To steer a firm in the right direction there should be clear direction from the top on what the firm’s culture is, and how it expects staff to meet those deliverables, writes Simon Collins, MD of the FS regulatory compliance practice at Eversheds Consulting


Regulators expect firms to implement a balanced approach to encourage good outcomes for consumers and discourage unnecessary risk or focus on reward at the expense of all else; beyond that there’s very little guidance. But if you consider the focus of the regulators, the key messages from speeches and publications, the picture of what bad looks likes becomes clearer, and from that good practice can be extrapolated.

To implement the right culture, the board should consider (as well as the controls in place) the balance encouraged between risk and reward. How are employees motivated? If the riskiest products pay more, it’s very possible this will encourage their sale But if remuneration includes an element of positive customer experience, employees are more encouraged to consider which product is best for that customer. If it transpires that a customer was mis-sold a product the ‘clawback’, or withdrawal of remuneration, is likely to be most effective, hence why the regulators have felt there needs to be a major change in personal accountability.

The Senior Managers and Certification Regime (SM&CR) went live in March 2016 for part of the industry, primarily banks, building societies and insurers. The rest of the financial services industry is due to switch from the failed approved persons regime to the new SM&CR in 2018.

The new regime recommendations were largely a response to the financial crisis, but other events (e.g. Libor, FX manipulation, and interest hedging products) highlighted the needs for change. There’s been a disconnect between delivering a service which people need and rely on, and creating a personal profit. The industry suffered due to short-termism and a lack of trust with customers. The new regime intends to create increased accountability and collective responsibility across the industry, pushing more responsibility to firms and senior individuals.

Cynics may say we’re entering a blame culture of finger-pointing and witch-hunting which will stifle business and innovation, but this isn’t driving the regulators, who’ve repeatedly said they are not trying to stop innovation and competition. In fact, one of their core objectives is promoting competition. Regulators recognise that a healthy market thrives on productivity which breeds profit. They will take action against individuals who take unnecessary and irresponsible risk, especially where that leads to consumer detriment.

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The SM&CR is therefore about aligning responsibilities with an accountable individual who has agreed (in writing via a Statement of Responsibilities) that they are wholly responsible for that area of the business and in the event of an issue the regulators will look to them first for an explanation. For example, one of the new ‘prescribed responsibilities’ which must be assigned to a senior manager is ‘responsibility for overseeing the adoption of the firm’s culture in the day-to-day management of the firm’.

Will increased accountability lead to less poor conduct? That’s certainly the intention. It’s still too early to tell how the regulators will react if and when there’s a failing, but the whole purpose of the new regime means it’s easier for them to identify who should have been responsible and hold them to account. It’s hoped that this will focus minds and encourage those at the top with the most responsibility to really think how their firms are run and what changes need to be made.
Another aspect of the new regime is to push more responsibility back onto firms.

This is most evident in the new Certification regime. The Certification regime applies to certain individuals whose roles are material risk-takers and/or could cause significant harm to the firm or consumers. Whereas previously these individuals may have been approved in a customer-facing role (for example), they will now be approved by the firm which will have to review and possibly enhance a methodology for assessing whether these individuals are, and remain, fit and proper. Once deemed fit and proper by the firm, an individual is issued with a certificate which is renewed (following assessment) annually.

If a ‘certified individual’ goes on to breach a conduct rule or act in a way deemed to interfere with the FCA’s objectives, then not only will that individual be subject to potential regulatory sanctions, but also it’s probable the FCA will want to understand how the firm deemed the individual fit and proper in the first place. This could mean a review of the firm’s methodology, an assessment of its governance, and some searching questions about its culture.

A further interesting development is the introduction of the whistle-blowing rules that came in to force from September last year for the majority of firms covered by the regime, but it’s also non-binding guidance for all other firms. Firms nominate a senior individual at the firm to act as a whistle-blowing champion; this will normally be the chair of the audit committee (where the firm has one) as the most independent person in the firm. The intention is to make it easier for employees to notify when they think poor behaviour is occurring. The purpose of the new rules is to make individuals feel more confident in alerting issues or concerns so there’s more opportunity for remedy.

This culture of speaking out seeks to align corporate values across the firm with its customers’ well-being; by 2018 virtually all employees (including contractor and part-time employees) will be subject to conduct rules. These rules are not complex, but enshrine good behaviour expectations so a firm should be confident that wherever there are touch points with customers throughout their relationship cycle, customers are getting the best possible outcomes. This expectation means that where a firm utilises third parties in the provision of its services, it has undertaken sufficient due diligence to be able to satisfy itself that the third party is aligned with its values.

We’re already seeing senior managers with responsibility for interaction with third parties refreshing levels of interaction with business partners so everyone is clear where their responsibilities stop and start, and even where the firm may have delegated activity to another party it cannot delegate the accountability and responsibility.

As with most financial and economic crises the immediate aftermath sees a period of intense activity to try to ensure a repeat event can’t happen. However, as time elapses and the memory dulls, greed normally begins to re-emerge and the lessons of past failures drift away. Will this time be different?

There’s certainly been a concerted effort by governments and regulators to try to ensure there’s no repeat, as capital standards are being raised and there is a real attempt to change mindsets and behaviours throughout our financial institutions. The question remains as to whether our financial services firms can marry commercial and customer expectations without one significantly damaging the other. One benchmark will be whether those genuinely accountable will go wider than just the firm itself when customer outcomes are not met or are damaged.