On 9 May 2016, Andrew Bailey addressed the City Week conference on a now familiar topic: the importance of culture in financial services. He made plain that culture remains a firm focus for both the PRA and the FCA and that senior management have a crucial role to play.
Unsurprisingly, a point of emphasis in his address was the role of senior management in forming and implementing a positive culture at all levels of their organisations. Together with consideration of credit risk, market risk and liquidity risk, Bailey added "hubris" risk, and the risk of "blinding over confidence" and pointed to instances where management are "so convinced of their rightness" that they fail to question the direction of travel. Bailey pointed to the implementation of the Senior Management and Certification regime, a regime that embeds responsibility over culpability, as a significant step forward in this regard, and pointed to the regime as being an "important hook" to assist firms in shaping their culture.
Bailey accepted that regulators cannot and should not seek to determine the culture of firms but noted that they can have significant influence. Regulators will look to firms to enshrine robust governance and effective challenge, the willingness to respond promptly to bad news, remuneration structures that ensure that individuals have "skin in the game" and risk management and internal audit systems that root out poor incentives and weak controls. Bailey focused in particular on the work that had been done with firms since the financial crisis to seek to align the private interests of a firm with the public interest, for example, action taken on loss absorbency.
Bailey also spoke about the public perception of the financial services industry. He observed that the public perception of banking, and some other areas of finance, remains too much towards the exploitative "Greed is good" end of the spectrum and that public opinion does not recognise positive changes that have been made by firms since the crisis. He believes that culture is an important part in demonstrating the changes that have been made and also recognised the role that regulators have to play.
Enforcement watchers watching the culture debate over recent years will no doubt have formed the view that enforcement action for having a poor culture sounds very improbable. What is far more likely is enforcement action for failings that have allowed poor culture to exist. In that sense, Bailey's address was interesting. He explained that, in his view, the culture of a firm is a product of a wide range of contributory factors, including the stance and effectiveness of management and governance, the structure of remuneration and incentives, the quality and effectiveness of risk management, and the willingness of people throughout an organisation to adopt and adhere to "the tone from the top". Bailey boldly stated that, in his assessment, there had not been a case of a major prudential or conduct failing in a firm which did not have among its root causes a failure of culture as manifested in these areas. Bailey will shortly take up his new role as CEO of the FCA, and we will see in due course how his words may translate into enforcement action.