Emily Shepperd, the FCA’s Chief Operating Officer and Executive Director of Authorisations, has set out the Regulator’s view on the importance of firm culture in financial services in a recent speech. In a wide-ranging discussion taking in current issues such as the FCA’s incoming Consumer Duty, the cost of living crisis, the importance of diversity and inclusion and the focus on ESG, Ms Shepperd set out her view as to what culture represents in this context, namely personality, habits and the ethos of the organisation. This speech is important because it provides guidance for senior leaders as to the FCA’s expectations in this area, and the regulator’s view as to the impact that these leaders can have on healthy cultures within firms.

Looking at its content in more detail, Ms Shepperd refers to the importance of the FCA’s incoming Consumer Duty, which she describes as “one of the biggest policies we have unveiled in recent years [and] one that will do the most to address conduct”. Drawing upon a theme highlighted in recent speeches on behalf of Nikhil Rathi (FCA CEO) and Sheldon Mills (FCA Executive Director, Consumers and Competition), Ms Shepperd makes reference to the connection between the Duty and the current cost of living crisis, relying upon its focus on vulnerability, which is made more critical when consumers face hardship. In this respect, the point is made clearly that the thinking around good outcomes starts at Board level (for example, evident with the necessity for a Consumer Duty Champion at Board level making this clear).

Although the FCA more widely, and the Duty specifically doesn’t set out exactly what firm culture must look like, Ms Shepperd highlights that the FCA will step in when it considers that consumers are at risk of harm. There is nothing new in the FCA taking action in circumstances such as this, as it has done before, but it is clear that this will be high in its mind when it assesses whether firms are complying with requirements under the Duty.

On this front, Ms Shepperd highlights that one of the tools that the FCA will use to ensure that the standard is met concerns the authorisation gateway. In this regard, firms can and should expect that the FCA will be asking questions about culture at this stage and will not be afraid to question and point out examples of poor behaviour where they are seen. On this point, Ms Shepperd’s speech highlights the funeral plan provider industry, which recently became regulated (July 2022) and where the FCA saw examples of consumer funds being diverted to short term business interests to produce profit for directors, in its view “prioritising personal gain over the safety of customers’ funds”. Off the back of the authorisations gateway, Ms Shepperd also referred to the FCA’s Early and High Growth Oversight support, where supervisors look to keep a closer look on newly authorised firms. It is clear from the speech that FCA supervisors will look closely at firms’ purpose, leadership, governance and the approach to people in the months and years following authorisation, including the focus on diversity and inclusion (D&I) as well as psychological safety.

Echoing themes highlighted in a speech recently delivered by Jessica Rusu, the FCA’s Chief Data, Information and Intelligence Officer, Ms Shepperd also talked about the connection between culture and innovation. In particular, reference was made to emerging governance issues from the regulator’s perspective concerning the use of artificial intelligence, as well as the need for firms operating within the new technology space (specifically including crypto) to understand the FCA’s expectations concerning culture. Finally, Ms Shepperd also raised the importance of ESG products and promotions, with a particular focus on governance and the support that firms can offer to employees to improve culture.

Overall, a lot of different areas of focus for the FCA were covered during this speech, providing a useful insight into the FCA’s thinking on a number of fronts. What is abundantly clear is that the paying of lip service to the idea of firm culture will not meet the regulator’s expectations and will lead to further questioning, potential actions and, in some circumstances, could impact whether a new entrant achieves authorisation at all.

A number of the issues highlighted above will be considered in a Deloitte Legal webinar on the Consumer Duty in early 2023 - watch this space!

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