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Culture, Governance and Accountability

The key to managing regulatory risk?

The UK financial services regulators continue to focus on the role of culture in the firms they regulate as a driver for potential harm. From our advisory and contentious work with clients we see first-hand the extent of regulatory scrutiny on how firms promote a positive healthy culture and how their governance structures and systems and controls support this.

We have unparalleled experience assisting financial services firms with the implementation of the SMCR. Our risk advisory and contentious regulatory specialists can help clients to assess the effectiveness of their governance frameworks and remedy issues identified. With other colleagues and specialist non-legal practitioners, we understand what culture is and why it matters. What’s needed will depend on the size, scale and maturity of the, firm in question. Our work with rapidly growing fintechs and challenger banks, as well as established global institutions allows us to tailor our advice to meet clients’ needs.

Through our work with clients on these issues we have identified seven themes that are central to effective engagement with the regulators for firms of all types. Over the coming weeks we will publish a series of short posts highlighting some of the questions that arise in relation to each of these themes and how these questions crystallise around certain regulatory priorities. Check in here to review the latest updates.

Board governance

Who is on the Board? What skills do they have – and what skills do they need? The role, structure and composition of the Board is critical to effective oversight. What’s required and appropriate will depend on the nature of the firm; at the same time there are universal principles to be drawn around how to promote effective escalation and challenge.

Executive governance

How does the executive exercise effective oversight of delegated matters? Since the introduction of the SMCR senior managers have focused on reasonable steps frameworks to demonstrate their compliance with these regulatory obligations. What does best practice look like, to ensure clarity for individuals? What information do executives need and how can this be presented to focus attention where it’s needed? What extra support does the executive need at critical points – on arrival in role, or to provide an attestation to regulators?

Conduct and culture

As conduct risks change, can your conduct risk management respond? The FCA has been clear that changes to working practices and market stresses as a result of Covid-19 will not excuse misconduct. Are staff at all levels clear on what conduct is acceptable – and able to identify conduct risks as these emerge? Can you limit the impact of periods of stress on culture? Does your response to non-financial misconduct support your culture?

Risk and control

The three lines of defence model has become near universal, expected by regulators for all but the smallest firms. Dynamic risk identification and management in the first line remains a priority for both firms and the regulators but brings with it some practical challenges. How do second and third line functions support a firm’s culture? When and how should you tweak the model and how do you know when it is working well?

Conflicts of interest

Conflicts can arise at many levels: identification and management of the associated risks is a key element of a healthy culture. Strict rules will apply in some contexts. Are your staff and management alert to potential conflicts? How are the risks built into product design or new business processes? How are intra-group conflicts managed, especially where individuals act as directors on group entity boards?

Internal reporting

Getting the right information to the right people is a perennial challenge: who is the decision maker that is going to solve the problem and how much information do they need? How do staff know what to escalate, and is there sufficient focus on cascade? Are reporting lines clear internally and what do they really mean in practice?

Holding people to account

Swift and effective disciplinary processes are vital to promoting a culture of trust, alongside the speak up and listen up campaigns that are now widespread. Do your disciplinary processes promote openness? How do you monitor whether your whistleblowing policy is effective? And that complainants don’t suffer long term career consequences?
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