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Culture and conduct: a new year’s resolution

  • United Kingdom
  • Employment law
  • Financial services disputes and investigations

08-01-2020

Jonathan Davidson, Executive Director of Supervision, Retail and Authorisations at the FCA, has written to CEOs of insurers concerning non-financial misconduct in wholesale general insurance firms. Davidson reminds firms of the FCA’s clear expectation that they should be proactive in tackling such issues. Culture is an acknowledged root cause of major conduct failings across financial services and the FCA expects a step change in the approach of the insurance sector (and other financial institutions) towards embedding a healthy culture, drawing on lessons learned by the banking sector.

Davidson takes a robust line, warning firms that the FCA expects firms and their Boards to take non-financial misconduct into account when considering the suitability and performance of (potential) senior managers and other senior leaders. In light of Davidson’s letter, the FCA will undoubtedly come down hard on any firm that cannot adequately demonstrate to the FCA that this has been done.

Conduct and culture: the regulators’ approach

The FCA has long emphasised the importance of conduct and culture in financial institutions and has made clear that it will turn the spotlight onto how firms manage conduct and culture in the coming year. In its 2019/20 business plan, the FCA noted that it will be ‘holding individuals to account under SMCR when things go wrong’ and highlights that ‘diversity and inclusion (D&I) issues may have an impact on the fitness and propriety of senior managers’. In November 2019 Gareth Truran, Acting Director, Insurance Supervision at the PRA, wrote to CEOs of insurers reminding them of the importance of developing and maintaining a culture where staff are able to speak up, noting in particular that recent incidents of sexual harassment and bullying in the insurance sector indicate that there is much work to be done.

In March 2018 the FCA published a discussion paper on transforming culture in financial services, defining culture as ‘the habitual behaviours and mindsets that characterise an organisation’. The FCA recognises that there are numerous drivers of behaviour, many of which it and firms can identify and therefore manage.

The FCA has also commented on poor conduct in its decision notices and in its guidance on the Conduct Rules whilst emphasising that there is no ‘one size fits all’ culture and it does not prescribe what a firm’s culture should be. Each firm must take into account the nature of its business, customers and stakeholders.

However, the FCA has set out minimum standards of behaviour in the form of the Conduct Rules, which sit at the heart of the senior managers and certification regime (SMCR). This regime aims to hold leadership to account, a point echoed in the FCA’s letter: ‘a senior manager’s failure to take reasonable steps to address non-financial misconduct could lead us to determine that they are not fit and proper. We expect firms and the Boards of firms to take this into account when considering the suitability and performance of (potential) senior managers and other senior leaders’.

What is ‘non-financial misconduct’?

Davidson refers to non-financial misconduct as including ‘discrimination, harassment, victimisation and bullying’. The FCA views both lack of D&I and non-financial misconduct as obstacles to a healthy culture in which it is safe to speak up and the best business choices are made. Examples of non-financial misconduct in the context of D&I might include discriminatory hiring and recruitment processes and remuneration/ incentive structures that promote executive risk-taking.

In December 2018 Christopher Woolard, Executive Director of Strategy and Competition gave a speech explaining why D&I mattered, noting ‘It should be clear by now that the FCA’s interest in diversity is not merely a matter of social justice, but a core part of how we assess culture in a firm’. Diversity initiatives are also not just limited to gender and BAME; Woolard suggested in his speech that social mobility should also be considered. Woolard also made clear that the way firms handle non-financial misconduct is potentially relevant to the FCA’s assessment of that firm, in the same way that their handling of insider dealing, market manipulation or any other misconduct is.

The way forward

Bailey gave a speech at the 2019 annual public meeting, highlighting: ‘Beyond the SM&CR, culture continues to be an issue of the highest importance for the FCA. It is a central consideration for our supervisors, who look at drivers of behaviour, staff incentives and governance arrangements in their day-to-day interactions with firms’.

The FCA expects senior managers to be doing what they reasonably can to prevent misconduct. Some firms have been slower to understand that this encompasses non-financial misconduct. Davidson’s letter spells out for firms that the regulators will be focusing on how firms address non-financial misconduct in the coming year and it is time to get their houses in order.

Clearly, as highlighted above, firms need to ensure that fitness and propriety assessments of senior managers and certification staff are rigorous and probing. Those carrying out assessments should be properly trained to understand what traits they should be looking out for and what enquiries should be made. Some form of monitoring may be necessary to ensure consistency and fairness. Firms should record the decision-making process to justify their conclusions to the regulator, should there be any question mark hanging over an individual’s assessment.

The fitness and propriety process should be appropriately reviewed and firms should ensure that there is an appropriate level of supervision and support for those responsible for the assessment to limit bias and avoid potential conflicts of interest. Where there have been behavioural failings, firms should have a robust response.

In the context of D&I, some firms have decided to link pay to diversity outcomes. In the last New Financial analysis of the Women in Finance gender pay report, New Financial noted that a third of signatories found that a link to pay had been effective in meeting the objectives.

Read our briefing: Culture, conduct and fitness and propriety: no more ‘cosy boys' clubs’

We are the authors of Eversheds Sutherland: the Employment Practitioners’ Guide to Financial Institutions