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Firms Need a Strong Culture for Good Conduct, Says the FCA

While a rise in stringent regulations has been the predominant means of enforcing compliant behavior since the financial crisis, the FCA also sees the importance of good culture in creating positive change in firms. Find out more in this blog.

Back in 2006, Warren Buffet ended a memorandum to his employees at Berkshire Hathway with this oft-cited phrase:

Culture, more than rule books, determines how an organization behaves.”

And a recent speech by Andrew Bailey, Chief Executive of the FCA, comes to a similar conclusion. In the speech, Bailey looks specifically at the role of culture within the investment management sector, where major growth has put an increased focus on the conduct of asset management firms.

Good Culture in Asset Management Firms: Why It’s Critical

The growth of the asset management sector has been significant in the UK over the last year. As Bailey notes, assets under management in the UK’s investment management sector grew to £9.1 trillion in 2017, up from £8.1 trillion in 2016. And one factor behind this growth is the increase in individuals investing their money—whether that’s through investment and pension schemes or their own independent efforts.

Bailey makes the point that while only 20% of assets under management in the UK are managed for retail investors, behind the 80% of institutional investors are often individuals. Indeed, he states that ‘probably around three-quarters of households in the UK are direct or indirect customers of investment managers.’

This is the reason, for Bailey, that asset management firms are such a good example of the role culture can (and should) play in encouraging good conduct.

“This is an area where we are asking a lot of individuals, and so it is reasonable that they will want to put their trust in experts who can assist with advice and guidance on decisions on saving and investment. And this brings into play the culture and behavior of those in whom trust is placed, the investment managers and advisors – so, the stakes are high, and getting higher…”

Issues of transparency and communication become far more critical when it comes to situations where individuals are investing large amounts of money and are expected to understand the nuances of a complex financial system. Bailey highlights issues such as a lack of explanation on fees and charges, which can have a significant impact on savings over a long period of time.

For Bailey, the effectiveness of communication in these situations is a ‘test of culture’, because it requires firms to have individuals who challenge complacency and ask difficult or challenging questions.

But the overall point is that this type of healthy, strong culture is something that rules alone cannot achieve. Bailey says that while the FCA are regulators who predominantly use rulemaking as a means to forbid or permit behavior, they are also now expanding their approach to one where regulation and supervision can encourage culture change.

Ethical Investment: A Glimpse Into a Better Future?

In the same speech, Bailey also looked at the rise of ‘long term patient capital’ and ethical investment as areas that have the potential to have a significant impact on trust in the asset management sector.

“I would argue that an industry which enables the support of patient capital and innovation, and of ethical investment and social responsibility, will be one where the trust will be stronger and deeper, and the culture will prosper. And, the regulator can help by enabling change to happen.”

Ethical investment, by its very nature, gives consumers increased transparency and visibility—and its rise can only benefit the wider industry.

What Does This Mean for Firms?

While Bailey’s speech focused on asset management specifically, the key messages apply to the wider financial services sector.

Firms cannot ignore the importance of a strong culture in minimizing the risk of bad behavior. Creating a culture where everyone feels comfortable and able to speak up is just as important as ensuring that staff are informed and aware of rules and regulations.

Bailey's speech also demonstrates that regulators are looking at firm culture as well as their compliance with key rules and regulations, and this is likely to become more of a focus in the future.

We’ve recently relaunched our suite of market conduct courses, including our Conduct Rules for Asset Managers course. Explore our suite of compliance courses and request a free trial.

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