Readers will have noticed an increased regulatory focus on culture and governance. Learning from previous scandals and issues, how can we navigate this landscape today?
The current attention from the regulator on pension transfers and Sipps remind us that, despite years of treating customers fairly rules, and remuneration and incentive reviews, some of our industry still finds it difficult to grasp the fact they act as the agent of the client.
The client relies on the adviser to act on their behalf and trusts them to provide suitable advice. Treating that customer fairly is the most important objective.
So what has gone wrong? The decision to grant pension freedoms may have played a role but there is no doubt culture is a big factor.
FCA chief Andrew Bailey said last year: “Culture can be remarkably resilient in the face of attempts to change it. However, if culture is ignored, then an opportunity is lost to tackle one of the major root causes of conduct failures. The answer is not to try to tackle the culture but to act on the many things that determine it, of which governance and remuneration are important.”
One of the core issues is the challenge provided to the senior leadership. Whether it be one individual or a listed board, do they receive the right level of challenge in the strategic and operational plans they implement?
You might think I am advocating the role of a non-executive director for every firm. I am not. But that may well be the solution for some depending on their size and complexity.
For others, it can be as simple as a friend of the firm, client or discussion group. The key is to open the business up to some form of external evaluation.
Some firms have set up advisory boards with clients playing a key role in the strategic development of the business, or investment and governance committees with external input from like-minded firms. Do not be afraid of some devil’s advocate debate.
As we grapple with the implementation of Mifid II and the impending impact of the General Data Protection Regulation, we are also waiting to see what the final extended Senior Managers and Certification Regime will look like.
One thing that seems very clear is that individual accountability will become increasingly important, with directors or senior managers having a “duty of responsibility”.
Under that duty of responsibility, the FCA may take action against a director or senior manager where:
- At the time of a contravention of the regulations, the senior manager was responsible for the management of any of the firm’s activities in relation to which the contravention occurred; and
- The senior manager has not taken reasonable steps to avoid the contravention occurring or continuing.
Reasonable steps will involve the appropriate recording of decisions, actions and delegations so it is clear how a particular approach or strategy has been agreed.
Firms must aim for the type of culture that welcomes a little tap on the shoulder or whisper in the ear that says: Why are we doing this? Who is really going to benefit? Does this smell right? Would I sell this to my mother? Can I explain this to the FCA, Financial Ombudsman Service or a judge? Does this genuinely feel right for my business?
If there is any wavering, are you able to challenge your colleagues? These are the sort of reasonable steps to be demonstrated. Whatever size the business, there is room for challenge and the need to embrace it.
Simon Collins is managing director, regulatory, at Eversheds Sutherland Consulting