On 4 February 2025, Emily Shepperd, the Chief Operating Officer of the FCA, delivered a speech on the importance of building and maintaining a healthy firm culture – emphasising the regulator’s continued supervisory and enforcement focus in this area. This article highlights some of the key takeaways from the speech, along with practical actions which firms can consider implementing.
I. Key takeaways from the FCA’s speech
1. It starts with culture.
Ms Shepperd stated that failings in culture and governance are routinely found by the FCA to be the root cause of consumer protection and market conduct issues, because:
“Culture drives conduct and decision-making, which directly impact outcomes for consumers, markets, and our economy”.
It is not the first time that the FCA has stressed this point – in its 2024 Approach to Supervision, the regulator confirmed that it looks to “the drivers of culture which underpin a firm’s conduct”, suggesting that when a matter draws the FCA’s attention to a firm, that firm should expect scrutiny of:
- its purpose (whether at a strategic level, or of a particular system and/or control);
- the competence and compliance of the firm’s leadership;
- its approach to rewarding and managing people; and
- its attitude (e.g. towards compliance).
These elements of culture set the tone for a firm’s compliance with FCA requirements around consumer protection and market conduct – and, indeed, wider requirements around risk management and resilience.
2. Culture goes hand-in-hand with economic growth.
Against the backdrop of the Government encouraging UK regulators across industries to support its economic growth mission, the FCA has made clear that it views healthy firm cultures as being central to growing the UK economy more widely.
Economic growth, Ms Shepperd states, is “reliant on a foundation of healthy firm cultures” that are capable of taking greater “thoughtful and calculated” risks, and in so doing “fuel innovation, agility and longer-term success” for themselves and the UK as a whole. Firms that foster environments which promote “psychological safety” are more likely to encourage diversity of perspective, thereby supporting better decision-making and preventing the risk of “groupthink”.
3. Non-financial misconduct – a red flag for a “failing culture”.
Ms Shepperd noted that the presence of an unhealthy culture “raise[s] serious questions about a firm’s wider decision-making and risk management.” Therefore, if the FCA finds that a firm has an unhealthy or toxic culture, it may also conclude that the firm does not make good decisions or manage risk well – and it may, accordingly, take action against that firm.
Unsurprisingly, non-financial misconduct (“NFM”), including bullying, harassment and discrimination, was identified as being “one of the clearest warning signs” of a toxic culture. How (and whether) a firm addresses these behaviours is often what distinguishes a healthy firm culture from an unhealthy – or, indeed, failing – culture.
Ms Shepperd confirmed that the FCA is set to publish its revised rules and guidance on NFM shortly, and that it is working with the PRA to consider the next steps of its wider diversity and inclusion proposals (CP 23/20). Given widespread industry and Government feedback (as referenced in the Sexism in the City inquiry) around the regulators’ DEI proposals on data reporting and target setting, we might expect to see a paring back of these requirements, with greater emphasis on senior accountability for appropriate management of conduct.
4. The ripple effect of culture – and the importance of accountability.
Ms Shepperd describes a firm’s culture as being “contagious” – for good or ill. Culture can “act like social immune system” and stop the spread of bad behaviour – or it can exacerbate it.
Consequently, senior leadership at firms play a crucial role in maintaining a healthy culture – to this end, Ms Shepperd hailed the Senior Managers and Certification Regime (“SM&CR”) as having “driven up standards” and “supported a culture of accountability”.
Nevertheless, Ms Shepperd signalled that the FCA is willing to use the SM&CR rules as a means of enforcement in cases where a firm’s culture does not meet the required standards. She also confirmed that the FCA, in coordination with the Treasury and the PRA, are reviewing, and will soon publish a consultation paper on, the SM&CR rules in order to make the regime more “efficient and effective”. Based on the indications of the Chancellor of the Exchequer in her Mansion House speech in November, we anticipate this review will focus predominantly on the certification element of the regime.
II. Practical Considerations for Firms
Given the continuing regulatory importance of setting and maintaining a healthy culture, we have set out below some practical actions which firms may consider:
- Training at all levels. The importance of tailored culture, conduct and NFM training cannot be overstated. This expressly includes the training of senior management, who must ensure that they follow firm policies and procedures on conduct issues, including non-financial misconduct – rather than addressing situations informally on their own, which is likely to be frowned upon by the regulator. In our experience, the most effective (and thought-provoking) training will include thorny ‘real-life’ scenarios and relevant case studies. As culture, conduct and NFM are inextricably linked, many firms will opt to combine these topics within training programs.
- Incorporation of NFM (and related expectations) within firm policies and procedures. Following its February 2024 culture and non-financial misconduct survey, the FCA reported its concerns regarding the availability and/or robustness of firm policies around disciplinary, remuneration and whistleblowing processes. Firms should ensure that their relevant policies adequately cover NFM, such that employees are clear as to: (i) what behaviour amounts to NFM; (ii) what to do when they witness or are subjected to conduct which they reasonably suspect amounts to NFM (i.e. escalation routes); and (iii) what consequences (including with respect to remuneration and disciplinary action) there may be in relation to such behaviour. Many firms will also clearly articulate an expectation that employees will conduct themselves with integrity and respect outside of the workplace, as well as in the office.
- Cultural root cause(s)? Firms should consider whether misconduct may indicate a wider cultural issue. Key questions to address include:
- What caused the misconduct? For instance, was the misconduct attributable to a poor tone from the top and/or lax attitude towards compliance within a particular area of the firm?; and
- Over time, are any potentially troubling themes or patterns emerging? For example, an inordinate rate of non-compliance in a particular team – which suggests that there may be cultural issues.
Evidently, if cultural issues are ultimately identified, they will need to be credibly addressed – failing which, the firm’s Senior Management could be vulnerable to a ‘failure to address’ allegation by the regulator.
Our team would be happy to address any questions you may have on this subject.
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