By Dawn Belton - Acting Head of Learning and Development at Huntswood

“I want to start with what I intend as an unambiguous statement; namely that the culture of firms and the people that make them up – and of course therefore the culture of industries insofar as it can be generalised – is of the utmost importance to financial regulators”(Andrew Bailey, 9th May 2016)”

Whether you’re looking at the regulator’s supervisory approach in the last few years, or indeed firms’ own strategic direction as they seek to bridge trust gaps with consumers post-financial crisis, it’s hard to disagree with the above statement, made by Andrew Bailey in his speech at 2016’s City Week Conference in May.

He was, at the time, a month away from taking the reins at the FCA, and his speech gave firms an early preview of the FCA’s future supervisory approach to culture during his tenure.

The measurement of culture is a challenge due to its multi-faceted and intangible nature, but it is certainly not impossible, especially when firms are able to understand and address the root causesof issues rather than just trying to mitigate the effects of poor culture.

Here, we examine six key areas to consider in the area of culture, not only in order to address root cause, but to help firms think about how they might measure their work in this area and ensure consistent cultural success.

1. BUSINESS MODEL AND STRATEGY

If you’re assessing your internal culture, consider the methods you use to examine it. It can be advantageous to look at the contribution of culture in the context of three ‘lenses’:

• Commercial – how closely aligned organisational culture is to your strategic and commercial aims
• Customer – how culture supports (or detracts) from delivering the right customer experience and outcomes
• Regulation – whether you can provide the regulator with assurance that culture is both appropriate and effective

How you balance these factors in your firm is the key to both commercial and customer outcomes success. With the FCA now recommending a risk-based approach to many areas of regulation, breaking culture down into these elements will help you strike the right balance; for example, do you examine the success of your financial incentives against the customer outcomes you are providing? They might help you deliver on your sales goals, but what effect do they have on the suitability of recommendations? Will they therefore drive customer detriment and future costs to the firm in terms of remediation?

This kind of thinking can be applied in many areas in exactly the same way – from your processes to your financial promotions, and from the MI your board receives to your reaction to incoming regulatory change. All of these can be examined through these lenses to ensure good outcomes, compliance and commerciality.

Remember, also, that being able evidence your considerations will be the key in satisfying regulatory scrutiny.

2. LEADERSHIP

A key task for business leaders is creating and maintaining an appropriate culture which reflects the vision, ethics, values and degree of individual empowerment within an organisation. This has always been true, of course, but given the introduction of the Senior Managers and Certification Regime, is more imperative than ever. If you’re a senior decision maker, consider whether you are able to:

• Articulate the ‘strategic purpose’ of your organisation; that is, “why do we do what we do?”
• Obtain a clear and ongoing view of customer outcomes within your firm, as well as the commercials
• Articulate (perhaps to the regulator) how your firm’s strategy ensures the delivery of good customer outcomes

The values business leaders establish and become role-models for can have far-reaching effects within a firm; open endorsement of a customer-centric approach can proliferate downwards to ensure that commercial success is built on high-quality customer experience. Leaders who endorse robust frontline training and are clear about the tone and values they want to instil can have a significant and tangible effect on business performance.

Conversely, leaders who do not understand their ability to influence attitudes and behaviours can place a firm at considerable risk. Ask yourself, how does your decision making reflect the desired values and attitudes of your organisation?

3. PEOPLE AND EMPLOYEE LIFECYCLE

Your workforce is arguably the most valuable asset to your firm.  The way people are recruited, inducted, trained, managed, coached, performance managed and, when things don’t go so well, exited, are all a barometer of your organisation’s culture.

Doing a great job is a key motivating factor for employees of any firm. However, the financial incentives available in a firm will always have some effect on its people’s behaviours. This is not to say that incentives are a bad thing – quite the opposite is true in many cases, but nonetheless, firms have a responsibility to ensure the incentives they offer to their people enable good outcomes for their customers.

Incentives that prioritise profit ahead of customer outcomes can easily result in undue detriment. Does your firm design its incentive schemes and employee remuneration with this in mind? How often are the outcomes of incentivised selling tested? Firms should be looking to do this regularly to assure themselves and prove to the regulator – if necessary – that customer outcomes are a key part of the discussion in relation to employee remuneration. Evidencing your work here is again advisable.

4. BEHAVIOURAL NORMS

Where decisions are being made within a firm, it’s fairly common to see ‘behavioural norms’ influencing the process. “That’s just the way we do things here” type-thinking can sometimes coincide with decision makers’ overconfidence, resulting in decisions being based on presumption – not a reliable basis for providing good customer outcomes.

The regulator believes that firms have an obligation to question the status quo within their organisation on a regular basis. Ensuring robust challenge in a firm can make decision making more methodical and self-reflective, and causes the business to have to justify its choices more thoroughly.

Does your firm embrace internal challenge as a means of business assurance? Is a process for staff to raise their regulatory concerns present, and are these concerns examined, again while taking into account the three lenses to ensure proportionality?

Again, retaining evidence of this type of work taking place in your firm will be instrumental in the event that the FCA does examine your work more closely.

5. CUSTOMER FOCUS

Ensuring firms place the customer at the centre of everything they do is the ultimate aim of the regulator. However, as well as some of the great work taking place within firms to provide good outcomes, there still exists, in some areas, a public mistrust of financial services.

Engaging with consumers and starting to bridge this trust gap will be the next significant challenge for firms. But how do you do this?

Much has been written about financial advice and access to financial services recently – consider whether your firm can treat this discussion as a catalyst for connecting better with consumers. Connecting with consumers though their channels of choice and successfully dealing with vulnerability will help you build advocacy, and will likely be the key to success in this area.

FCA focus on customer outcomes will of course continue, and the most competitive firms will be those who preside over a good level of engagement with their customers as a means of breaking down trust barriers and easing access to products and information.

6. MONITORING AND CONTROLS

The shift towards a customer-centric culture in financial services means that periodically ‘taking the temperature’ of products, processes and the outcomes they provide now features heavily in the regulatory discussion.

When it comes to continually improving the customer experience, robust, regular outcomes testing is an unrivalled tool for gaining an accurate view of how products and processes are performing. Not only this, but if your firm experiences regulatory scrutiny, being able to evidence that you have regularly assessed the outcomes you’re providing will assist you in satisfying the regulator.

THE FUTURE OF REGULATION

Firms seeking to discern what the future of regulation holds for them in terms of culture can examine the factors above to get a good idea of how their firm is performing.

Despite its intangibility, culture can (and will) continue to be examined as the sum of many constituent parts; from values and attitudes to the tone from the top of the business, and from the way firms’ people are incentivised to the way products and processes are designed and improved. Firms who embrace this by shaping their work around the individual needs of the consumer will almost certainly fare well in the long term.

Huntswood has developed the Culture Conduct Model to measure Culture across financial services and will be helping facilitate the WMA’s Insight 360 on Culture on 24th November 2016.