The financial services industry seems to accept that changing its culture is essential to meeting new regulatory challenges. However, firms have to make more effort to place the customer at the centre of their activities if they are to survive under the ‘twin peaks’ regulatory system.
Recent research by global professional services firm Kinetic Partners discovered that 83% of chief executive officers (CEOs) in the financial services industry believe a company’s culture is the most important factor in how it deals with regulatory challenges.
The study, which covered the banking, asset management and hedge fund sectors, also showed that 91% of chief compliance officers – those employees at the coalface of regulation and its impact on the business – cite culture as being the deciding factor.
Culture was seen as being more important that hiring staff with the right regulatory skills or a business’ relationship with the regulator when it comes to avoiding significant regulatory problems. Just 3% believe finding the right staff is essential while the relationship with watchdogs was cited by only 1%.
Given how vital culture is to navigating the regulatory landscape, firms must be making progress in this area, right? Well, some evidence from the ground suggests more could be done.
Financial services worried by focus on culture
Culture certainly will play an important role in the twin peaks regulatory system, with the incoming Financial Conduct Authority (FCA) saying it will visit financial firms every four years to make sure their culture is up to scratch.
While financial services companies recognise that the importance of culture, the increased attention this will receive from industry watchdogs is also among their biggest fears – suggesting awareness that they could be doing more.
Law firm DLA Piper and accountancy group BDO found 91% of asset managers say the incoming FCA’s focus on culture will have a medium to high impact on their business.
When intermediaries, retail banks, investment banks and insurers were asked to name their leading regulatory worries, more than 80% of each group highlighted increased attention on culture as a concern.
BDO head of asset management Michelle Carroll said: “Banks are mostly in the limelight when it comes to culture and I do think they need to acknowledge that they have a social and fiduciary responsibility. But what’s clear is that firms in the non-banking financial services need to change their culture as well.”
Leading from the front
So how can firms improve their culture? Kinetic Partners believes that the most important factor here is their leadership.
Julian Korek, founding member of Kinetic Partners, said: “The culture within any company is set by the CEO – and it’s good that our CEOs recognise that and recognise the symbiotic link between culture and compliance.
“Getting the culture right so that people make the right choices is essential for financial services firms, and will define the way the firm does business and the way it interacts with clients and prospects.”
While the industry is moving towards the ideal espoused by regulators, it seems clear that it’s a long way off fully meeting these lofty aims.
As the FSA’s Dear CEO letter about potential conflicts of interest shows, the present regulator thinks a significant chunk of the asset management industry could be doing more to align its culture with the interests of the customer.
Improve culture and everything else falls into place?
DLA Piper and BDO’s research showed that the focus on culture is not the only regulatory challenge facing firms. The early publication of enforcement actions and greater investigatory powers were also leading concerns.
But Carroll suggested that improving culture could lead to other concerns being eased, saying: “I would argue that if we focused on culture with a fresh pair of eyes, then we wouldn’t need to worry as much about new enforcement or investigatory powers.”
The comforting news in all this is that the industry understands the old days of box-ticking its way through regulation have passed. Significant improvements to firms’ culture is essential if the customer is going to be put first,as expected under the spirit of the new regulatory regime.
Let’s hope the recent Dear CEO letter reflects on an industry culture that is on the wane, rather than the need for a fresh round of criticism from the regulatory powers.
