A regulatory perspective: measuring and assessing culture, now and in the future, the role of purpose and the importance of D&I

Speech by Sheldon Mills, Executive Director, Consumers and Competition, delivered at the Investment Association.

Speaker: Sheldon Mills, Executive Director, Consumers and Competition
Event: The IA Culture in Investment Management Forum
Delivered: 22 September 2021
Note: this is the speech as drafted and may differ from the delivered version


  • Culture remains central to how we supervise the firms we regulate. The importance of an authentic, embedded purpose, visible leadership and an inclusive environment where staff feel safe to speak up is paramount.
  • Hybrid working brings opportunities and challenges. Firms need to find approaches that give due regard to safeguarding their purpose and values, the wellbeing of staff and effective oversight.
  • Diversity and Inclusion is an aspect of culture where the investment management sector has considerable ground to make up. We welcome the initiatives led by the IA but lasting change will only come from firms looking at their own culture and taking action.
  • Firms in the investment management sector have a huge sphere of influence on ESG, both to improve their own ESG performance and to drive positive change through their investments. We look to firms in the sector to be effective stewards.

I want to talk about why culture is so important. I’m going to cover some of the key characteristics of a healthy culture. And I’ll touch on how we assess culture in our supervision of firms.

Culture and purpose, in the wake of the pandemic, are as important as ever.

There are three main messages I want to convey. First, that culture and purpose, in the wake of the pandemic, are as important as ever. Secondly, that diversity and inclusion are key priorities for the FCA and ones where we’ll be taking action to raise standards. And lastly, that climate change and sustainability is an area where your sector has a huge sphere of influence and we expect you to drive meaningful progress.

Culture from the point of view of the regulator

I want to start by discussing how we measure and assess culture more broadly, before moving on to the impact of the pandemic. 

The culture of the firms we regulate is central to the FCA’s approach. We see healthy culture as critical both to consumer protection and to well-functioning markets. In almost every instance of poor conduct, deep-set cultural issues have been present. We believe firms with healthy cultures are less prone to misconduct. And evidence increasingly shows they are also more likely to perform better. For example, Google research has found that cultural factors are much more important to building a high-performing team than the skills and traits of its members.

Culture is at the heart of how we supervise firms. We expect senior leaders to nurture healthy cultures in the firms they lead. Cultures that are purposeful and safe. That have sound controls and good governance. 

Measuring and assessing culture

We measure and assess a firm’s culture against four drivers of culture: purpose, people, leadership and governance. This covers a wide range of areas – to list but a few it could include: significant business model restructures, the approach to remuneration, speak-up culture, Board and ExCo composition, diversity, succession planning, the application of the SMCR, the effectiveness of a firm’s controls environment or its governance structures. 

We have a range of tools available to us to address the issues that we identify. These range from using our supervisory influence to requiring independent oversight, to withholding permissions or taking Enforcement action. We use these powers proportionately and based on which we think is most effective to tackle the issue.

But the FCA is not prescriptive about culture. We know that cultures are unique to firms and sectors. 

The four drivers of culture are equally important, but I would like to focus on purpose and people briefly now.

Purpose is absolutely central to a healthy culture. It can seem intangible. We’ve previously described it as a gravitational force. In simple terms, it is the goals that a firm sets itself, the economic function it performs and the value it provides to its customers 

and other stakeholders. It is most clearly manifested in a firm’s strategy, values, products, services, and processes. 

We’ve heard from firms that having a clear purpose has helped them navigate the Covid crisis.

We’ve heard from firms that having a clear purpose has helped them navigate the Covid crisis, when quick decision-making and consumer outcomes have been key.

An effective purpose must be meaningful. It must be embedded into the way the business works. Staff need to understand the business’s purpose and how their work contributes to it.

Purpose directly influences workplace culture and people. People need psychologically safe places to work if they are going to give their best and be able to develop and flourish. They need to be able to speak up when they see things that they think are wrong, without the fear of reprisals. Leaders should value the voices of all their staff. They have unique insights that can lead to more innovative approaches, greater efficiency and reduced misconduct. 

Another key driver here is how people are incentivised. This is an area we pay close attention to when we assess firms. We expect variable remuneration to be linked both to financial and non-financial measures. Remuneration Committees should be thinking carefully about what it is that they are rewarding management to do. Do bonuses reflect the firm’s purpose?

Culture in the 'new normal'

It’s important to think about these drivers of culture in the context of the pandemic. The world has changed over the last couple of years. One of the most lasting cultural impacts could be the prevalence of hybrid working. At the FCA we’re beginning a trial period from November. 

There are clearly huge potential benefits to staff wellbeing and productivity. And, in the right circumstances, it can promote better inclusion. It can also enable leaders to be more visible and connected to their staff.

But it can also lead to isolation, fewer avenues to speak up, and a lack of control and oversight.

The balance firms strike here must be right, both for staff as individuals and for the organisation. New joiners and younger staff may need - and prefer - more time in the office. To help them learn the business. And to ensure the firm’s purpose and values are instilled. And indeed, all of us benefit from the opportunity to collaborate with our colleagues. Getting this balance right will be key to building trust and ensuring your people feel valued and supported. And that they’re able to contribute to building a healthy and sustainable culture.

During the pandemic, we have seen leaders engaging more directly and openly with people in their businesses. This is an important gain that we shouldn’t lose. But it will need thought and care to keep it in a hybrid workplace. This is even more important when we think about a workplace where people can speak up and feel included. 

Through our range of supervisory tools, we will monitor how firms continue to adapt to the new normal. We look for assurance that leaders identify and mitigate the risks that emerge.

Diversity and inclusion

I want to turn now to diversity and inclusion. The murder of George Floyd brought a reckoning for many on their attitudes and assumptions about racial inequality. Businesses have to adapt with the changing expectations of customers, employees, shareholders, and other stakeholders. Diversity and inclusion are critically important to the FCA. Firms that are diverse and inclusive deliver better outcomes for shareholders, consumers and markets.

And when we say diversity, we are not solely referring to race, gender and social background. Firms should also be thinking about disability, sexual orientation and other dimensions of diversity.

The gender pay-gap remains wide. Women are under-represented in senior roles. A recent report found less than 1% of asset managers are black.

Few organisations, if any, are completely on top of this issue. The FCA certainly has more to do. But the investment management sector is lagging compared to some others. The gender pay-gap remains wide. Women are under-represented in senior roles. A recent report found less than 1% of asset managers are black. And a 2017 study found that 38% of investment managers went to independent schools. That’s against 7% of the UK population as a whole.

The Investment Association has launched some excellent initiatives in this area. Such as the black leaders’ mentoring programme and the IA diversity data guide. The Investment 20/20 programme is imaginative and bold. We welcome this vision and ambition.

But these initiatives must be backed up by action by firms. Lasting change will only come through focusing on recruitment. Ensuring you’re investing in your people. Addressing the barriers that people face in progressing through their careers within your organisations, or when they are ready to take on new challenges elsewhere. And, critically, fostering a culture of inclusion within your firm and across the sector. Key to that is the psychologically safe workplace that I talked about earlier. Psychological safety and inclusion go hand in hand.

So what is the FCA doing to raise standards here? We published a Discussion Paper in July. We want to engage in a wide conversation on this issue. We encourage you to respond by the end of the month. This discussion will lead to us consulting on rules and guidance next year. We will also increasingly raise diversity and inclusion questions in our engagement with firms. 

And what do we expect from firms? We want leaders to look hard at the culture of their business. To ask how they can build greater diversity in the next generation of leaders. And how to foster a culture of inclusion that makes use of diverse views. Collecting diversity data is essential here. But it is only the start of improving representation. We expect firms to collect data, actively monitor it with interest and take bold action where needed.

Climate change

Lastly I want to talk about climate change. The stark warnings from climate scientists and the growing number of extreme weather events across the world have shown that action on climate change cannot wait. The investment management sector is absolutely critical in forging this change. You have extraordinary power to influence the firms you invest in. To raise standards. To increase transparency.

Action on climate change cannot wait. The investment management sector is absolutely critical in forging this change.

We are encouraged to see so many of you signing up to net-zero initiatives. At the last count, the Net Zero Asset managers initiative was up to 128 signatories, responsible for some $43 trillion in assets under management. The race to zero has of course been a priority ahead of the upcoming UN Climate Summit, COP 26. And we will be doing a lot more work in this area. We want to make sure our regulatory framework sets the right expectations and incentives. To see that it addresses any remaining barriers. And to pave the way for credible, effective, transparent and well-governed net zero strategies. 

We also welcome the IA’s work with the Asset Management Taskforce on Investing with Purpose and the progress that is being made on the recommendations in last year’s report

There has been an acceleration of stewardship activity on climate change and other ESG matters in recent years. For example, some 545 investors are now signed up to the Climate Action 100+ initiative, which is engaging 167 companies, responsible for 80% of global industrial emissions. This investor action is beginning to bear fruit. Almost half of the focus companies in the Climate Action 100+ initiative have set targets to achieve net zero by 2050. But there is still a lot to do to turn these targets into tangible climate action. And to demonstrate delivery against credible short and medium-term milestones.

We look to you to drive the changes that we need. For a sustainable environment and fairer societies. And at the same time, to deliver long-term value for your clients and consumers. This will mean investing with purpose. And stepping up to be active stewards. It means using your voices. It means engaging with companies. It means influencing and setting incentives for their boards and management. 

Climate change, like diversity and inclusion and other ESG issues must be a central part of how you do business. This will increasingly form part of the FCA’s supervisory engagement strategy and you should expect to be challenged more on these issues. And that means that they will need to be embedded in healthy cultures. Cultures where it is safe to speak up, where the incentives are right. And most of all, cultures that are purposeful.

Final thoughts

So, to wrap up, I want to leave you with a few key thoughts:

Firms with healthy cultures, cultures that are purposeful and safe, can deliver positive results for customers, employees and shareholders. And for society and the environment. That means leaders paying close attention to culture. Understanding and assessing it. And taking action.

The world has changed and will continue to change. The cultures and business models of the past must adapt. Leaders will need to think about what these changes mean for culture. What has been learned from the pandemic. And what the risks are for the future.

In particular, we look to leaders to build on the Investment Association’s work on diversity and inclusion. To think hard about the experiences of people in their businesses. And to build inclusive cultures.

And we expect investment management firms to play a vital part in tackling the climate crisis. Using their unique position to push for meaningful change. Seeing this not as a marketing tool but as part of their role. 

The investment management sector has the potential to be a powerful force for good. Firms that embrace that role and make it part of their cultures will be those that prosper in future. And deliver better outcomes for us all.