On 19 March, Andrew Bailey, Chief Executive of the FCA, delivered a talk on culture in financial services. This speech was delivered against the backdrop of the FCA discussion paper "Transforming Culture in Financial Services" which contains papers addressing various aspects of culture. This is not the first speech on culture given by the FCA and no doubt will not be the last. Plainly the issue of culture, what it means and how it is shaped, remains an important and sometimes elusive subject for the FCA to grapple with.
In his speech, Bailey made clear that he views "good culture" as being something that cannot be ensured simply through the imposition of rules. He said that rules can operate to constrain the narrow economic self-interest of firms and individuals that would otherwise result in misconduct. However, he was clear that, in his view, firms and individuals have social responsibilities over and above those manifested in specific rules. Because the FCA is interested in preventing misconduct from occurring and not simply mopping-up afterwards, it must seek to engage with culture whilst recognising that it cannot completely control or shape it.
Bailey singled out two recent regulatory developments as being important for creating the right incentives to shape and create good culture. The first is the Senior Managers and Certification Regime (SMCR). Bailey said that fundamentally SMCR is about the simple yet profound concepts of responsibility and accountability. Senior managers are responsible for the activities under their specific control and accountable for that responsibility. The second is the introduction of remuneration regulation for Banks. Bailey said that the regulator was not concerned by the level of financial remuneration that preceded the crash per se. Instead, the regulator's concern related to the incentives behind the remuneration, particularly those relating to variable remuneration (bonuses). Bailey said that the UK approach was now to ensure that individuals had "skin in the game" through rules requiring deferral and backed up with malus and clawback. He reiterated that, as with SMCR, the underpinning concept behind the regulation of remuneration, namely requiring some "skin in the game" was simple and profound. He said that it was crucial for management, particularly boards, to implement these reforms in order to bring about the much needed cultural change.
More generally, Bailey espoused the need for what he described as an engagement by firms and individuals in "positive culture", which was about social and ethical engagement, not simply about compliance with the latest regulation. He said that "positive culture" encompasses wider themes such as equality and diversity. Bailey said that he was in favour of monitoring and supporting the implementation of positive culture through benchmarking and targets, otherwise in his view change would never come.
Bailey has spoken before on the subject of culture, including in his final speech as CEO of the PRA (on 31 May 2016) "Culture Matters a Great Deal". That speech explored many of the same themes and included the bold statement that every major conduct or prudential failing is based on an underlying cultural failure. The backdrop of the current speech is mixed for Bailey. For example, whilst SMCR has been implemented, there has yet to be any reported case of enforcement and as such the ability to gauge its success is limited. Bailey has also received some criticism in the media for the regulators handling of high profile instances of misconduct, such as the RBS Global Restructuring Group and Paul Flowers (former Co-operative Chairman) "The FCA prohibits Paul Flowers".