This article, by Redland’s Carl Redfern, was originally published by Thomson Reuters © Thomson Reuters.
The UK Financial Conduct Authority (FCA) has laid the blame for recent major conduct failings within financial services on firm culture. It is continually stressing the importance of “culture” and is determined to ensure that cultural change happens within firms.
Culture and governance feature prominently in the FCA’s Business Plan 2018/19 and it has recently indicated that it will continue to focus on these themes.
The FCA’s objective is to bring about fair market conduct and the right customer outcomes. Underpinning this objective is the Senior Managers and Certification Regime (SMCR), which is designed to create a formal link of accountability between individuals and the conduct of the firm. The SMCR provides clear rules and responsibilities for senior managers, certified staff and all other staff who will be subject to a set of rules governing their conduct. The FCA has made it clear, however, that it does not believe “one size fits all” when it comes to a firm’s culture.
It has set a minimum expected standard but does not prescribe what a firm’s culture should be. This has left some wondering how to implement the seemingly intangible concept of cultural change. This is further compounded by the challenge of working out how it can be governed, monitored and measured.
For many years, people have watched huge flocks of starlings gather and “dance” in astonishing formations in the evening sky. It is called “murmuration”. The starlings seem to react to emerging threats and risks as a single entity, moving in beautiful patterns, often confusing the attacking falcon, or whatever the threat may be. The result is that the whole flock is much safer. It can be observed that a change in behaviour of one bird affects and is affected by the behaviour of the whole group. This means it does not matter how big the flock is, they react in almost perfect synchronisation.
This phenomenon is known as “scale-free correlation”.
Research suggests that each bird monitors several small and specific indicators from the birds closest to it in the flock, its “peer group”. It looks for tiny changes in distance, alignment, direction, acceleration, etc. Starlings have very fast reactions and respond rapidly to these changes, but this does not explain how they react to threats on the other side of the flock.
A new theory is that alongside these quantifiable metrics they also continually assess patterns of light and shade caused by the bunching and swirling of the group. This gives them an understanding of where they are individually within the flock as it twists and turns. The result is an incredible speed of communication and agility. Each bird has a broad sense of where it is in the group and understands what the wider group is doing, and importantly, where it is going. The flock can react collectively, as one, to new risks and threats, regardless of its size. This is the link to culture, in any medium-sized or large firm. Company culture has been described as a “shared set of norms that influence behaviour”, but many CEOs or chairs of the board might wish their “culture” helped their business to be as positively responsive and cohesive as a murmuration. If we compare starling murmuration with company culture then there are insights we can take with regard to developing, maintaining and measuring a cohesive and responsive “flock”.
Most of this operational data can be viewed through a “cultural lens” and used to manage culture within the firm.
As Jonathan Davidson, FCA director of supervision — retail and authorisations, said in a recent speech: “culture in a firm is, in simple terms, ‘the way things get done around here'”. It naturally follows that operational management information, which reports on what is being done, can be used to monitor culture. It is similar to the quantified metrics that each starling needs to keep in its place, such as speed, direction and alignment. The real challenge for companies, however, is to identify and use the “patterns of light and dark” that make culture into an effective tool for improving performance and delivering good outcomes for customers and markets: making cultural development scale-free and correlated.
This is where technology, the systems that support day-to-day activity across nearly all roles within a firm, can make a difference.
Increasingly, in modern life, we expect systems to help us. We are becoming used to Amazon telling us what to buy, or Netflix telling us what to watch, or Google telling us what is new. The financial service regulators in the UK, the FCA and Prudential Regulation Authority (PRA), have made their focus on culture and conduct clear and reconfirmed their increasing intent to enforce improvement in firms.
The individual accountability regime provides firms, and particularly individuals, with a clear set of rules and responsibilities that need to be adhered to, but by its very nature, the culture aspect of the regime is less tangible.
This means that boards and executive teams, and on their behalf, risk and compliance functions, have a complicated job to focus on and adapt to both the tangible and the less tangible aspects of ensuring they meet their regulatory requirements.
In addition, all three lines of defence — front-line, risk and compliance oversight and internal audit — also need to support and protect senior managers against the personal impact of non-compliance. In the same speech, Davidson said “… You [senior managers] are not just accountable for your own actions but — to a reasonable extent — for those who work for you.”
Technology provides solutions for implementing and holistically complying with SMCR and cultural change initiatives. As a minimum your system(s) need to provide an auditable, accurate single point of truth. This enables strategic objectives and customer outcomes to be monitored through meaningful management information that can be produced quickly, efficiently and in real time, which highlights the cultural indicators (the patterns of light and shade).
The pace and complexity of regulatory change means that risk and compliance functions face an increasing workload, often against a backdrop of rising cost pressures. Technology should be deployed to automate schedules and tasks that are currently performed manually. Technology should also proactively prompt and remind the relevant people of key activities, priorities and focus areas without the need for manual intervention.
People development and management is at the heart of cultural change. Systems can help to ensure that all staff are properly trained and equipped, and also that they understand the intersecting multiple culture and conduct initiatives that underpin cultural change. Under the SMCR, a senior manager will be made personally accountable for ensuring this happens (a prescribed responsibility).
Systems can do this by automatically flagging team members who need help, who need coaching or those who do not understand their responsibilities. Technology can empower your people to be more effective people managers.
It is perhaps counterintuitive, but many firms need to adopt new systems to help their people focus on their people. It is this focus on people and their behaviours which will deliver successful culture change and compliance with regulatory obligations. Cultural initiatives that introduce large administration burdens or “tick-box” evidence capture get in the way of and often prevent the changes they are intended to deliver.
Modern technology, sometimes referred to as regtech in financial services, that is “technology designed to support compliance and mitigate the costs to regulation”, can efficiently and effectively deliver culture and conduct programmes. These people-centric regtech solutions can be easily tailored to your firm’s specific business and people processes.
Successful businesses are beginning to emulate starling murmurations by implementing systems that focus on their people and their behaviour, collate the relevant cultural messages and consistently distribute the message to everyone that needs it, giving them the vital impression of light and shade as the firm evolves, and making their alignment to the bigger picture clear.
Risk and compliance professionals need to assess whether they have the appropriate processes and control infrastructure in place to support their firm’s target culture and, if not, present a clear business case to implement it.
By Redland from Redland Business Solutions
© Copyright Redland Business Solutions 2019