On 6 November 2018, Andrew Bailey gave a speech to the Investment Association that dealt with culture.
The broad theme of the speech was how the regulator could enable, encourage and incentivise in order to tackle the difficult issues of culture and trust. In terms of producing good culture, his view was that a set of rules was unlikely to be able to spell out all that needed to be done in all situations in order to encourage good culture.
Bailey focussed his comments around investment management. Against the backdrop of the increasingly large number of individuals who necessarily placed their trust in experts (investment managers and advisors) to ensure their savings would provide a comfortable retirement, Bailey raised the issue of the lack of transparency, particularly around fees and charges.
A clear finding in the FCA's Asset Management Market Study had been that investors were often disengaged from what they were paying in fees, and therefore the impact on their savings. In such cases, even small differences in cash and charges could have a large effect on the total pot. Whilst the answer will often be given as transparency and disclosure, Bailey said that it had also to be accompanied by effective communication. That did not necessarily mean simply just giving more and more information. The effectiveness of communication with consumers was, he said, a test of culture.
Another theme he raised was how some cultures would lean towards complacency, relying on a favourable indicator or two, but demonstrating "a lack of curiosity" in digging deeper into issues to assess whether there were systematic problems. This is why, Bailey stated, that the FCA had made the case for a stronger independent director presence in asset management governance, so that there were people who could ask the difficult or challenging question. Good culture supports this and, Bailey said, it was the role of the regulators as much to encourage it as to require it. This was notably through supervision exercising judgment based on the framework of rules in order to achieve the outcomes they want to see.
Bailey also spoke about a "sea change in culture" at the FCA by enabling change to occur through a variety of approaches, such as in its work on innovation and technological change for the industry. He saw this as a shift from regulation as a means to forbid, require or permit, to one where it enabled change to occur.
Finally, Bailey spoke about ethical investments and passive investing. There was a longer-term shift towards passive investment, but it went alongside a desire for more ethical and socially responsible investing and a desire to encourage longer term patient capital. In terms of trust, Bailey considered this a good development. An industry, so he said, which enabled the support of patient capital and innovation, and of ethical investment and social responsibility, will be one where the trust will be stronger and deeper, and the culture will prosper. The regulator could, he said, enable change to happen.
Good culture is a critical part of the regulatory landscape. An absence of good culture can lead to serious issues, ultimately even involving Enforcement. Whilst nothing Bailey said will be a cause of surprise to those in the industry, his emphasis on consumers and what they need, particularly against the background of the FCA's recent Asset Management Market Study, might point to where future enforcement action will lie.