Speech by Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations, given at the 6th Annual Culture and Conduct Forum.
Speaker: Jonathan Davidson, Executive Director of Supervision - Retail and Authorisations
Event: The 6th Annual Culture and Conduct Forum for the Financial Services Industry
Delivered: 26 November 2020
Note: This is the speech as drafted and may differ from the delivered version
- Culture remains a key area of focus for the FCA.
- During the coronavirus (Covid-19) crisis, financial services firms have supported consumers, and been part of the solution rather than the problem, providing an opportunity to rebuild trust in financial services moving forwards.
- While coronavirus might be the most immediate challenge firms are facing, it isn’t the only one – the need to break barriers around diversity and inclusion, and climate change and sustainability are key challenges that also require urgent attention.
- Firms with healthy cultures – cultures that are purposeful, safe, and support environments that are diverse and inclusive – will be better placed to tackle these challenges.
- The financial services industry has the opportunity to make real progress, driven by social purpose.
Culture transformation and the interaction with business models has been my passion as a regulator for the last 5 years.
I’m also pleased to be here because I had organised a conference in the spring to bring industry leaders together and generate a consensus about purpose in financial services and the way forward. But then coronavirus came along and I cancelled our conference. We have all turned our energies to supporting customers and colleagues as they faced the health and economic challenge of the pandemic.
A lot has changed since delivering the keynote at this event last year, but one thing that hasn’t changed is that culture remains a key area of focus for the FCA.
Healthy cultures are purposeful, diverse, safe and inclusive
The specifics of your culture, like your strategy, remain up to you as leaders. But there is a growing consensus that healthy cultures are purposeful, diverse and inclusive.
A culture where all employees feel a purpose beyond just making money while avoiding regulatory censure. A culture where a job is not just a job. A culture where all employees feel safe. Safe from retribution for speaking up. Safe from harassment and victimisation.
In fact, an inclusive culture where all employees feel listened to and recognised for what makes them special. A healthy culture is one where diversity is the fertile soil in which innovation and improvement flourish.
Diversity and inclusion
Without safety, without inclusion, the value of diversity is lost and the diversity will eventually wither and die.
Over the last few years, we’ve increased our focus on non-financial misconduct because a culture where non-financial misconduct is tolerated is not healthy, it’s not safe and it’s not acceptable. We are taking this seriously and recently we prohibited 3 individuals from working in the financial services industry for non-financial misconduct.
Diversity and inclusion is a multi-faceted issue that requires serious thought and attention. The events of this year – the tragic and shocking death of George Floyd, and the Black Lives Matter movement – have increased the public consciousness about the inequalities and injustices that have no place existing in modern society. It has also had a significant impact on many employees, who are rightly highlighting that more needs to be done.
It’s clear that effective action needs to be taken quickly for financial services to become an industry that is truly reflective of the people it serves.
The business case for healthy, purposeful cultures
But there’s no use in talking about purposeful, diverse, safe and inclusive cultures if it doesn’t also deliver healthy returns to shareholders. Last year my team and I brought together working groups of thought leaders from across financial services. They worked through the business case for purposeful cultures with their industry associations and firms in their sectors. They produced a set of essays that we published as a Discussion Paper in March this year.
What did they conclude? Well, the title of some of the papers will give you a clue: Amra Balic and Anthony Manchester of Blackrock’s essay was titled ‘Purpose: at the heart of profitability’. Joe Garner of Nationwide’s essay was titled: ‘The pyramid of business purpose’.
Simon Culhane of the Chartered Institute for Securities and Investment (CISI), Paul Feeney of Quilter, and Mark Goyder of Tomorrow’s Company wrote an essay for the Retail Investment Sector titled ‘Restoring Trust – the case for the retail financial services industry to rethink its purpose’.
Jo Causon, the CEO of the Institute of Customer Service wrote one on ‘Purpose, relevance and impact: the key to sustainable business performance improvement’. And Michael Cole-Fontayn, the chair of the Association for Financial Markets in Europe (AFME) and Mark Yallop, the Chair of the FICC Markets Standards Board, wrote one titled ‘Wholesale Banking does not have to change: survival is not mandatory’.
While the working groups concluded that there was a solid business case for firms being purposeful they also identified some high barriers to making the vision real.
I would summarise the most oft quoted barriers to having purposeful healthy cultures as having one clear common feature: fear. Fear of the short-term focus on profits, elevated in importance by financial key performance indicators (KPIs) and short-term horizons for reporting. Fear of taking the initiative to do the right thing and being blamed if it goes wrong – especially by the regulator. Some oft quoted consequences of these fears were:
- a purpose which is a thin veneer for the outside world which doesn’t resonate internally
- bureaucracy (including dense and thorny barriers of compliance)
- slow, legalistic, command and control approaches
- lack of empowerment and engagement especially of mid-management - a management often constrained by bureaucracy and fear of blame, and unfairly and unkindly referred to as the permafrost layer
- the domination of a compliance box-ticking mindset at the expense of a systems thinking outcome and learning mindset
Culture and coronavirus: making it real
So, in March, when I cancelled the culture and purpose conference I was concerned that these barriers wouldn’t get dismantled. I confess that I did not foresee that faced by coronavirus the financial services would purposefully sweep away many of the big barriers to healthy cultures.
Supporting customers and colleagues is a purpose that has empowered staff to make decisions quickly and consistently. Several bank CEOs found that front line staff showed ingenuity and judgement in adapting to ensure continuation of customer service especially to the vulnerable. It has created the trust for colleagues to do the right thing at speed without paralysing fear of the consequences. Many firms across the sector have embraced purpose from the CEO to the front-line.
Trust is a two-way thing: employee trust in senior management has been reciprocated by senior management trust and empowerment of middle management. The permafrost has started to melt.
Speed and responsiveness
Firms have successfully acted quickly and responsively to the unprecedented need for radical changes – changes that would have taken weeks or months have taken days. For example, I was inspired by the speed and effectiveness of the move to home working. I was surprised (and delighted) by the speed with which firms modified complex customer journeys and IT systems to deliver payment deferrals and other customer support.
What struck me was the early and thoughtful engagement of firm leadership in problem-solving at the outset – leaders have de-layered the organisation for these issues and role-modelled system based thinking on how to deliver outcomes.
Feedback and engagement
Speaking of de-layering, I was also struck by the improvement in the frequency and way that leaders have been engaging with their employees. And not just in tell mode. Leaders have been using technology to have a two-way conversation with their colleagues.
The listening-up culture is becoming real. The cycle of learning and action from frontline feedback is strengthening. Staff feel that leaders are being more accessible and more authentic.
Where does that leave us?
Purpose is no longer a veneer on the culture, it is the grain that is running through it in many firms. Purpose has provided firms with a compass to navigate the uncharted waters of this crisis.
Leaders and staff have been convinced of the power and importance of purpose because they have experienced it. But the experience of coronavirus hasn’t been the same for everyone and it hasn’t been positive for everyone. Some colleagues in the industry have continued to serve customers face to face. Many have had to endure increasing levels of hostility from stressed customers. Indeed, the Institute of Customer Service reported in July that customer-facing staff across a range of sectors have been subject to increasing levels of hostility, with more than half (56%) having experienced abuse from customers during the pandemic.
Many colleagues working from home have had to provide child-care and home schooling; others have struggled with loneliness or the stress of working in difficult home circumstances. New recruits have not been able to benefit from all those opportunities to learn by watching others and interacting over a cup of coffee, in the lunch queue, or just while walking from one meeting to the next.
Tackling these challenges to the way we work is going to require purposeful leadership. And there is more change and more challenge on the way. Challenges from the macro-economy, from Brexit, from the accelerating change in digital technologies, from changes in most financial services markets.
We place great emphasis on leadership and how they respond to these challenges. Purposeful leaders give the same careful attention to their external strategy and purpose and their internal culture and capabilities. So we have extended the Senior Managers and Certification Regime to 48,000 firms that we regulate for both conduct and prudential purposes. For me, a key concept is that leaders are not only responsible for their own decisions but also for being proactive about the behaviour and competence of those they lead. In regulator speak, they need to take reasonable steps to ensure that there are no breaches in their area of responsibility.
Leaders are expected to make sure that every employee knows what the 5 conduct rules mean in their role. For example, every colleague is expected to fully understand what acting with due care, skill and diligence means in their role. Leaders also need to regularly check and certify that all colleagues in key roles are fit and proper. Neither of these matters are for check box compliance. Done right and done thoroughly they will make a real and discernible difference to behaviour and competence in firms. This is why we agreed to put off the date for compliance during the pandemic.
In summary, successful leaders will, in my view, be skilled in leading both strategic and cultural change – informed by purpose.
The business of social purpose
What purpose should inform leadership in financial services? The answer to that question must recognise the unique and essential role of financial services in the economy and society. Put simply, the financial sector channels and guides the investment and funding with which our economy is built, diversifies risks and provides affordable financial support to those in need by advancing credit. It also facilitates every single economic transaction through the payments system.
This crisis has shown that the financial services sector can be trusted to fulfil its purpose of providing support to consumers and small businesses and keeping the economy going. Financial services have been part of the solution, rather than the problem.
Because of its unique roles, including in channelling investment and funding, financial services are now well positioned to purposefully support and benefit from some of the key challenges facing society. These challenges include how to build back better after the crisis, how to level up, and how to promote sustainability and the journey to net-zero emissions.
Financial services are truly in the business of social purpose. Social purpose increasingly matters to consumers, employees and shareholders – people want to engage with, work for and invest in, firms that are purposeful. Only last week I was talking to some leaders of financial services firms and one described asking a recent graduate what made them choose their firm amongst all the similar and well-paid offers they had received. The graduate replied that it was because they had stopped using plastic cups.
Addressing climate change is vital to society; Sir David Attenborough has described it as ‘humanity’s greatest threat in thousands of years’. Climate change is a key part of our purpose at the FCA. Our new CEO, Nikhil Rathi, this month gave a speech about Rising to the Climate Challenge setting out what we have been doing on climate change and recognising the crucial role of financial services in climate change.
At the FCA, we are fully committed to work in this area in the run up to and beyond the United Nations Climate Change Conference (COP26) which is being hosted by the UK in Glasgow next year.
Looking to the future
To summarise and look to the future. The financial services sector has reached a tipping point in the journey to healthy, purposeful, safe, diverse and inclusive cultures that create healthy returns for shareholders. The question is how can we, together, tip the balance?
At the FCA, as part of our transformation programme, we are going to restructure to integrate the supervision and policy functions to take a holistic view and approach to the challenge of making financial markets work better. I have decided not to apply for one of the new roles, and Nikhil (our CEO) has indulged my passion for culture and purpose by letting me become a senior adviser on financial services and the FCA’s purpose and approach to sustainability in preparation for the COP26 conference next year. I very much look forward to engaging with you on this over the months to come. If we are truly at a turning point, then let’s not waste the opportunity.