech by reflecting on the past. I want to finish by looking to the future.

I hope that the accountability regime will be a good thing for firms as well as customers and markets.

It is the antidote to decision-making by default, fostering clear accountability and thinking. I am hopeful. Firms who have already applied this regime tell me they are already feeling its positive effects.

By extending the regime, we are also extending this new approach, this new mindset, across the whole industry.

And I hope that, whether you’re a credit broker in Carlisle or an international investment manager in Canary Wharf, you will agree that having the right culture is just good business.

Thank you.

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After almost a decade of crisis and uncertainty in the Eurozone, optimism is on the rise. But still unemployment is high and divergences among member states are always there. What should be done so that the euro delivers on its promise to increase the wealth of the societies? To discuss this I am joined here by…

The Securities and Exchange Commission today announced that Catherine McGuire, Counsel in the Division of Trading and Markets, is retiring after 44 years at the SEC.

Ms. McGuire has received more than a dozen awards for her service, including the Distinguished Service Award, the SEC’s highest award, in 1992, and the Presidential Meritorious Executive Award, in 2000.  She began her SEC career in 1973 in what was then the Division of Market Regulation and was promoted to positions of increasing responsibility, including serving as Counsel to Commissioner Bevis Longstreth from 1982 to 1983.  She was named Chief Counsel and Associate Director of the division in 1993 and has advised the division as Counsel since 2008.

“Catherine McGuire has been an outstanding advocate for investors and a guardian of safe and efficient markets throughout her career at the Commission,” said Division of Trading and Markets Acting Director Heather Seidel.  “She has been dedicated to the Commission’s mission to protect investors, maintain fair and orderly markets, and facilitate capital formation, and her continuing legacy is a talented and committed division staff, many of whom she mentored, supported, and advised.”

Ms. McGuire said: “I am grateful to have spent my legal career at the Commission.  I am extremely proud of the work by the Division of Trading and Markets and the dedication of its staff.  Their commitment to the agency’s mission is inspiring and represents the best of government service.  It has been a privilege to work with them on behalf of investors.”

Ms. McGuire’s numerous and significant contributions include work to implement the Securities Reform Act of 1975, the Securities Exchange Act Amendments of 1983, the Secondary Mortgage Market Enhancement Act, the Market Reform Act, the Government Securities Act, the National Securities Markets Improvements Act, the Gramm-Leach-Bliley Act, the Commodity Futures Modernization Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act.   She also worked on rules involving trade confirmations, regulation of municipal securities and government securities dealers, municipal securities disclosure, retail sales practices, securities arbitration, anti-money laundering, options, and derivatives.

Ms. McGuire is a graduate of the University of Michigan and the University of Kansas School of Law, which honored her with the Distinguished Alumna Award in 2004. 

Almost all firms and individuals offering, promoting or selling financial services or products in the UK have to be authorised by us.However, some firms act without our authorisation and some knowingly run investment scams. This firm is not author...

PSD2 is an EU Directive which sets requirements for firms that provide payment services, and will affect banks and building societies, payment institutions, e-money institutions and their customers. As well as promoting innovation, PSD2 aims to improve consumer protection, make payments safer and more secure, and drive down the costs of payment services. The new regime will be in force from 13 January 2018.

More services will be brought within the FCA’s scope by PSD2. These include account aggregation services which aim to help consumers manage their finances by bringing all of their bank account data together in one place, and services that allow consumers to make payments in different ways online, without using a credit or debit card.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:

'Competition in the retail banking and payments is vital to UK consumers and the wider economy. PSD2 builds on this by giving consumers more choice around how they manage their payments and bank accounts. It also brings in some important protections for consumers and seeks to increase the security of payments.

'Firms should make sure they know what’s required of them to be ready for the new regime. We will continue to monitor closely whether competition in the market improves in the interests of consumers.'

PSD2 also introduces a number of new requirements around how firms treat their customers and handle their complaints, and the data they must report to the FCA.

It requires existing payment institutions and e-money institutions to be re-authorised or re-registered. Firms should consider whether they now need to seek authorisation or registration because of changes to the scope of regulation made by PSD2. This includes businesses providing account aggregation or online payment initiation services. Applications will open on 13 October 2017. 

Notes to editors

  1. In the UK PSD2 is largely implemented through the Payment Services Regulations 2017, which was published by HM Treasury.
  2. The FCA is the competent authority for PSD2. The FCA has published the PSD2 Policy Statement which explains the changes we are making to our proposals following consultation and confirms amendments to our Handbook and new non-Handbook directions for certain firms excluded from regulation. The FCA has published its Approach Document alongside this – this is designed to help firms navigate the payment services and e-money regulatory requirements, including those set out in HM Treasury regulations.
  3. PSD2 requires all payment account providers across the EU to provide certain regulated firms access to customers’ accounts, subject to their explicit consent. One way of making this access possible could be through the Competition and Markets Authority’s Open Banking remedy, which follows from the 2016 market investigation into competition in the UK’s retail banking sector. 
  4. On 1 April 2013, the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  5. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  6. Find out more information about the FCA.

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Almost all firms and individuals carrying out financial services activities in the UK have to be authorised or registered by us. This firm is not authorised or registered by us but has been targeting people in the UK, claiming to be an authorised firm.

This is what we call a 'clone firm'; and fraudsters usually use this tactic when contacting people out of the blue, so you should be especially wary if you have been cold called. They may use the name of the genuine firm, the 'firm reference number' (FRN) we have given the authorised firm or other details.

You can find out more about this scam tactic and how to protect yourself from clone firms.

Clone firm details

Fraudsters are using or giving out the following details as part of their tactics to scam people in the UK:

Rathbone Brothers (clone of FCA authorised firm)

Telephone: 02071939603

Email:[email protected]

Website: www.rathbonebrothers.com

Be aware that the scammers may give out other false details or mix these with some correct details of the registered firm.

FCA authorised firm details

This FCA authorised firm that fraudsters are claiming to work for has no association with the ‘clone firm’. It is authorised to offer, promote or sell services or products in the UK and its correct details are:

Firm Name: Rathbone Investment Management Limited

Firm Reference Number: 116316

Address: 8 Finsbury Circus, London EC2M 7AZ

Telephone: +44 02073990000

Website: www.rathbones.com

How to protect yourself

We strongly advise you to only deal with financial firms that are authorised by us, and check the Financial Services Register to ensure they are. It has information on firms and individuals that are, or have been, regulated by us.

If you want to check a consumer credit firm that may not yet have been authorised by us, please also check the Interim Permission Register.

If a firm does not appear on the Register but claims it does, contact our Consumer Helpline on 0800 111 6768.

There are more steps you should take to avoid scams and unauthorised firms.

You should also be aware that if you give money to an unauthorised firm, you will not be covered by the Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS) if things go wrong.

Report a clone firm

If you think you have been approached by an unauthorised or clone firm, or contacted about a scam, you should contact us. If you were offered, bought or sold shares, you can use our reporting form.

What to do if your firm is cloned

If you think your authorised firm has been cloned or scammers are fraudulently using your name or other details, contact our Firm Helpline on 0300 500 0597.

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