Emily Shepperd, the FCA’s Chief Operating Officer and Executive Director of Authorisations, delivered a speech to the Westminster Business Forum this week stressing the importance of culture in regulated firms and providing a clear message that it must change to meet the regulator’s expectations. Following up on her speech on the same theme, delivered in November of last year (see ‘From Zeroes to Heroes: How culture in financial services can change for everyone’s benefit’ as well as our blog on this ‘The FCA sets out its view on culture in Financial Services’), Ms Shepperd was able to draw together a significant number of important, relevant themes including: the impending July 2023 Consumer Duty deadline; environmental, social, and corporate governance (ESG); the emergence of new tech; and the Senior Managers & Certification Regime (SM&CR).

Using the example of bad behaviour from the recent past (and making the point that it can still exist in parts of the regulated environment) Ms Shepperd anchored her speech on the importance of culture to the credibility of modern organisations and the impact it can have on consumer confidence. Looking at the concept through the lens of younger generations, specifically Millennials and Gen Z, she makes the point that corporate culture really matters. Over recent years this has really come to the fore, and it is apparent that evolving generational values are having a significant impact on the shape of company culture, from employees becoming much more discerning about the type of businesses that they want to work for, to consumers looking at a much deeper level into the approach and values of the companies they purchase consumables from. In her speech, Ms Shepperd makes clear that paying attention to culture is more than just paying lip service to appease these employees and consumers, “…is not just the slogan on your website…It is the very essence of what your organisation stands for, embodied by how it conducts itself”. If we weren’t already aware, it is clear that culture is something that the regulator clearly cares about and wants to see real change enacted.

Key points from the speech include the following:

• The relationship between culture and conduct – Ms Shepperd highlights the importance of the existing fitness and propriety assessment for individuals working at a senior level in financial services, drawing upon recent examples of people being “struck off” for falling below this standard. This includes those convicted of child pornography offences, sexual harassment and serious violence, and is reflective of a change in approach from the regulator over the last couple of years, where we have seen an increase in the regulator’s willingness to take action against individuals engaging in unsavoury behaviour unconnected to the regulated work undertaken (see, for example, the FCA ban on a director after receiving a conviction for grievous bodily harm and possession of an offensive weapon in November 2022).
• The continued importance of the SM&CR - in December 2022, the Chancellor unveiled the “Edinburgh Reforms” that included a review of the SM&CR in Q1 2023 (see our blog ‘Edinburgh Reforms underway: UK government and the Regulators commence their reviews of the SM&CR’). Whilst reviews are ongoing, Ms Shepperd makes clear that one of the motivations behind the regime, namely ‘stopping bad apples rolling’, remains very important in financial services and is clearly relevant when it comes to culture and conduct. Ms Shepperd’s speech points out that some firms are still not reaching the standard expected, highlighting the FCA’s work with wholesale broker firms where many were not “properly considering” adverse information in regulatory references when recruiting and onboarding certified staff, as well as some firms who were “willing to turn a blind eye to their new recruits being dismissed for market abuse, expense fraud and sexual harassment”. It is clear that the FCA wants firms to pay closer attention to regulatory referencing including, where necessary, extending probationary periods and imposing extra monitoring or restrictions on activity.
• ESG and sustainability – Ms Shepperd draws upon the FCA’s recent work on sustainability disclosure requirements and investment labelling ESG strategy, stating firmly that the FCA is, “…determined to clean up ‘ESG’ and ‘sustainability’ classifications, restoring credibility and confidence to the system, before cynicism destroys what is a potentially huge and beneficial market”.
• The importance of culture to the Consumer Duty – the Duty comes into force at the end of July 2023, and it is clear that the higher standard it requires, coupled with the shift towards focusing on customer outcomes, will require a significant change in many firms’ cultures. In practice, this means firms’ boards and senior management need to make sure that they are embedding a culture in which good outcomes for consumers is central to the decision-making process, and they can expect the FCA to request evidence demonstrating how their business model, the actions they have taken, and their culture are focused on delivering good customer outcomes.
• Leveraging new tech – the FCA has made clear over the last few years that it is on a journey towards becoming a much more data-led regulator, and this needs to be viewed within the context of the rapid advances made in Artificial Intelligence (AI). It is clear that as financial services firms move to increasingly rely on AI, the FCA will be watching and considering the impact and consequences for consumers and markets, and how this can impact upon firms culture (including whether it remains sufficiently ‘outcomes focused’).

Ms Shepperd’s speech is wide-ranging and draws together a number of recent FCA initiatives to drive home the importance of culture for financial services firms. It absolutely stands to reason that the regulator will be following this up, looking for evidence from the firms that it regulates to demonstrate that it is taking this seriously, and show how it is embedding this across the organisation. We are also expecting the FCA Consultation Paper on improving diversity and inclusion across the financial sector and accompanying draft rules this quarter, which will provide further impetus for firms to examine their internal culture and processes.

So what else can firms do to address the regulator’s expectations?

Given the wide-ranging nature of the concept of corporate culture, there are a number of factors that need to be taken into account when firms consider their own approach and progress – these include:

• People management policies and practices (including performance management, pay and bonuses) – these should be reviewed to ensure they reflect the FCA’s requirements and expectations (including particularly in relation to the Consumer Duty and the need to ensure that reward aligns with Duty obligations).
• Detailed training for the Board, including NEDs and Senior Managers regarding what a strong culture looks like, and how it can be embedded at all levels in the firm.
• Review of policies and processes for managing behaviours and allegations regarding inappropriate conduct – are decisions reached aligned with regulatory and wider stakeholder expectations?
• Whistleblowing and speak up hotlines – are they being used and are matters investigated appropriately? What does the data show about trends and patterns?
• Reminders and refresher training for staff (including Certified Staff and SMFs) on their obligations under SM&CR and Consumer Duty, including new Conduct Rule 6 in relation to Consumer Duty.
• Review and analysis of DE&I policies and practices – how will the firm be able to show alignment with the FCA requirements on DE&I? Is sufficient data captured to allow for meaningful review and reporting?
• Pay equity reviews, including Gender Pay Gap reporting and analysis, as well as preparing for the EU Pay Transparency Directive implementation.

How can we help?

We can support firms looking to address culture and to drive change internally, and can advise on the legal implications that flow from the points discussed in this note. We can help with the people issues arising from the Consumer Duty, working in conjunction with our colleagues across Deloitte – our recent podcast highlights a range of issues for firms to consider.

Deloitte’s Global Conduct Watch platform provides a secure and seamless end-to-end whistleblowing solution which can help organisations accelerate how they identify, resolve, and report on fraud and other misconduct. Together with wrap around legal advice on structuring whistleblowing programmes, policies and investigations, as well as Deloitte’s market leading forensics capabilities, organisations can build a single source of information to manage and monitor cases relating to incidents of workplace misconduct, policy and procedure breaches, and compliance and integrity matters.

If you would like more help on any of the above, please contact:

Marian Bloodworth and Julia Gorham, Partners in Deloitte Legal’s Employment law team

Richard Storey, Director in Deloitte Legal’s Financial Regulatory team

Jules Colborne-Baber, Partner, Head of Investigations and Lead of Deloitte’s Economic Crime proposition

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