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EXCO SUMMARY PAPER

Subject FCA'S APPROACH TO CULTURE IN FIRMS

Date of meetin

29 September 2015

Ex Co s onsors

Jonathan Davidson and Megan Butler

Sign-off

Authors Annex Purpose of a enda item

Has the sponsor approved the paper? No

Jacqui Boyd

For Decision

Section A: Executive Summary

Summary Summary

This paper seeks decisions from ExCo on our proposals as to how the FCA should best engage with firms and others about culture issues at firms, taking into account the many strands of culture-related work currently being undertaken within the FCA and externally.

We are bringing these proposals because the FCA's external communications about culture may be insufficient for our continuing role in influencing firms to focus on culture change as the financial crisis recedes and the economy recovers. From house view and baseline view work, culture appears to be a key driver of significant risks in every sector and the root cause of recent high-profile and significant failing. Our approach of setting a framework for all FCA activity will enable individual sectors better to plan their specific culture­related work and to position that successfully as part of a coherent FCA strategy - reducing duplicative, overlapping work and identifying opportunities for efficiencies in the FCA's overall programme of culture-related work. We believe that our proposals will help the FCA in the plan and budget round by contributing to decision-making as to the prioritisation of key initiatives and the allocation of resources.

A clear and consistent FCA narrative in relation to culture, supported internally by an approach based on the existing 'culture clusters' framework, will enable better consistency in the FCA's external messages to firms and will allow each sector to tailor their supervisory approaches and action plans to reflect the idiosyncratic culture-related risks in a way consistent with the FCA's overall approach.

Our proposals include that the FCA engages with firms more proactively in relation to culture issues, building a collaborative and constructive dialogue between the regulated and the regulators. Our proposals are forward-looking and catalytic; they will help firms to take ownership of the issues and responses to them. In this way we will contribute to a meaningful and lasting transformation of culture in firms, achieving this by enabling firms to take ownership and responsibility. We believe that success here would have a powerful positive impact on the FCA's achievement of our statutory objectives.

We propose a plan with three key elements:

1. Strengthening the FCA's internal culture resources and capability to help supervisors make judgements about firms' and sectors' culture and deliver effective mitigation to related risks;

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2. Bringing consistency and clarity to our external messaging relating to culture;

3. Engaging with the industry more proactively outside of regular supervisory process in order to deliver our key messages relating to culture and to ensure that firms continue to focus on this issue.

The annex sets out our proposals in greater detail, and gives an overview of the FCA's culture-related internal work-streams and (where these may affect the FCA's work) ongoing external initiatives.

Issue

• In preparation of the House Views, culture has been identified by all sectors either as a risk or a driver of other risks. The scale of the problem may not be represented adequately unless we consider and address culture risk from a cross-sector point of view.

• Recently a number of professional industry panels, international regulators and other bodies have published an array of reports on culture focusing on two main areas: risk culture; and focus on incentives and performance management. The reports olten present conflicting recommendations over what regulators should or should not be doing about culture.

• We have some way to go to meet the expectations of firms and consumers in providing clearer guidance and examples - especially as

. to what "good" looks like.

Background

Culture drives individual behaviours which in turn affect day-to-day decisions and practices ir.i the firms we regulate. We know that poor culture can result in severe customer detriment and ineffective markets (PPI, FX). We recognise some firms have made progress; however, this has olten been limited. We receive multiple signals from firms and others externally asking us to be clear on what success looks like in achieving cultural change and what our expectations are in this regard.

We also recognise the need to engage with the industry much more proactively in this space, including outside of the supervisory process, to sustain the commitment of the industry to deliver those changes and to support them in making this happen.

We are committed to sharing with firms examples of what good (as well as poor) looks like, having meaningful conversations about culture in the supervisory process. At the same time, for culture change to be sustainable, it needs to come from within firms, driven by the commitment of senior management who recognise challenges and the commercial benefit of creating good culture.

Where we are now The annex sets out the work currently taking place in the FCA with a focus on culture. The annex gives an overview of the current 'culture clusters' approach to culture supervision and the current thematic project on culture in banks as well as outlines external work in this space.

Proposed approach

See the infographic at the end of this paper.

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• We see the FCA acting as a catalyst in a cooperative relationship with the industry, various industry panels and professional bodies. The financial services industry needs to see that we are joined up in our efforts to promote good culture.

• A consistent approach supported by the existing framework of culture clusters that can be applied flexibly by the sectors to suit their priorities and needs. This will be facilitated by the Culture Working Group to ensure consistent messaging.

• Long-term strategy of coordinated communication and events will help firms consider and improve their own cultures as well as help supervisors have meaningful conversations about culture with their firms and sectors

• As regulators we need to engage with industry stakeholders, and facilitate the development of industry standards and measures around cultural indicators, and to ensure that firms continue to focus on this issue

We want to engage with firms in the way that is most effective within the limits of the regulator's role. Some of the most important components of sustainable culture change are having the right tools, having a meaningful reason to do so, being incentivised for the right things and leading by example. While we are carrying out incentives and remuneration work already, the proposed approach will fill the gap in giving firms and the industry as whole a binding narrative and reason to change culture that is aligned to our objectives and that enables them to develop the tools that they need.

How are we going to do this?

We will influence firms by first setting clarity over our existing framework internally, followed by listening, sharing experience and communicating with firms about culture in a more explicit and proactive way.

Key messages will include references to accountability, ethics, and risk culture. We will also make it more clear internally and externally that good culture is essential to building commercially sustainable business that is based on trust.

We will not prescribe 'what' a firm's culture should be, although we will clarify some high-level expectations and share our experience of good and bad practices. We will also not prescribe 'how' firm's should implement cultural change but we will bring together industry stakeholders and facilitate engagement so that firms understand the importance of getting culture right and have tools to deliver sustainable culture change.

The high-level approach includes the following components:

1) Improving clarity over internal framework, tools and training available beyond Supervision to be able to join the dots with other areas such as Enforcement or Authorisations.

2) More frequent and coordinated use of the existing communication channels to deliver key messages, for example by using the speeches delivered by newly appointed directors, leveraging cross-sector and multi-firm work, dovetailing with - and in an increasingly positive way - with communications about the new accountability regime.

3) Sector-specific plans: our overall framework is flexible enough to be operationalised according to each sector's specific needs and priorities. The Culture Workinq Group will have a role as facilitator and

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coordinator between sectors so that the approach and messages remain consistent and mutually reinforcing.

4) Industry engagement: this can take form of, for example, round-tables with industry, professional bodies and academics on a regular basis and a series of events dedicated to discussion on particularly challenging areas e.g. middle management.

5) Clear link to Accountability: we will make clearer links between culture and accountability, bringing back more attention to the principles and the long term positive goal of the new accountability regime.

Thematic Project

As part of this update, we have considered the current thematic work on culture in wholesale and retail banks - a 2015/16 business plan commitment. We recommend changes to this traditional thematic work in line with the supervisory approach. The key changes are:

• Focus on retail banks; • Stop further assessment of firm practices, but use our initial discovery

work relating to retail banks to help inform our engagement activity; we will feed back to individual firms where possible;

• Narrow the scope of the retail part of the project to look at middle­managers, and to take out of scope how frontline staff raise concerns and how these are acted on;

• Act as a catalyst in a programme of engagement activities to enable firms to address the challenges faced in culture change at middle-management level. ·

These changes will need to be communicated externally including to the firms involved.

[Add a para on the wholesale part of the project]

Risks to this approach

• Resources - currently limited resources available in the CSD • Timelines - some internal projects are already under way • Cooperation - willingness of project owners to coordinate with other

projects

Policy implications

With new rules on remuneration, the SMR and the guidance on performance management and financial incentives for frontline sales staff in place, we do not envisage further policies to be developed at this stage. Best approaches will be idiosyncratic to the firms and what works well in one may not be the answer in another. We would not recommend therefore any specific rules in this area in the near future.

Timing

CWG will continue rolling out internal training and communications on culture as planned.

Speeches: we will work with Communications to best use new directors' speeches to support our approach.

Events to start in 2016: CSD will liaise with sectors after prioritisation to develop a consistent sector-based plan for the coming year.

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Proposed Ex Co decision/ discussion

Alternative options ExCo should consider

Recommend ation(s) from other relevant Committees

We seek ExCo's agreement to: 1) The FCA's overall 'catalyst' approach to culture which will deliver clarity

to firms on our expectations of them and support supervisors on how to make sound judgements on firms' cultures;

2) Develop a communications strategy to make more frequent and coordinated use of various communications channels to deliver key messages and clarify high-level expectations;

3) Within the scope of the overarching approach, sectors to develop a strategy of engaging with firms about culture that is specific to their sector's priorities; the Culture Working Group to facilitate aligning approaches across sectors to ensure consistency;

4) Culture thematic project: stop "traditional" thematic work following the initial research phase in the retail sector and instead act as a catalyst to drive faster change in line with the supervisory approach outlined above. [add line on wholesale]

We see it as very important to continue with an internal education plan via Culture Forums, Hub updates, and strengthening resources to help supervisors and other colleagues. We see a good opportunity in engaging with firms in this way to advance our own objectives - although how it is operationalised can varv accordina to current appetite resources and so on. n/a

Section B: Internal considerations

Internal consultation

In gathering information about internal and external culture-related work we have consulted with the Culture Working Group, Chief Economist's Department as well as International Department and the Culture Thematic Advisory Group.

An earlier dralt of this paper was circulated to Linda Woodall, Jonathan Davidson, Valerie Gordon-Walker, Megan Butler, and Gunner Burkhart who considered and agreed to this recommendation.

Their view is that... ..

The paper was also circulated to Julia Hoggett, Rob Taylor, Alison Barker, Karina McTeague, Clive Gordon, Simon Green and Caroline Gardner, well as a number of other relevant stakeholders, such as the Culture Working Group, - (Risk), Tom Spender (Enforcement), Communications, Chief Economist's Department and Julia Tennant.

Their views were that.. ..

In particular, Karina McTeague felt that lack of coordination of culture-related work internally risks are confusion, misdirection and poor traction - which will also be visible to the outside world. She felt that the CSD should have a vital role to play in providing oversight of all activity, to provide a streamlined and well-directed approach, identifying common themes, having an overview of what external engagement is being undertaken, and supporting embedding the approach to culture across the FCA - not just Supervision. She suggested that resource should be allocated to this on an ongoing basis.

Any issues raised?

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GCD views Natalie Baylis, Chief Counsel for Markets, Funds and Authorisations (received 14/09/15):

"There are no siqnificant leqal issues in this paper in the current draft" Competition The proposal set out in the earlier sections is consistent with the current &economic approach adopted by the FCA. Therefore, there are no incremental costs implications arising from this strategy.

Mark Bethell, Competition (received 14/09/15): FCA activities that increase firms' incentives and those of their staff, to provide better outcomes for consumers in terms of price, quality, range, service and innovation can be seen as in line with the FCA's competition objective.

Equality & We have completed an Equality Impact Assessment to assess the impact of diversity our proposals on any individuals with protected characteristics. We are not implications expecting equality and diversity implications from the prosed approach.

CR views requested on 14/09/2015

People, CSD resources: to be confirmed finance, system and value for

We will also be drawing on assistance from the Culture Working Group and Communications.

money implications Going forward, each sector will develop proposals on how they are going to

apply the approach in their local areas, although the impact on resources should be low.

Impacts on The main impact would be on Communications department which would have other a key role in supporting the coordination of messages. business areas

PRA Interfaces

It is important that we work closely with the PRA on the topic of culture. While our objectives are different, there will be any areas of common interest, such as the SMR, where we must ensure that our messages are aligned.

Follow-up CSD to liaise with sectors to help them develop proposals on how they are going to apply the approach in their local areas and coordinate this via the Culture Working Group. The CSD will also work closely with Communications to inteqrate the messaqes on culture and accountabilitv.

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What Is the FCA trying to achieve in 'Culture'?

FCA Regulatory Experience

Industry Knowledge

FCA culture programme

Feedback Loop: Sector specific views of culture also built

into House Views

Act as a Catalyst in the 1ndustnes wregulate

e

Culture Working Group

Develop and leverage tools for individual sectors to use

Academia, other industries

Consultant expertise

Tools: Thematic reviews

Conferences Publications SMCR, etc

Programme Activity

Outcomes

Industry: Clarity over expectations, tools to deliver change

FCA: Definition, view, priorities Supervisors: Clarity over tools, interventions and expectations

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