Culture and the Senior Managers Regime - a virtuous circle?

09 May 2016

The Financial Conduct Authority (FCA) has recently published its business plan and it has a strong focus on culture, governance and accountability. One of the outcomes that it is seeking is an industry trusted by its customers and the regulator believes that embedding cultural change is key to achieving this. I don't believe many people would disagree but the question many are asking is what to do about it in practice?

Many banks have been undertaking cultural programmes for the last few years and have made some changes. Most, but certainly not all, have clearly stated a vision, a purpose and supporting values. Some have developed underpinning behaviours and a few are starting to consider how to measure their cultural progress. It can be challenging to explain why investing in, or continuing to invest in, a cultural change programme is a worthwhile cost and, with the recent poor financial results that many banks have shown, the pressure to reduce discretionary costs is increasing. This may well reduce the appetite further for spending money to drive cultural change, which can be seen as a 'nice to have'.

What is clear, however, is that despite the work that has been done to date, the views of the industry's customers haven't changed significantly and the trust in the industry hasn't yet returned. The way a Board communicates its purpose, vision and values is often very different to how it feels to its customers and to its employees. How many people have sat in meeting rooms where a firm’s values are written on the walls but not being lived in the meeting that they are in?

I believe strongly that a focus on culture isn't simply a 'nice to have'. Every week we hear about another corporate failure - whether it is a financial failure or a scandal that impacts on the reputation of an organisation. At the heart of many of these failures is a failure of culture. A desired culture that isn't embedded throughout the organisation, a culture that hasn't responded to a changing external environment or a culture that doesn't allow its employees to speak out when they see something happening that they don't think is right.

So what can firms do to help drive cultural change? One of the answers to this question lies in the embedding of the requirements of the Senior Managers Regime (SMR). The SMR is driving personal accountability and requiring senior managers to be comfortable that they are taking reasonable steps in discharging their responsibilities. As discussed in our recent SMR thought paper 'What it really takes to sleep soundly at night,' senior managers can't do this without ensuring that their strategy, governance, business model and underlying culture are aligned. They need to be confident that the culture throughout their business encourages people to behave in the way they expect and empowers people to speak out when they see issues arising. Focusing on the culture in each part of the firm, and making sure it is aligned with the Board's desired culture, will not only help drive cultural change within the firm as a whole but it will also provide the senior managers with more comfort in their responsibilities in the SMR. By each senior manager thinking through how they are confident that their firm’s desired culture is in place will in turn help the Board measure cultural progress.

The FCA wants to see progress on culture, alongside the embedding of the SMR. Senior managers want to see that an appropriate culture is embedded to allow them to be comfortable that they, and their teams, are acting reasonably. Boards want to better understand the cultural progress they are making and what action needs to be taken to drive further change. Thinking about the link between culture and the SMR could provide one way of addressing these different wants.

 

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Comments

Thanks Vik, it's interesting that the messages from the Regulators here in the UK also resonate with your US clients. We also see organisations from outside of the FS industry dealing with exactly the same issues. In upcoming blogs on both the Senior Managers Regime and on culture, we'll be sharing what we think works well and what we would encourage clients to be focused on. I'll look forward to your thoughts on those as well.

Sarah - This was a really great article that lays out some of the challenges. This concept of the tone in the middle is something that I think a lot of organizations struggle with, not just in the FS / regulatory space, but more broadly even when it comes to putting strategy into execution. It would be great to hear about what works well and seeing if there are some key lessons learned to be applied elsewhere.

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