FCA: Get governance and risk right and culture will follow

FCA chief executive Andrew Bailey is calling on firms to first focus on governance and risk management and lead from the top in order to effect cultural change.

Delivering the keynote speech at the Hong Kong Monetary Authority annual conference for independent non-executive directors, Bailey said part of the regulator’s duty was to determine whether practices such as “recruitment, performance management, reward and capability” contributed to creating a long-term culture within firms that served their interests as well as those of their customers, while retaining integrity in the market.

He says: “Culture is characterised by a pattern of behaviours no doubt, but if we are to understand its causes, I think we need to get back to more structural features in, for instance, governance and risk taking.”

Calling on firms to ensure their chosen culture was aligned with “appropriate conduct outcomes”, identifying drivers of behaviour while controlling any consequent risks.

Bailey says following the financial crisis questions were asked over responsibility and accountability and why it did not sit with senior management.

“This was sometimes portrayed as blood lust or a witch hunt, but in fact it was asking the reasonable question, ‘who is responsible and thus will be accountable for what happens’.”

He says the new senior managers and certification regime – currently applied to banks and insurers – was soon be rolled out to other financial services organisations to “embed responsibility and accountability”.

He adds: “At the FCA, we use a range of supervisory tools and methods to work with firms on issues relating to their culture, such as the firm’s stated purpose, ‘tone from the top’, incentive structures and the effectiveness of management and governance.

“Incentive structures also drive the behaviour of staff, along with other people- related practices, such as recruitment and performance management. This is where tone from the top gets turned into real practice.”