FCA highlights the importance of culture within UK financial services

Emily Shepherd, the regulator’s chief operating officer, was speaking at a recent industry event, focusing on the role that culture and conduct play in positive outcomes for the financial services industry.

She said that when the FCA has investigated failures of consumer protection or market conduct, the root cause is usually failings in culture and governance.

“The FCA has deliberately tried to shift the conversation around risk, encouraging more open discussion about the nature of those risks, who should bear them, and just what level of risk we are willing to allow into the system,” Shepherd said.

“The conversation is evolving, but what is absolutely clear, is that the risk-taking required for long-term growth will be reliant on a foundation of healthy firm cultures.”

The FCA has been in discussions with the government about how best to support its economic policy and has argued that to achieve deep reforms, there must be acceptance of greater risks and a prioritisation of resources.

Jonathan Cavill, expert in financial services at Pinsent Masons, said: “The FCA has called on the government to set ‘metrics for tolerable failures within the overall system’ in order to enable it to regulate for growth.”

“The FCA’s call on firms to embed healthy cultures which do not ignore consumer harm is part of the regulator’s contingency planning,” he said.

“However, with the steady ongoing shift to outcomes-based regulation of financial services, the government’s growth agenda does not mean less regulatory risk for firms. It means firms will be expected to make more judgment calls and will face less regulatory predictability overall.”

The Labour government has continued to champion  reform of the senior managers and certification regime (SMCR), first proposed by the 2022 to 2024 Sunak Conservative government, as part of the reform package known as the ‘Edinburgh reforms’, that aimed to support a “dynamic, stable and competitive financial services sector”.

Shepherd’s speech also touched on the government’s commitment to reforming the SMCR, citing positive feedback on the regime from firms around accountability assisting with good governance and business success.

The FCA is currently working with Treasury and the Prudential Regulation Authority (PRA) to review the SMCR for efficiency. The FCA has previously defended the SMCR as a bulwark against toxic culture.

Elizabeth Budd, expert in financial services regulation at Pinsent Masons, said: “The FCA’s comments are in stark contrast with allegations that the SMCR makes the UK unattractive for business.”

“Labour has taken on the previous government’s cause of reforming the SMCR, but Labour’s proposed reforms seem to be confined to the Certification Regime. Certification covers specific functions that aren’t Senior Management Functions, but can have a significant impact on customers, the firm or market integrity.” she said.

“The FCA has not provided details on its work with the Treasury and the PRA, save to say that the aim is to make the regime ‘even more efficient and effective’. Watch this space.”

The speech was made shortly following the announcement of a package of reforms to the financial services sector by the Labour government, which aims to drive growth.

Daniela Ivanova, expert in insurance regulation at Pinsent Masons, said: “On the backdrop of a re-evaluation of the diversity, equity and inclusion agenda across the Atlantic, the FCA has made it clear that it sees it as a fundamental part of a healthy culture in the UK financial services sector.”

“Firms seeking to adjust their public image may wish to consider what regulatory impact any public relations re-positioning on the issue of diversity and inclusion may have,” she said.