How would you define culture? Many definitions include the words: attitudes, customs, beliefs, goals, values or behaviours, particular to a group of people or a community.

In the context of a firm, culture often gets segmented into different aspects depending on the topic in hand eg ‘customer service culture’, ‘quality culture’, ‘risk culture’, ‘reward culture’, ‘change culture’, ‘empowerment culture’… the list goes on. However, these aspects remain interconnected, as culture is the common thread that lives and evolves in a firm through the people that work there and how they do things. The culture connects the past to the present and guides the future as the different aspects fluctuate in relevance and importance to the workforce.

This can be demonstrated with the example of attitudes and behaviours following a round of redundancies in a firm; the importance of reward declines and job security increases. People that feel vulnerable look for work elsewhere and customer service or quality standards drop. Depending on the scale of such an event the impact can reach across an organisation and the culture can shift at the drop of a hat.

Compelling regulation

Making a positive change to the culture of a firm is far more difficult, it is something that has to be fostered and influenced not directed or switched on. However, this is the challenge faced by firms that fall within the Senior Managers Regime (SMR) as the regulator has placed accountability firmly on the Senior Management agenda in the form of cultural change. Andrew Bailey reinforced this in his speech ‘Culture in financial services – a regulator’s perspective’ at the City Week 2016 Conference on 9 May 2016, he said:

"Responsibility, as embedded in the Senior Managers Regime, is therefore an important hook to assist in firms’ shaping their own culture, and also to provide regulators with the powers to conduct supervisory oversight and to act when needed.  But, let me reiterate that it is not the job of regulators to enforce culture and to change culture.  If we have to step in, and occasionally we do, the overriding conclusion is that management has failed.

This drive by the regulator for cultural change originates from the conclusion reached by the Parliamentary Commission on Banking Standards (PCBS)[1]. The PCBS expressed the view that:

‘…many bankers, particularly at senior level, have been allowed to operate with very little personal accountability. When things went wrong, individuals claimed ignorance or hid behind collective decision-making.

…there was often little realistic prospect of enforcement action against senior individuals.

… there is a strong case in principle for a new criminal offence of reckless misconduct in the management of a bank.

The realistic prospect of enforcement has been addressed through the new regulation; the criminal offence has been addressed by the introduction of new legislation; the cultural change comes from within the firm – the Senior Managers. A cultural change where Senior Managers are clearly accountable for their behaviour. Where they don’t claim ignorance and they make the best possible decisions. Decisions that that align to the firm’s strategy and risk appetite.

Embedding accountability

The regulator has been clear that ‘Governance & Culture’ will be a focus of their supervisory visits. Firms will need to demonstrate the culture of accountability in their governance, policies, management, processes and controls.

In my experience bridging the gap between corporate strategy and personal objectives is a great way to embed accountability.

One of the most beneficial team meetings I ever held was when I sat down with a list of the firm’s strategic goals, the list activities in the departmental plan and my own objectives. We looked at the relationship between the items on the three lists and then I asked my team to tell me if there was anything in their own objectives that they could not relate/connect to my objectives. In a matter of a few minutes everyone around the table was able see how they were contributing to the firm’s goals.

As you may imagine writing the departmental plan and personal objectives required real investment, however my return was significant. Every year it became easier to update the plan, to write new objectives or extend the old ones, to conduct performance reviews and to determine pay-rises and bonuses. But above all, it allowed me to focus my management time in other areas as every member of the team performed their roles with full accountability.

Other areas where accountability should be explicitly embedded can be identified by reviewing the risks relating to SMR (a list can be found here). Unsurprisingly, many of these relate to management activities and are controlled by Human Resources, including:

  • Performance Management
  • Succession Planning
  • Reward structures
  • Conduct policy
  • Promotion policy

For example, if the performance management cycle or promotions process do not encourage or reinforce the need for accountability then ‘dyed in the wool’ managers won’t adapt as there is no incentive to change. If you accept that accountability has to permeate the culture of an organisation top down and be reflected bottom up, uninterrupted, then it is fair to say that any gaps present a risk with serious regulatory implications.

These new risks introduced by SMR need to be on the agenda of Senior Managers and if they are not already on the risk register they need to be added.

 

Andrew Bailey is the Deputy Governor for Prudential Regulation and Chief Executive Officer of the Prudential Regulation Authority

A full transcript of Andrew Bailey’s speech can be found here.

A list of risks introduced by SMR can be found here.

 

[1] The Parliamentary Commission on Banking Standards (the Commission) was appointed to conduct an inquiry into professional standards and culture within the UK banking sector. The Commission was appointed in response to the LIBOR rate-rigging scandal, which followed the financial crisis and a series of high-profile conduct failures within the UK banking industry.

 

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