Insurance 2020: Culture

United Kingdom

Culture, once the preserve of management gurus, is swiftly moving mainstream. Over the past few years both the PRA and the FCA, as well as the European regulators, have increasingly drawn attention to the importance of the board ensuring that the firm has the right culture. And what has become very clear is that a firm’s culture now means a great deal more than the “tone from the top”; it extends throughout the business and includes considerations of diversity. Pious statements of good intent from the Chairman or the Chief Executive fall well short of the 2020 reality.

The word “culture” has a host of meanings and, most colloquially, is what your staff do when nobody is looking over their shoulder. To adopt the rather more formal wording used by the FCA, it is the characteristic mindsets and behaviours that are typical for your firm.  In other words, what are the  norms, often unwritten and also sometimes unspoken, that determine your standards when designing new products, handling problems, dealing with customers or incentivising staff?

Improving culture in financial services is a priority for the FCA because it views a firm’s culture as a fundamental driver of misconduct.  As Jonathan Davidson remarked in an FCA podcast, there are in his view two fundamental causes of failings at firms. One is firms’ business models and strategies, and the second is firms’ culture. The FCA’s recognition that the way a firm takes decisions is as important a determinant of its conduct as the decisions themselves is a remarkable affirmation of the importance of culture in shaping a firm’s business and regulatory relationship.  The FCA has occasionally expressed this with almost evangelical zeal, one senior officer stating that “I am absolutely committed to effecting a transformation in the culture of financial services.  I want to make a healthy culture [where] customers can get good outcomes.”

Let us start with the antithesis: what does bad culture look like?  A glimpse at some recent FCA Final Notices highlights the way in which poor culture can drive misconduct. Two examples will suffice.  “At the top of the business, despite warnings from board members and from the Internal Auditors, the board and senior management failed to embed a culture of compliance throughout the firm[1] ”.  “Additional significant weaknesses in Canara’s AML and sanctions systems and controls were also identified by the Authority, including a failure to embed a culture of compliance with regulatory requirements throughout the firm[2]”.

What these examples show us is that culture comes from a wide range of sources.  It will often be the board and senior management who set the culture. The FCA can observe culture as being either present or absent.  At both Sonali and Canara the problem was lack of the requisite culture, in both cases one of compliance.

But what does good actually look like in this context?  There is no easy answer to this conundrum, and the FCA has published a number of papers on this topic. At its simplest, though, the suggestion is that a healthy culture has two key characteristics. The first is that the firm is purposeful in the sense that its staff are there not just to earn their salaries but because they feel that doing their jobs makes a real difference.  Second, and of key importance from a regulator’s perspective, is for a firm to have a culture of psychological safety. This is a culture of listening up, which is a great deal more than a culture of calling out wrongdoing, and which arises when a firm encourages everyone to participate in decisions (at the appropriate level, of course) and to feel comfortable when expressing their views.

The FCA has recently started giving rather more concrete indicators of the elements of good culture.  Couched in the form of industry interview sessions and third-party contributions[3], these are real-life examples of what the FCA thinks amounts to good practice.  They fall well short of guidance, but nonetheless give an indication of what the FCA will expect to see on the ground.  Just selecting three examples of what the FCA may be looking out for:

  • Staff motivation – the commentary observes that the number one driver of engagement for most employees is career and future. With a repetitive, monotonous job, a financial reward is a good motivator. However, it can be important to offer coaching and grow people to feel more of a sense of purpose and meaning and impact, and to have more autonomy and stretch.
  • Performance appraisals People need feedback and goals, and to know how they are progressing. A firm should consider having fortnightly conversations rather than only rely on an annual appraisal.
  • Consistently achieving the right customer outcomes – taking the example of call centre staff, three suggestions noted by the FCA were giving a greater sense of purpose and autonomy by allowing staff clearly defined discretions; taking staff out into the field so they can meet the type of people they deal with; and recognising that they can provide valuable insights gained from customer contact that can feed innovations to the business team, and rewarding them accordingly.

A further limb of culture is diversity, which includes age, geographical provenance and educational and professional background as well as gender. The European Banking Authority has recently released a study[4] which, like the FCA, connects cultural attributes with actual conduct.  Its core observation is that more diverse management bodies can help to improve decision-making regarding strategies and risk-taking. Such a body reduces the phenomena of ‘group think’ and ‘herd behaviour’ because it incorporates a broader range of views, opinions, experiences, perceptions, values and backgrounds. It also, intriguingly, makes more money for the shareholders. The EBA found that credit institutions with executive directors of both genders were more likely to have an above average return on equity, with a gender-diverse-management yielding 7.28% versus 5.95% ROE. This statistic, though, requires a pinch of salt because larger (and often more profitable) national or cross-border banks are generally more diverse at management level than smaller regional ones.

But whatever the merits of a diversity-makes-you-money argument, the FCA considers that diversity forms a major element of culture and hence of conduct. Its most recent contribution to this discussion is a statistical review of the number of women in financial services. Based on an examination of the FCA register from 2005, the key observation is that women only make up 17% of FCA-approved individuals, a number largely unchanged since 2005. While – as in the EBA study – there are more women in senior manager roles at larger firms, the implicit point in the study, and surely the FCA’s motivation in publishing it, is that firms at all levels should be doing more to achieve diversity at senior manager level.

How will the FCA implement all these expectations? Simple – it already has. The FCA has decided not to attempt to legislate for culture but, instead, to devolve this responsibility to senior management. Indeed, as it has stated, the only set of rules that it has written to address culture are those embedded within the Senior Manager and Certification Regime (SMCR). This tells us three things. First, getting culture right is not just for the CEO but for all senior managers, each within his or her remit.  Second, and perhaps most obviously, the FCA is signalling its interpretation of SMCR that a senior manager who correctly discharges his or her responsibility will probably be taking the necessary steps towards establishing an adequate culture. But, lastly, the rub is in the converse – where the FCA detects an unsatisfactory culture, it will be looking without more ado at individual Statements of Responsibility to see who was in charge of that area, and then to ask them what they have (or more likely have not) done about culture.



[1] Final Notice: Sonali Bank (UK) Limited (12 October 2016)

[2] Final Notice: Canara Bank (6 June 2018)

[3] See for instance FCA Transforming culture through employee motivation and recognition – December 2019

[4] On the benchmarking of diversity practices at European Union level under Article 91(11) of Directive 2013/36/EU – February 2020