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30 March 2017

Continued focus on culture change in financial services

The FCA, Bank of England (BoE), Banking Standards Board (BSB) and Government continue to keep the focus on the need to change financial services culture. The thinking is that regulation and legislation can only go so far and additional ways to effect culture change are needed. These are to address the enduring fear of a repeat of the misdemeanours that led to economic downturn as well as a perception of lack of accountability for those appearing to be within the letter of the law but guilty of betraying its spirit (as well as those fined for record amounts).

Recent developments include:

The FCA...

presented a review of the SMCR on 7 March 2017, one year from implementation with the banks, emphasising "the FCA's continued focus on culture and governance in firms, and builds on initiatives to help the FCA identify and assess key senior individuals". In referencing that changes have been put in place to ensure that firms adopting "a culture of individual accountability" should be at the heart of how firms conduct themselves, the regulator said that "we recognise culture change takes time and there is still more to do. So we will continue to keep a watchful eye on the progress that firms are making."

The BSB...

commented on 21 March 2017 that "significant efforts have gone into repairing some of the damage from the financial crisis, and addressing some of the underlying causes of the numerous scandals that we have seen in banking. Regulation is now much tougher than it was, senior leaders in banking are more accountable for their actions, and reward and incentive structures – in banking, as elsewhere – have come under greater scrutiny." "But tougher laws and regulations on their own are not sufficient. Rules can be gamed; they can also never account for every eventuality. The responsibility for high ethical standards and professional competence sits not with the regulator, but with firms themselves." "We need to understand what – almost 10 years on from the financial crisis – is still causing staff in some firms to have ethical concerns at work, or feel unable to challenge poor behaviour when they see it, despite efforts by policymakers, regulators and firms themselves. This will be an area of further focus for the BSB in 2017."

The BoE...

published a speech by Mark Carney on 21 March 2017, in which he reviews the main elements of the BoE's work to lift ethical standards in the financial industry, concentrating on how codes of conduct and the senior managers regime (SMR) can improve culture. The BoE Governor’s comments include that there are encouraging signs that the SMCR regime is making a difference. For firms, the regime is clarifying and improving governance, accountability and decision-making processes. For supervisors, the regime is helping identify weaknesses in governance and accountability, and encouraging the necessary changes. The BoE chose to adopt the SMCR as its mission demands that it holds itself to the highest standards of governance and accountability. In reference to the recent incident of Charlotte Hogg, Deputy Governor, not meeting the high standards, the BoE look to comparable situations in the private sector where it expects: evidence that the firm is taking the matter seriously; proportionate consequences for the individual, including some form of disciplinary warning and possibly some impact on remuneration; and a wider review of lessons learned if there was any evidence that there was a systemic problem.

The Government...

is consulting on changes to corporate governance for large organisations that are neither regulated or listed to require greater accountability and to rebuilding trust by connecting a wider range of stakeholder and social responsibilities as part of a change of corporate culture. The consultation closed in February 2017.

The firm’s comments on this paper published in Employer’s law can be found by clicking here.

Charles Russell Speechlys...

2016 survey and white paper on Cultural Risk chimes with this direction of travel. Put together with a panel debate with the Institute of Business Ethics and the Queens Mary’s Department of Banking and Business Ethics, its conclusions included that: Culture can be a valuable differentiator for financial services firms; good culture needs to address more than the codes, regulations, duties to customers, conduct rules and the administration of justice; values and good culture drivers should come from the top, and then become lived, part of the fundamental assumptions, beliefs and motivations of all in the firm (the tone from the top, the tune from the team); it should be a natural part of a sustainable business model for firms to put the client at the heart of the business; adopting a structure that encourages and rewards staff to serve the customer in line with the firm's culture is critical; a significant proportion of people feel that regulation is stifling innovation and damaging entrepreneurial spirit within the sector; fear has driven some firms to overcomplicate the compliance process which has led to either negative or less than ideal culture; some firms need to simplify by working out their shared values, attitudes, standards and beliefs and then aligning them across the firm’s goals, strategies, structure and approaches to its people, customers, investors and the greater community.

To read our Cultural Risk white paper please click here.

This article was written by William Granger. For more information please get in touch via william.granger@crsblaw.com or +44 (0)20 7427 1073.

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