On 4 September 2020, the FCA published its "five conduct questions" report ("Report") in which it outlines wholesale banking industry feedback for 2019/20. The five conduct questions are part of the FCA's strategy for supervising wholesale banks and focusing on conduct and culture.
As pupils return to the classroom and are reminded of school values, the Report is a timely note from the regulator of the high level principles and standards of behaviour that it expects from the firms and individuals it regulates.
In a change of approach from previous years, the FCA has focused on the following: (i) identifying conduct risk; (ii) remuneration as a key driver; (iii) culture, safety and leadership; and (iv) purpose, principles and values. The FCA also widened its engagement, looking at staff working at levels below senior managers in financial services firms (for example Vice President level). The report summarises findings from roundtables held with these so-called "Engine Room Staff".
Overall, the FCA wants firms to be more proactive in terms of identifying conduct risks and be able to adapt as conduct risks evolve. It confirms that conduct risk and culture will remain on its regulatory radar. In terms of what we should expect to be the regulator's focus following this 2019/20 engagement, the FCA suggests that firms may want to consider the following issues:
- Have staff had sufficient training to be able to identify conduct risk in their day-to-day roles beyond general awareness?
- Does the firm’s overall framework for identifying and mitigating conduct risk reflect adequate, bottom-up exercises to understand those risks?
- Do staff understand how their own roles and responsibilities can potentially create conduct risk or harm for the customers, the firm or markets?
- Are messages from the top, including corporate purpose and values, translated in a meaningful way to the specific roles and responsibilities, targets and objectives at the individual and unit level across the firm?
- Is enough being done to support line managers in their efforts to enable their teams to perform at their best?
Key issues
- COVID 19. Unsurprisingly, COVID-19 gets a mention, with the FCA stating that the pandemic has resulted in operational changes which bring new conduct risk challenges. The FCA questions the robustness of oversight arrangements in workplaces and calls for firms to engage staff at home so as to identify potential sources of harm in individual environments.
- Tone from Within. At the earlier stage of its engagement with firms in relation to conduct, the FCA emphasised the importance of the "Tone from the Top" (i.e. Board; Chair; CEOs and Global Business Heads). This approach included its Annual Conduct Meetings with top management executives. This approach was later modified to reflect recognition of the importance of the immediate line manager i.e. "Tone from Above". In this report, the FCA introduces the concept of "Tone from Within" as another layer in relation to its approach to conduct risk. This represents an individual's mindset, preferences, beliefs, habits and pre-dispositions. It is designed to get staff to think about how they might react in relation to conduct risk issues. The FCA believes that the development of the "tone from within" is crucial to corporate change.
- Behavior Curve. The FCA makes reference to the Behaviour Curve it introduced in its May 2019 report. The curve depicts a range of individual behaviour, from good to poor (although it is not designed to reflect actual proportions). The FCA emphasises that behaviour is not static and that different circumstances may raise or lower the risk of poor conduct (e.g. news about corporate restructuring or introduction of challenging targets). The FCA stresses that conduct risk is not reduced simply because an approach has been found to assessing and managing it.
- Identifying conduct risk. The FCA considers that more work needs to be done in relation to improving the ability to identify conduct issues in immediate surroundings and identifying issues arising in day-to-day work. Roundtable discussions revealed an understanding of topic areas such as conflicts of interest, material non-public information, suitability, fairness to customers, diversity and inclusion and non-financial misconduct. However, the FCA noted there was a lack of awareness of the wider conduct issues. The FCA states that these include enabling client misbehaviour, failure to train or be trained, new risks arising from automation, the impact of Libor transition and risks related to staff working from home. Firms are encouraged to promote comprehensive "front of mind" understanding of conduct risk and perhaps complement promotion of these skills with good mitigation decisions.
- Remuneration. The FCA notes that larger wholesale banks have begun to incorporate separate ratings for "what" annual results have been achieved and "how" they have been achieved in terms of personal behaviour and conduct. Conduct was said to form up to 50 percent of performance appraisals in many firms. The FCA notes that although firms claimed that the "how" aspect versus the "what" aspect was often as a 50:50 balance for individual performance assessments, the FCA found the impact on remuneration of good behaviour was minimal. Emerging best practice identified by the FCA includes: carefully conducting assessments including peer review; formally weighting conduct (the how) versus other factors (the what) for impact; and actively collecting and analysing the data generated across the whole firm.
- Culture, Safety and Leadership. In last year's report, the FCA noted that firms had whistleblowing policies and processes in place and were looking to ensure a speak up culture within workplaces. This year, the FCA comments that although official whistleblowing and other escalation channels exist, feedback suggests that these only seem to be used for particularly serious cases. Participants at roundtable discussions stated that they experienced anxiety when dealing with cases of "border line significance". There was consistent emphasis from participants that direct line managers played a decisive role in enabling whistleblowing. Best practice identified by the FCA includes: visibility of CEOs, executives and managers as leaders of culture and adopting a more proactive stance in ensuring all levels in the firm have a psychologically safe environment; and appointing "conduct ambassadors" who are formally appointed and trained for these roles.
- Purpose, principles and values: In last year's report, the FCA noted that firms had made considerable investment in terms of purpose statements and the promotion of vision, mission, values and principles. It argued that linking conduct initiatives to an active concept of purpose could result in better outcomes. In its 2019/20 roundtable discussions, the FCA found some confusion in terms of corporate purpose and short-to-medium term business goals. Some frustration was evident in terms of linking the purpose of a firm and an individual's own roles and responsibilities. Participants stressed the importance of clarity of a corporate purpose statement and the ability of a manager to explain the contribution of various business units to the wider corporate purpose. Participants were also receptive to the idea of aligning personal purpose with that of corporate purpose.
Next steps
- Firms should take the time to consider the messages in this report and how their practices, policies and procedures reflect the FCA's expectations. Particularly around good conduct being rewarded and how this impacts remuneration structures. If a firm doesn't already have one, now may be a good time to consider whether a conduct and culture programme would be a worthwhile investment, it would certainly be seen as a positive step forward in the regulators' eyes.
Co-author: Bisola Williams, Expertise Legal Manager
