Creating the right culture within capital market firms

By Saeed Patel

The transformation of culture in financial services continues to be an area of increased regulatory focus, with poor culture widely reported as a contributing factor to the significant misconduct issues that led to the financial crises a decade ago. As a result, we have seen a plethora of new regulations come into force since then, with the latest being the Senior Manager & Certification Regime.

In the past firms either allowed or encouraged cultures to develop in which the interest of individuals diverged from the interest of the firm. Aggressive trading strategies with excessive and at times reckless individual risk-taking was supported by remuneration schemes that rewarded short-term revenue generation. Together with a belief that misconduct would go either undetected or unpunished this culture has historically contributed to a process of ethical drift where unethical behaviour went unchecked and became progressively more widespread and accepted as the norm.

Key steps for firms to promote the right culture comprise of:

  • Setting the correct “tone from the top”: The primary responsibility for determining culture lies with the CEO and Board which must set out core values for how it conducts business. These values must be embedded in how the firm operates on an everyday basis and not merely set out as aspirational statements in a policy document.
  • Ensuring the Board has sufficient independence and expertise: To provide effective challenge the Board needs to have the right expertise at its disposal to scrutinise business areas on misconduct and to establish the formal governance processes and structures, policies and systems that specify expected behaviours.
  • A culture of openness: Firms need to provide an environment where individuals feel able to speak up, and where failure is viewed as an opportunity to learn from mistakes. Employees need to feel empowered to raise their hand and believe that their efforts will result in a meaningful response. Senior leaders advance through the firm because their behaviour is consistent with the firm’s values.
  • Delivering senior-level endorsement of whistleblowing programmes: Firms must develop effective formal and informal escalation procedures to support the raising of concerns at an early stage, and that staff are aware of structures protecting whistle-blowers.
  • Promoting integrity: Putting in place a framework for ensuring that remuneration is aligned with risk will incentivise behaviour in line with the firm’s values.
  • Having the right controls in place: Strengthening and reinforcing the first line of defence and developing strong information management systems for conduct monitoring are critical to ensuring the right data is being monitored and reported on. Providing real-time visibility of conduct risk to the Board and senior management will allow them to take appropriate steps in ensuring the right culture is being reinforced.
  • Provide the right training: Establish expectations for training and qualifications standards with a requirement for continuous professional development with annual assessments.
  • Hire the right people: Know who you are hiring and working with by introducing enhanced due diligence and screening checks on employees and new joiners to determine if they are fit for purpose. Mandated detailed regulatory reference checks help firms to prevent the ‘recycling’ of individuals with poor conduct records between firms to root out ‘bad apples’.
  • Monitor your culture: Cultures across companies can change over time, so to ensure a firm’s culture stays in line with company values, independent surveys can be undertaken to identify potential conduct vulnerabilities and their drivers, and to benchmark with other firms.

In summary, the promotion of a healthy culture in financial services based on psychological safety for employees of an environment of openness, listening and speak out culture is an important and necessary step to prevent misconduct issues of the past repeating themselves and to restore and strengthen investor confidence in capital markets.

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