By Hannah Laming, Partner, and Craig Hogg, Associate at Peters & Peters Solicitors LLP
Before the coronavirus pandemic sent shockwaves through the UK economy, the Financial Conduct Authority (‘FCA’) stepped up its efforts to promote good governance and culture in the financial services sector, with the publication of its first discussion paper of 2020, entitled ‘Transforming culture in financial services – driving purposeful cultures’ (‘DP20/1’).
Published on 5 March, DP20/1 comprised a collection of firm and sector-specific essays, which drew from a broad range of contributors – including Zurich UK, The London Institute of Banking & Finance, and the University of Bath – with each piece discussing the concept of ‘purpose’. The aim was to better understand what constitutes effective governance and culture within the financial services sector.
The message outlined by the FCA was clear: although the regulator does not prescribe a ‘one-size-fits-all’ culture for the industry, it considers that a healthy and ‘purposeful’ culture within firms “leads to better outcomes for consumers and markets, and healthy and sustainable returns for shareholders”. A month later, the FCA re-emphasised the importance of good governance in the sector in its 2020/21 Business Plan, in which the regulator further underscored the importance of the Senior Managers and Certification Regime (‘SMCR’) in fostering healthy cultures and fair customer outcomes.
FCA’s wide regulatory ambit
The FCA’s policy efforts in this area are important – the regulator has oversight over a large and diverse population of financial services firms. The SMCR, for example, has been successively expanded over time: in December 2019, the scheme was first extended to encompass FCA solo-regulated firms, and is currently set to be introduced for benchmark administrators and appointed representatives from December 2020 onwards.
Although the deadline for solo-regulated firms to have completed their first “fitness and propriety” assessment of certified persons has now been delayed until 31 March 2021 on account of the COVID-19 pandemic (with the FCA further consulting over the appropriate deadline for other SMCR requirements, such as the date when the Conduct Rules will come into force) the expectation is that financial services firms continue to embrace SMCR initiatives.
In a statement issued at the end of June, the FCA stated that solo-regulated firms should continue with their SMCR programmes and, if they are able to certify staff earlier than March 2021, they should do so. The FCA also reminded firms that they should not wait to remove staff who are not fit and proper from certified roles. The expectation further remains that Conduct Rules training is effective, so that staff within solo-regulated firms are aware of the Conduct Rules and understand how to apply them.
Defining ‘healthy culture’
Despite this wide regulatory ambit, some common ground over what constitutes healthy cultures is emerging. Non-financial misconduct, such as serious personal misbehaviour, bullying, discrimination and sexual misconduct in the workplace, now fall squarely within the reach of SMCR. More specifically, the FCA has made plain that tolerance of non-financial misconduct will amount to a driver of unhealthy culture and senior managers who countenance or foster a culture of this kind will not be considered “fit and proper” under the SMCR.
In addition to the concept of ‘purpose’, in DP20/1, the FCA identified a further element as crucial to developing a healthy culture within firms: so-called ‘safety’. While ‘purpose’ encapsulates what a financial services firm should be trying to achieve (described by the regulator in the foreword as “the gravitational force that draws in and aligns teamwork, engagement, inspiration and creativity”), for a culture to be safe, the FCA states that employees must feel comfortable expressing their opinions and must be listened to when they do. Effective whistleblower protections, diversity and inclusion, and fostering psychological safety through a “speak up, listen up” culture are therefore of central importance to this mission.
The FCA’s approach to effecting cultural change should, if implemented expansively in the UK, serve as a model for financial regulatory bodies around the world. Back in 2018, the Chairman of the U.S. Securities and Exchange Committee, Jay Clayton, applauded the FCA’s “illuminating” early work in the area, observing that culture within firms is “collective” and “defined by the countless daily actions of its people”. The conclusions reached in DP20/1 continue this theme: for healthy cultures to develop, the FCA – and those international counterparts following its lead – must continue to act ambitiously to implement change across the entire hierarchy of financial services firms.
NDAs: a roadblock to long-lasting change?
Despite these positive developments, one continuing threat to the FCA’s goal of promoting purposeful and safe cultures is the ongoing use of non-disclosure agreements (‘NDAs’) to silence whistleblowers or those speaking up against discrimination or harassment. Such mechanisms hold the potential to wholly undermine compliance efforts, and to drive down transparency in the financial services sector.
For example, in its June 2020 report, ‘Silence in the City 2’, the whistleblowing charity Protect cites the case of an unnamed compliance professional working in a ‘financial institution’ who was subjected to bullying after blowing the whistle on financial irregularities in her firm. The individual concerned ultimately left the firm involved, but only after agreeing a settlement with the company that included signing an NDA.
While the All-Party Parliamentary Group on whistleblowing has recommended that NDAs be banned in whistleblowing cases, and the Advisory Conciliation and Arbitration Service (‘ACAS’) published guidance for employers and workers to that effect in February of this year, it still remains unclear to what extent this position will be embraced by financial services firms. For the time being, NDAs continue to be a mainstay of corporate reputation management.
Whilst the FCA has invested heavily in its ‘healthy culture’ initiatives to date, without greater regulation – particularly surrounding agreements like NDAs – its work to bring about meaningful change in the sector will continue to be undermined. To repeat the words of DP20/1 contributors, Professor Veronica Hope Hailey and Dr Imogen Cleaver of the University of Bath, change is needed “to move away from the orthodoxy that the role of directors is to optimise the return to shareholders, often at the expense of other stakeholders, and towards seeing businesses as ‘purposeful’, as part of society rather than ‘apart’ from society.”