FCA sees SM&CR as catalyst and opportunity to transform culture in financial services
Its recent 'Dear CEO' letter, the FCA sets out its expectations on firms and Senior Managers in tackling non-financial misconduct. For some time the FCA has emphasised the importance of culture at firms causing financial conduct issues. In this recent letter, the FCA makes clear that non-financial misconduct will be a key focus for its supervision of firms and senior managers.Significantly the FCA sees SM&CR as a catalyst and opportunity to transform culture in financial services. Of even more significance is that the letter also suggests that the FCA, working with the PRA, will work to improve standards of behaviour and therefore begin supervising and potentially acting against instances of non-financial misconduct.
The letter emphasises that non-financial misconduct (which includes victimisation and bullying, harassment and discrimination etc.) and an unhealthy culture can cause harm both to employees and markets, as well as to consumers. In particular, it references recently publicised incidents of non-financial misconduct and states that poor culture was a key cause in conduct failings within the industry.
All firms are expected to consider the letter, and identify any gaps between its practices and the FCA's expectations, and to take appropriate steps to remedy such shortcomings.
The letter also sets out the FCA's expectations with regards to a firm's approach to tackling non-financial misconduct, and stresses that how a firm responds to non-financial misconduct is a reflection of the firm's culture. The FCA expects senior managers to embed positive cultures through proactive identification and modification of the key drivers of their culture. The FCA has identified the 4 key drivers of culture as:
1. Leadership: focusing on the implementation of SM&CR. The FCA notes that a senior manager's failings to handle non-financial misconduct may be considered indicative of whether they are fit and proper, and boards are expected to consider a (potential) senior manager's actions or failings in this regard when assessing their suitability;
2. Purpose: having a clear and articulate purpose that is meaningful to, and resonates with its employees and customers. Firms are encouraged to identify any inconsistencies between such purpose and the day-to-day practices of the firm;
3. Approach to rewarding and managing people: ensuring that this approach is consistent with the firm's purpose e.g. having appropriate incentive structures in place; and
4. Governance, systems and controls: again ensuring that these systems and controls are compatible with a firm's purpose e.g. having strong whistleblowing procedures in place.
The FCA has published a number of online resources providing information on transforming and delivering cultural change, which can be found here.