Andrew Bailey, the former CEO of the FCA, commented in a 2019 speech that “We define culture quite simply as the typical behaviours that characterise a firm.” Although it does not prescribe what a firm’s culture should be, the FCA expects firms and their leaders to drive behaviours that create and foster cultures tending to reduce the potential for harm, both to consumers and the market.
Instead of assessing firms’ cultures directly, the FCA has identified the four key drivers of behaviour within firms that it believes can lead to harm:
Firms should concentrate on these drivers when assessing their culture and developing a framework through which their culture can be evaluated.
As stated in the FCA’s March 2018 discussion paper, culture in financial services is widely accepted as a key root cause of major conduct failings within the industry. Given this and the role that it wishes to play in rebuilding trust in financial services, the culture of firms is a priority for the FCA. It expects firms to foster cultures that support the spirit of regulation in preventing harm to consumers and markets.
The FCA’s statements in speeches and announcements confirm its view that the way in which a firm remunerates and incentivises employees will influence their behaviour and shape the firm’s culture. In August 2019, the FCA advised Chairs of Remuneration Committees that it would review firms’ remuneration and recognition practices to ensure that approaches to rewarding and incentivising all staff reinforced healthy cultures and did not drive behaviours that would lead to harm to consumers or markets.
On the one hand, remuneration practices that place disproportionate weight on financial measures could encourage excessive risk-taking and carrying on the business in a way that promotes profit over all else, including good customer outcomes. On the other hand, a more rounded approach to assessing employees’ performance may support the embedding of both good conduct and good customer outcomes within the business and may encourage behaviour that aligns with the firm’s risk profile.
Most regulated firms are already required to comply with relatively prescriptive rules when it comes to remuneration (for example, deferral requirements under the specific remuneration codes). Although complying with these rules will ensure compliance with the applicable remuneration code, the assessment of the way in which a firm rewards its employees requires an approach involving a consideration of the impact of remuneration practices on the firm’s culture as a whole. Some of the regulatory remuneration requirements may be viewed as going some of the way in helping firms to ensure that their remuneration practices are driving a good culture (for example, the remuneration principle that a firm must ensure that its remuneration policy is consistent with and promotes sound and effective risk management). However, these specific rules do not provide an exhaustive framework through which firms can assess their remuneration practices within the context of their impact on culture and importantly, do not apply consistently to all regulated firms.
Firms should look beyond their remuneration practices to ensure that their employment contracts and policies also support and promote the desired culture. In particular, contractual terms relating to employee duties and required performance standards, bonus and incentive provisions and termination clauses should reflect the culture and remuneration practices of the firm. When performance plays a part in awarding remuneration, ensuring the appraisal framework and the criteria used to assess performance is clear and targeted is key. Employment policies for disciplinary issues and whistleblowing also play an important part in creating the desired culture.
There are a number of questions that firms and their remuneration committees should be asking:
The role of remuneration in relation to supporting and promoting diversity and inclusion is also integral from a regulatory perspective. The FCA expects firms to consider how remuneration policies promote equality of opportunity and ensure that diversity and inclusion are embedded within a firm’s approach to rewarding individuals.
Many regulated firms will now also need to consider their remuneration practices in light of the new rules under CRD V, as well as the changes that are expected under the forthcoming Investment Firms Prudential Regime (“IFPR”).
If you’d like to know more about how we can help you with your culture and remuneration arrangements, or with any aspect of compliance, our expert team is here to help.
Contact us today on 0207 436 0630 or email info@thistleinitiatives.co.uk.