‘Culture of compliance’ starts from the top down

I recently read a very impressive speech by the Financial Conduct Authority’s (FCA) Chief Operating Officer and Executive Direct of Authorisations, Emily Shepperd.

Delivered at City and Financials’ 8^th Annual Culture and Conduct Forum, Shepperd discussed the current culture of the financial services industry and how in the world of film and television, it is “depicted in a negative light.”

Programmes and films have portrayed financial services professionals as driven by “greed.” For example, in the popular film, the Wolf of Wall Street, the protagonist ends up being incarcerated for money laundering and fraud.

But what do we mean by culture? And how can the financial services culture be viewed more positively?

What does the FCA mean by culture?

“Culture is what you do when no one is looking” – Emily Shepperd, FCA

What I believe Shepperd means by the above quote is – on the surface, firms may follow regulatory obligations, especially when it comes to providing regulators with reports, designing the right procedures, and implementing changes as required.

But beneath what you are told to do – does your firm genuinely believe in this regulation and its aim in combating financial crime, protecting consumers, and inspiring innovation? Or is your company just doing as it’s told but not letting it sink in from top to bottom?

Is it instilled into your company culture and ethos of every employee? And what is your firm doing when “no one is looking”?

The FCA expects the following from senior leaders when nurturing healthy cultures at firms:

• Cultures that are purposeful.
• Cultures with sound controls and good governance.
• An environment where employees feel safe to speak up and challenge where necessary.
• Where salary does not encourage irresponsible behaviour and does not damage the firm and wider financial market.

The last bullet point is an interesting one. It suggests that a ‘positive’ financial industry doesn’t just rest on the shoulders of the entire firm or industry, but the individual. And this is where accountability and being responsible for one’s own actions take shape. Metaphorically speaking, one drop of water from the clouds may be separate from the ocean, but most rain comes from the sea and goes back into the sea. One drop is a part of the financial market’s choppy waters. Therefore, one action impacts the rest and if “irresponsible behaviour” occurs, it damages the “wider financial market.”

Good behaviour and good culture begin with the leader of the company – employees learn and digest the behaviours of whoever is in charge, so it is up to senior leaders to set an example.

Otherwise, the FCA or other regulators may come after you. This is true in the case of the former Chief Executive Officer of Sonali Bank (UK), Mohammad Ataur Rahman Prodhan who failed to lead senior management into instilling a culture that “valued robust adherence to its regulatory responsibilities.” The compliance procedures in place were highly ineffective and anti-money laundering (AML) wasn’t made a priority.

AML is a priority for the financial industry and has rocked the world of the compliance officer when it comes to making it a firm’s concern.

How can leaders shape culture?

The FCA has suggested that once a leader has noticed the company culture needs to change. It can be done so through language.

“The boss and those at C-suite level set the tone for culture.”

Whenever a boss starts to use a certain phrase, it is passed down the chain to the employees –certainly not like wildfire but more like a gradual wave depending on how large the firm is. Another tip for leaders – cut down on emails and walk right up to people and talk to them for a quicker pace of change that impacts culture positively.

Ever since Covid-19, many businesses are primarily working from home, so it can be difficult to adjust culture virtually. We’ve got to start somewhere. Possibly a Christmas or Summer staff party? Whatever it is, communication is key to the mission of culture.

“Our role as a regulator is to lead by example and we do care about culture as it informs conduct and that is what we regulate.”

The FCA’s main policies that firms should consider

Shepperd also touches on the policies that are top of mind for the FCA and should be implemented by firms and prioritised by senior managers.

The Consumer Duty

The FCA’s final rules and guidance for the Consumer Duty were published on 27 July 2022. There are five milestones to prepare for which can be found here.

Just as a refresher, the Consumer Duty requires firms to:

• Act to deliver good outcomes for retail consumers.
• Act in good faith, avoid causing foreseeable harm, and support consumers to pursue financial objectives.
• Ensure customers receive communications that are clear and easy to understand, products and services that meet their needs and offer fair value and any support they need.

The Duty challenges firms to ask important questions such as – what is your purpose?

Protecting the vulnerable is a duty and critical when customers are experiencing rising interest rates and inflation.

It advises firms to not exploit customers for their own gain in profits – this is comparable to the Wolf of Wall Street but just at a smaller scale.

The FCA has cited “understandable resistance from some firms” when the Duty first was introduced because it “requires enormous cultural and operational change.” They are not setting a standard for firm culture but “will step in when consumers are at risk from harm.”

By raising standards across the board, the FCA can nip consumer risk in the bud – even before it has happened.

Examples of poor culture

The FCA found evidence of poor culture when assessing funeral plan providers’ applications. For example:

• Diverting consumer funds which should have been invested via an independent trust for future funeral plans.
• Investing in short-term business interests to increase profits for directors.

They put a stop to this to prevent widespread harm. This should be as clear as day when it comes to the FCA’s expectations. They will be assessing firms and scrutinising those who are bad actors – so don’t prioritise personal gain over consumer safety.

Tools to embed a positive culture

The FCA’s shiny not so new toy – the Early and High Growth Oversight tool helps new companies to embed the right steps from the beginning and supports new firms aiming to scale up.

The ‘S’ from ESG and culture

The ‘S’ from Environmental, Social and Governance (ESG) refers to human rights, stable employment, diversity, equality, inclusion, individual data protection, and cybersecurity.

The FCA believes that instilling diversity and inclusion are crucial to culture. It completed a study into diversity and inclusion and found firms were focused on improving representation at a senior level but not at the mid or junior level.

The FCA expects firms to collect data on the diversity of their staff, actively monitor it with interest and take bold action, paying attention to where it intersects. This is to increase “recruitment” and “retention,” and can provide “unique insights” into “innovative approaches, greater efficiency and reduced misconduct.”

FCA’s commitment to innovation

The FCA has demonstrated a real dedication to innovation. It supports tools that support compliance teams such as artificial intelligence (AI).

In terms of cryptocurrency, the FCA’s role is to ensure crypto firms that would like to register in the UK are following AML regulations. However, few firms have been authorised as the standards are high.

The crypto market is volatile and poses investor risk as we have seen with the FTX and BlockFi crashes. Therefore, the FCA supports innovation “but not at the cost of consumers or market integrity.”

Only 5% of applications to operate in the UK were of high quality and demonstrated that the regulations were understood. 30% needed material extra work. 65% of applications were very poor and were not registered. So, there is still work to be done by crypto firms in explaining how the Money Laundering Regulations would be integrated into business models.

There is a major focus on ESG. The FCA will be looking closely at what support firms offer to employees to improve their culture. If firms get it right, there could be more films about bankers saving the economy rather than harming consumers and satisfying corporate greed.

CUBE comment

The FCA’s words demonstrate that it is looking to achieve the greater good – fighting financial crime, protecting the vulnerable and inspiring innovation and integrity of markets.

For this to be achieved, regulators have strict guidelines for ESG, Consumer Duty and crypto. To ensure that your firm is compliant and operating to the highest standards, deploying CUBE’s RegTech can promote a positive compliance culture.

Stay ahead of emerging regulations and close compliance gaps with CUBE’s Automated Regulatory Intelligence.