A rolling 'bad apple' should gather no easy job: the FCA’s expectations for a healthy culture & a call to action on prior misconduct in onboarding

Corporate culture is (and has for many years been) a significant area of focus for the FCA and central to its supervisory model. The culture within every company is unique. It is the complex interplay between individuals and forces that make up their work environment, from organisational values to the behaviour of leadership and peers.

Unsurprisingly, the FCA has not sought to prescribe what a firm’s culture should be, but has instead highlighted indicators of a healthy culture. The FCA has devoted considerable ink and breath in this regard – in recent years, it has published numerous articles and its officers have delivered many speeches about the hallmarks and effectiveness of culture in the financial services sector, which it considers will ultimately lead to better outcomes for customers, employees, and investors alike.

In a speech to the Westminster Business Forum on Monday, Emily Sheppard (FCA Chief Operating Officer and Executive Director of Authorisations) articulated the FCA’s latest thinking on culture. While the overarching theme was that culture should evolve with the demands of markets and consumers, the following points are of particular note:

• Purpose underpins culture, and firms with purposeful cultures will be best equipped to adapt to changing consumer and market expectations.
• Culture underpins conduct, which drives business performance and consumer and market confidence – this is why the FCA imposes fitness and propriety conditions on senior executives and takes action to ban or strike off those whose honesty, integrity or reputation falls short.
  • In March, the FCA and PRA published a joint Discussion Paper seeking input on ways to improve the Senior Managers and Certification Regime (SM&CR), as part of reviewing its effectiveness, scope and proportionality.
  • Misconduct in wholesale markets will be a key area of FCA supervisory efforts. In this context, the FCA will focus on firms turning a blind eye to past misconduct when recruiting. The FCA wants firms to be more proactive in preventing ‘rolling bad apples’ from moving between firms, which means:

1. Taking regulatory referencing far more seriously – the FCA’s supervisory work with wholesale broker firms found that many firms were not properly considering adverse information in regulatory references when recruiting and onboarding certified staff.
2. Enhancing onboarding procedures, including proactively contacting prior employers for more information or clarification, and undertaking investigations or diligence.
3. Taking clear steps to mitigate the risk of future misconduct, such as extending probationary periods, adding extra monitoring, or restricting activities of recruits who have previously been involved in misconduct.

• The FCA has seen the creation of the Consumer Duty (which comes into force in a month) as a trigger for changing its approach to be less prescriptive and more outcomes-driven. The higher standard of the Consumer Duty and the shift to focusing on customer outcomes will require a significant change in many firms’ cultures and senior managers are expected to embed a culture in which good outcomes for consumers is central. People management policies and practices, including performance management, pay, and bonuses will be critical. At every stage in the regulatory lifecycle, the FCA will be asking firms to demonstrate how their business model, actions, and their culture are focused on delivering good customer outcomes.
• Openness and diversity of thought remain essential elements of culture – employees in financial services must feel psychologically safe to speak their minds and raise concerns. In this regard, the FCA has recently set out steps to improve whistleblower confidence, and it will set out further proposals for Diversity and Inclusion in the coming months.

Firms should act to reflect the insights and warnings above, in particular in onboarding processes. But given culture is such a dynamic and complex concept, where should firms start? A culture assessment is the natural first step – seeking to understand employee perceptions of culture by collecting the stories they are telling about the organisation. Importantly, qualitative data needs to be paired with quantitative data to ensure you have the context behind what people are really saying. With this base line, you can design changes to impact organisational culture and better support the indicators of a healthy culture outlined by the FCA.

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