This month, the issue of culture is in the spotlight once again as the whole financial services industry moves closer to compliance with the Senior Managers and Certification Regime. Meanwhile, the Financial Conduct Authority has published the findings of its 'ageing population project' and appealed to the Competition and Markets Authority.

John Sutherland, a senior advisor at the FCA, recently published an article that outlined the ways in which the FCA expected business leaders to be active in shaping the behaviour of firms as a way of making their internal cultures 'strong.' His arguments provide us with a good insight into the FCA’s preoccupation with culture.

Individual behaviour forms an integral part of a company's culture, so Mr Sutherland asked two questions: what are the ways in which we see people behaving now, and how would we like to see them behave in future?

In view of the fact that the FCA’s preoccupation with financial firms’ culture shows no sign of abating, how can those firms make lasting cultural changes and continue to meet its expectations (and those of other firms)?

As a starting point, Sutherland argued, the firms ought to find ways to 'measure' their culture to help them uncover any weaknesses that might exist and think about making improvements. He thought that there were three important areas of any financial firm’s business that revealed a lot about its internal culture.

1. Leadership. Governing structures and the ‘tone from the top’ play a significant part in making people all over the company behave in the right way and in establishing adequate processes and aligning them to regulatory expectations. With the roll-out of the Senior Managers and Certification Regime (SM&CR), senior managers know that the regulator will be watching them as never before. Individual accountability is becoming more and more important for the FCA.

2. Operations. If the 'tone from the top' aims at the achievement of good results for customers, it also has to pervade operational practices. Policies and procedures should all work towards these good results, with no disjunction between the culture among the firm's leaders and the one promoted through daily operations.

3. Cultural Influences. Performance management, incentives and remuneration schemes all play a part in shaping firms' cultures and can have a significant effect on the behaviour of staff and the results that customers receive.

John Sutherland suggests the following three steps when it comes to putting cultural change into practice.

Step one: Set the 'tone from the top.' Senior managers have to articulate the purposes of the business clearly, set out the standards of behaviour that they expect people to follow and then tell everybody about them effectively, embedding them throughout the firm as they do so.

Step two: Understand the causes of behaviour. Someone has to understand the things that cause members of staff to behave in the way they do. These things might be financial; they might not. Once it understands them the company must align them with the types of behaviour it desires and control them effectively thereafter. If the wrong types of behaviour are rewarded or 'incentivised,' the firm's culture will ultimately suffer.

In addition to incentives and remuneration, other key causes of behaviour include trust, communication and accountability for decisions at a senior level. If these are in place, behaviour is more likely to reflect those behaviours deemed acceptable by senior management.

Step three: Put it into practice. This final step occurs when cultural change, and the desired types of behaviour, have been embedded throughout the organisation and aligned to the stated purpose of the business. If a firm uncovers unacceptable behaviour at this stage, it is likely that its implementation of stage two is weak in some way.

FCA confirms decision to refer investment consultancy market to CMA

The FCA has confirmed that it will make a "market investigation reference" to the Competition and Markets Authority (CMA) regarding investment management consultancy and fiduciary management services. This comes in the wake of its Asset Management Market Study, which found that the investment market had some negative features that were either preventing, restricting or distorting competition, including:

• pension trustees relying on investment consultants, but without the ability to assess the quality of their advice or to compare services at all well;
• the three largest firms holding between 50-80% of the market share;
• barriers to expansion for smaller consultants; and
• conflicts of interest inherent in vertically integrated business models.

'Vertical integration' occurs when a company assumes control over several production or distribution steps involved in the creation of its product or end-service. 'Horizontal/lateral integration' describes the merging of two or more companies at the same point in the production process.

In the period since the publication of a report in which the regulator first outlined these concerns, the three largest investment consultants have proposed a package of 'undertakings in lieu' (UiL). The regulator has since rejected the UiL on the grounds that the measures only cover 56% of the market and the FCA does not believe that the measures would put its worries on the subject to rest.

The CMA has now begun to investigate the industry. It wants to see whether things do exist in the market that serve to distort, prevent or restrict effective competition. If it finds them, it will then think about remedying them. It has grouped its investigation into the three following areas.

• Whether the difficulties that the customers have in assessing, comparing and switching remove most of the incentive for investment consultants to compete on prices.
• Whether the quality or value-for-money that customers receive is affected by conflicts of interest that exist in investment consultants’ business models.
• Whether barriers to entry and expansion diminish competition from "challenger firms."

A "provisional decision report" is expected to be published in July 2018, with the final report due in March 2018.

Advancing the FCA’s analytical engine

Stefan Hunt, the FCA's head of behavioural economics and data science, recently delivered a speech about the analytical designs, models and techniques that his organisation has been developing to help it understand and oversee things better, especially in the consumer credit market.

Analytics support regulation

More than half of the UK’s adult population are in some form of outstanding consumer credit debt. Although lenders pay a good deal of attention to the probability of consumers defaulting, the regulator is more concerned with the harm that poor practices might do to those consumers.

Harm can take many forms and the FCA uses many types of data to assess and manage potential and emerging problems in this area, including "information asymmetry" (where one party has more or better information than the other) and behavioural problems (such as psychological quirks which prevent consumers from acting in their own best interests).

The FCA’s analytical engine

Over recent years this work has enabled the regulator to make key changes and important decisions, including the following.

• The payday lending price cap. Using details of loans that 37 firms previously granted to regenerate credit scores, the FCA created a model of payday lenders’ decision making. This has enabled the regulator to assess the impact of a range of different cap structures and levels, both on the profitability of firms and on consumers who would no longer have access to this form of short-term credit
• Market analysis of high-cost, short-term (HCST) credit. As part of the work behind the FCA’s most recent publication about HCST credit, the regulator analysed the credit scores of consumers taking out these forms of credit. When this data was combined with other findings from the credit reference agency, including market size, consumer vulnerability and metrics of consumer harm, a picture of how the market is performing starts to emerge.
• Understanding the use of overdrafts. One area of high-cost credit currently causing concern is the cost of using overdrafts. The FCA gathered the transaction history of 250,000 customers from the top six current account providers and used analytical models to determine the different types of consumer and their usage patterns.

Analysis at the FCA

Data from credit reference agencies and behavioural data from firms are two of the most valuable sources of data for regulatory analysis, with various analytical techniques available to the FCA to achieve optimal results.

The FCA is committed to ensuring an evidence-based, forward thinking approach to regulation and is currently using analytics as a significant component of several ongoing projects.

FCA publishes results of its "ageing population project"

The FCA has published the results of its work into the public policy implications of an ageing population and how both the regulator and the wider financial services industry can better support their needs.

This is the first in a series of documents focusing on the needs, attitudes and behaviour of consumers which will feed into an overarching ‘Approach to Consumers’ strategy to be published later this year.

The FCA’s Occasional Paper 31 details the risks that arise when the financial services needs of older generations aren’t met, resulting in exclusion and potentially poor outcomes. They are also more likely to experience periodic or permanent vulnerability.

While the FCA isn’t proposing any additional rules or guidance at this stage, the regulator has outlined a number of areas for firms to consider, split into three distinct areas.

1. Product and service design

Very often, products and services are designed with an ideal or ‘perfect’ customer in mind, not taking into account the needs of older customers, or those with specific weaknesses. Systems and policies to do with "the customer journey" are also not designed with enough flexibility to take a real individual’s circumstances into account.

Firms should consider:

• anticipating the current and future needs of older customers in their target markets;
• providing additional support or alternative access channels for weak or elderly consumers; and
• testing products on a range of consumers, including older customers.

2. Customer support

Although the FCA does not expect firms to build processes around the needs of the UK's ageing population, it wants firms to think how they can provide older customers with greater support in the following ways.

Finding the most appropriate products and services to meet their needs.
Helping them to realise when they are experiencing difficulties and encouraging them to talk about those difficulties.
Taking steps to put the appropriate support in place when customers require it, or in the event of their needs changing.

3. Continual reviews and adaptations

The market is constantly changing, so no firm is conducting a once-only exercise when it meets the needs of older consumers. Such a job requires continual, strategic changes. The FCA thinks that they should work out whether it is worth adapting or retaining channels for those consumers who rely on them. It also thinks that they should never stop reviewing their strategies, business models, policies, controls and management information (MI) to ensure that they remain appropriate in the light of changing needs among customers.

Related matters

The FCA also said that it had been exploring other, related subjects and had made some findings. Under one heading, that of "engagement with retail banking," it said that staff can be trained to notice when a customer is experiencing difficulties and refer him quickly to a specialist team; that banks might think of creating safe environments and cultures in which customers are comfortable to talk about the difficulties that they are experiencing; that they might work out how to identify people who are finding a specific transaction or interaction particularly 'challenging' and try to remove them from standard processes and provide specialist support; and that they might consider the needs of their older consumers when developing distribution channels or plugging in new technology.

Under another heading, that of "third party access and planning ahead," it said that firms and their trade bodies (such as the British Bankers Association, which has done some work in this regard) could consider making it easier for older people and their carers to set up and use third party access arrangements safely. Under yet another heading, entitled "later life lending," it said that lenders and intermediaries could consider how to 'signpost' consumers to alternatives when they 'decline someone' due to an upper age limit or affordability. They could do this by saying that a ‘no’ from one firm does not necessarily mean a lack of eligibility across the board, while pointing out alternatives.