Negative headlines featuring toxic cultural behaviour within the insurance market make painful reading for our industry. In reality though, the salacious nature of those headlines has masked what are far more deep-seated cultural issues that need to be addressed. Issues that go to the root of conduct, financial performance and business resilience issues – issues that attract the attention of both the FCA and PRA. For too long, culture has been perceived as an HR issue, something to be addressed with disciplinary action when it gets out of hand. That is changing and 2023 may well prove to be the ‘last chance saloon’ for firms to recognise that shift. It is a matter that boards need to comprehend.
Background
The FCA and PRA issued a Discussion Paper in March 2020 (DP20/1: Transforming culture in financial services – driving purposeful cultures) and a further paper (DP21/2: Diversity and inclusion in the financial sector – working together to drive change) in July 2021. In 2022, Consumer Duty rules further reinforced the message that a positive culture, based on consumer needs, was the regulatory expectation, and that culture needed to be driven from Board level.
We may not have had a specific set of rules based solely on ‘Culture’, but the FCA has made it clear that there will be repercussions in the short and long term for those firms not acting on their rules and guidance going forward. This started with the revised SM&CR guidelines introduced in December 2019 in which individuals subject to the SM&CR rules (SMR Function Holders) were required to act with integrity and observe proper standards of market conduct. Now the FCA is embedding culture in its regulatory approach with the new Consumer Duty rules reinforcing the obligations on senior managers under SM&CR, requiring firms to look carefully at how they meet the new Consumer Duty requirements and most importantly, how they evidence to the regulator that they are doing so. Firms that get culture right are setting themselves on the right path to a positive relationship with the regulator, in an environment where mindset and approach is given more value than simple box-ticking regulatory compliance.
On the 28th November 2022, Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations for the FCA (and one of the Top 100 most influential women in Finance 2022) delivered a speech at the City and Financial Global’s 8th Annual Culture and Conduct Forum for the Financial Services Industry titled “From Zeroes to Heroes: How culture in financial services can change for everyone’s benefits”. She summed up perfectly what culture means to the Financial Services sector and that it needs to come from the top with this statement:
“The FCA expects senior leaders to nurture healthy cultures in the firms they lead. Cultures that are purposeful. That have sound controls and good governance. Where employees feel psychologically safe to speak up and challenge. Where remuneration does not encourage irresponsible behaviour that can ultimately damage the business and wider markets.”
Two further key messages coming out of her speech for Insurance firms were:
- The FCA cares about culture because this drives conduct: The Consumer Duty encourages firms to analyse their culture and how that affects their conduct.
- Firms should offer the right environment for employees of all backgrounds to feel safe in challenging and speaking out. The link between culture and diversity and inclusivity is clear in the FCA corporate mind.
The new Consumer Duty rules also set a high bar for firms in the way they manufacture, sell and service insurance products to retail consumers. They are seeking to eradicate the scenario of profit driven by consumer confusion and exploitation and put customers at the heart of an organisation.
The FCA has talked about culture for long enough, giving firms enough chances to proactively change for the better and are really starting to put them on the hook for the organisational cultures they create – or tolerate. Consumer Duty is going to be one of the big sticks the FCA use to measure the effectiveness of culture. This was introduced in 2022 and remains a key part of the FCA Business Plan for 2023/4.
Why Culture Matters
The FCA have said that “Culture is the things you do when no one is looking”. It is the driver and values of the company and the individual and not the façade they think someone else wants to see. This can be incredibly hard to change. It is easy enough to wear a mask and pretend to be something else but it is incredibly hard to be something other than “a wolf in sheep clothing” – you can’t hide the character underneath, but changing that character is what is now expected.
The reality is that a lot of what has caused our collective approach to culture to shift in a more positve direction has happened as a consequence of the salacious headlines mentioned earlier. Everyone recognises that the culture in the industry needed to change for the benefit of both the people working within it and the consumers who rely on it. Examples of this shift includes:
- The LMA Charter – October 2022 setting out how the LMA “expect all their members and guests to conduct themselves when working in the London market” with a set of values and a Behavioural Framework as guidance around these expectations.
- The Lloyd’s Annual Culture Survey and Dashboard sent out to Managing Agents, with key brokers invited to participate, that seeks to measure current market culture and provide data on culture and diversity across the market.
- The award–winning annual Lloyd’s Dive In Festivals that have been running every year for the last 8 years focussing on culture, diversity and inclusivity. This is now relevant to so many businesses in and outside of the Lloyd’s and London market and has attracted a great deal of very positive attention and initiatives coming out of them.
- The FCA Financial Lives Survey, which provides valuable insights into the financial positions of UK consumers and has now been through 3 cycles in 2017, 2020 and 2022. It provides firms with access to key data and information on the general sentiment amongst consumers and is a tool that can be used by firms to help inform a customer-centric approach to business.
Conclusion
We expect more action will be taken against firms if they do not take their culture seriously, something the FCA have communicated they plan to do in their 2023/4 Business Plan, with the Threshold Conditions being used more robustly to test appropriate behaviour and culture. In ICSR’s view, firms that continue to get their culture wrong are going to see an increasingly punitive approach from the FCA as a consequence of not doing what is expected of them. If they continue to ignore the very strong guidance of the FCA around culture, they will pay the price, whether it is losing their authorisation as a firm to trade, or individuals seeing their SM&CR “approved person” title removed.
Organisational culture is no longer a ‘nice to have’ for regulated firms. It is increasingly a tool that the regulators are using to help drive better outcomes for consumers in terms of the way they are treated and the financial and business resilience of the firms they do business with. No longer can culture, diversity & inclusivity be considered an HR issue. It is an issue for the Board to be concerned about. In our experience, it is a matter many firms are now starting to take seriously, but plenty are yet to fully grasp the issue and understand the threat it could pose to their organisations. For those firms, 2023 may indeed be seen to have been the last chance saloon if they do not take action soon.
If you would like to discuss the way your firm approaches culture, and the risks it brings as a regulated business, please speak with Niki Underwood, Claire King or your usual contact within the ICSR team.