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Speech by Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations at City & Financial's Culture and Conduct Forum.
Speaker: Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations
Event:City & Financial's Culture and Conduct Forum
Delivered: 23 November 2023
Note: This is the published version of the speech which may differ to that delivered.
Highlights
As firms look to raise the bar under the Consumer Duty, they need to consider how their own culture can help to drive better outcomes.
New, flexible proposals on D&I will help firms to drive changes that are ultimately beneficial, but it’s important that the purpose of this is understood and that the right policies and procedures are in place to ensure an inclusive culture with the right incentives.
Enabling people to contribute, challenge and add value means listening, looking at processes and making changes to ensure people can perform at their best.
Introduction
Last year I spoke to you about the Consumer Duty and making sure firms offer the right environment for people to provide challenge and speak out.
Since then, the Consumer Duty has come into force and we have published, with the PRA, a consultation paper on diversity and inclusion (D&I)– which closes on 18 December.
Understanding purpose
Let me start with the Consumer Duty, which came into force this summer.
The duty raises the bar on how firms should treat their customers, with greater focus on acting in customers’ best interests and putting them in a position to make effective decisions.
We recently saw one large wealth manager overhaul its fee structure to make it simpler, more transparent and comparable.
The firm in question highlighted that it expected to see higher medium- to long-term income generation from the change, despite upfront costs in the short term as part of the transition.
It makes good business sense, but we also know that it will mean that some firms will need to reflect on their culture and how it supports these outcomes.
When the Senior Managers & Certification Regime (SMCR) was being implemented, we said that healthy cultures would help Senior Managers meet their objectives.
But how do you build a healthy culture?
One place to start is diversity and inclusion – and it’s really important that we reflect on the inclusion aspect.
Our recent proposals aim to boost diversity and inclusion in the financial services sector and unlock talent.
The aim is to deliver better internal governance, decision making and risk management, ultimately strengthening the safety and soundness of firms with better outcomes for markets and consumers.
The proposals are designed to set flexible minimum standards to raise the bar in the sector by making sure firms develop a D&I strategy setting out how they will meet their objectives and goals.
In 2022 we undertook multi-firm work on approaches to D&I in financial services.
Almost all the people we spoke to were committed and passionate about making progress.
While there were thoughtful initiatives underway, many firms’ strategies were generic and did not take a holistic view.
They lacked both a clear articulation of purpose and actions oriented to achieving their goals.
But the reality is that if the purpose is not clearly understood, articulated or indeed backed up with actions then ‘tone from the top’ is little more than lip service.
We have long argued that D&I makes good business sense, because a diverse and inclusive environment is one where colleagues can challenge.
It reduces the likelihood of group think.
Taking this further we can see how it could enable firms to better understand their customers' diverse needs
Ultimately leading to better customer outcomes.
Building an inclusive environment
A healthy culture on its own may not equal profit, but a poor culture can certainly lead to calamity.
In the past few months we have seen a notable firm closure originate in a non-financial misconduct issue.
We are proposing guidance to make clear that misconduct such as bullying and sexual harassment pose a risk to healthy firm cultures.
It will help ensure firms can take decisive and appropriate action when such behaviours occur.
To succeed, the right policies, controls, processes and incentives are necessary, but not sufficient on their own.
Cascaded strategies and purposes need to align to both positive action and consequence management when necessary.
Colleagues who feel they can be themselves, who feel confident that they can speak up and will be listened to are empowered to perform better.
That means fostering an inclusive culture throughout.
Second and third line functions can help senior management functions (SMFs) achieve this by holding all leaders to account for their organisation's culture, not just the individual whose statement of responsibilities it sits in.
Making sure there’s confidence in hiring and promotion practices and supporting the development of talent.
That means ensuring a transparent articulation of policies and targets to inspire confidence.
These things are inextricably linked and mutually reinforcing: hiring the right people can improve culture, in the same way that getting your culture right can improve your ability to hire top talent.
In our proposals we have put flexibility at the heart, because we know there is no one size fits all.
However, transparency remains a crucial component.
It needs to run all the way through to the top – to enable good governance, and to make sure boards to have the information they need to set cultural and strategic direction.
This applies to not only culture, but can also be seen in light of the outcomes under the Consumer Duty.
Putting customers at the centre
Coming at this from the perspective of a Chief Operating Officer, I have strong affinity towards process efficiency.
Anyone who knows me will also know that I’m slightly obsessed with data and metrics.
At the FCA we like to walk the talk.
That’s why we now apply similar principles to the firms we regulate.
Beyond setting targets for representation, we’ve applied the SMCR and operational resilience to our organisation.
That’s not been without its challenges, not least because we are different from the firms these are designed for.
They remain important because they come down to having the right processes in place.
Fundamentally, when you get those right, you get the most from your employees.
For us internally it has meant putting the operational building blocks in place and taking industry best practice to the FCA with a focus on operational efficiency and effectiveness.
Alongside that we have worked to enhance transparency, and to monitor outcomes.
We’re working closely with the Government on metrics and welcome industry feedback on how we can measure our performance against our secondary objective to promote competitiveness and growth in the medium to long term.
But we are also mindful about how our metrics – and we already publish a range of these – interplay with behaviours.
We want to make sure the right incentives are in place.
One question people used to ask when our Authorisations process wasn’t quite as pacy as it is now, was how quickly we allocate cases.
It’s an example of Goodhart’s law – once a measure becomes a target, it ceases to be an effective measure.
My answer was always that we could allocate immediately if people wanted to, but in the face of significant queues, focusing on that would make little difference to the end outcome for customers.
In fact, it would most likely stretch our case officers even further, contributing to burnout and a reduction in the quality of our assessments, rather than improved outcomes.
Not a culture that would help people perform at their best.
Ultimately measures and targets need to focus on the desired end outcome and incentivise positive work environment and good behaviours, especially for leaders.
What we focused on instead – in line with ambitions to be more transparent and implementing a customer mindset – was making sure we were open and honest about our challenges, communicating these as clearly as possible.
More importantly, focus on the overall outcome we were seeking meant we also invested in people and in processes.
This helped to foster an environment in which we delivered a reduction in the queues of more than 50%.
Taking an outcome-focused approach has meant that we now process cases more quickly, while maintaining a robust gateway.
And, in a way that focusing on time-to-allocate would not have, it also enables us to work more closely with firms throughout the process, ultimately benefitting their chances of being authorised.
This is in addition to the work we have done to strengthen our pre-application processes and to smooth the path from our Innovation Sandbox into the authorisations process.
We’re taking that mindset of customer centricity one step further and have launched Early and High Growth Oversight to nudge 300 firms initially into adopting the right culture and behaviours early in their lifecycle as authorised firms.
This initiative also supports young and innovative firms looking to scale at pace.
Reducing costs and adding value
Other things we’ve been looking at across the FCA is how we strengthen our operational base to reduce work that takes up a disproportionate amount of time compared to the value it adds.
When I first joined the FCA I used to walk around the floor and ask people their thoughts.
It yielded a lot of very useful insight.
Part of the transformation journey is the digitisation of our authorisations forms, with our most used form recently launched in beta.
We receive about 15,000 applications a year using this form.
A key benefit of the new forms will be to help firms put in better applications by making sure these are easier to use and can’t be submitted until all fields have been completed
It means we will get better applications and can focus on substance rather than hunting down missing information.
Elsewhere, to embed behavioural change, instil greater discipline and align incentives we’ve not only made our project management simpler for everyone to understand.
We have adjusted governance over the change portfolio and the charging model underpinning it.
This has enabled us to prioritise better and reduce costs, while delivering against our targets.
We’ve also looked at our processes more generally from an end-to-end perspective to see where these can be more joined up and where there is unnecessary duplication.
An example is the improvement in the way we triage vast amounts of information received by our contact centre to ensure this is handled most effectively.
Our colleagues told us in our annual survey that other internal processes were slowing them down.
We surveyed colleagues for feedback on processes that were particularly sticky – nicknaming it the ‘treacle challenge’
In other words, we listened and made sure colleagues were included in work that ultimately sought to benefit them as end users.
These things make a difference.
We started in procurement, where we were already working on implementing a new procurement solution.
Aligned to this, we looked at ways to smooth some of our clunkier processes and ensure these were clear, with guidance on processes and legal frameworks – ultimately saving colleagues time.
We took advantage of the new system to build in and monitor service level agreements (SLAs) on engagement with our procurement function.
This in turn will generate better management information (MI) to be shared with senior levels of the organisation.
This has all been done with the aim of us making us a more efficient and effective organisation, delivering public value and better use of resource, ultimately benefitting the firms we regulate.
It means colleagues can focus more on adding value by applying their judgement.
Because in my mind this is one of the keys to a good culture – enabling people to perform at their best.
Finding opportunities from new technology
We’re by no means near the end of the journey of improving our processes.
We need to constantly evaluate and adapt to developments in technology to deliver innovative and efficient regulation.
One question we, along with most others, are currently pondering is the potential of machine learning and artificial intelligence (AI) to take this further, and possibly faster than ever before.
This includes looking at how we can securely adopt large language models (LLMs) or other forms of Generative AI.
To do this we are making sure to build strong controls or governance, including ensuring appropriate levels of human or technical validation appropriate to the very different models, and associated novel threats, emerging.
Areas where we could see benefits in future would be coding support, summarisation and deep retrieval search capabilities.
We’re also mindful of the broader debates this inspires and are looking at the way this is applied across the industry and what it means for consumers, markets and competition.
This is one of the strands of our regulatory work on AI.
Another is how it’s going to affect consumers and how to make them aware of any risks they might be exposed to.
Finally, we are mindful of our role in broader debates on AI, the efficacy of using it and the guardrails that are needed for it to be applied appropriately.
This will involved significant ongoing coordination with our regulatory colleagues, both in the UK and overseas.
Conduct
I haven’t forgotten that this is the culture and conduct forum.
Conduct, of course, is our middle name.
Which is why we take culture so seriously.
But this means thinking beyond platitudes to attract diverse talent.
It means building an environment where talent can thrive, and the right behaviours are incentivised.
It’s about having the right policies and processes in place.
It’s a culture that’s truly inclusive.
It allows people to bring their whole, and best, self to work.
It means setting targets and measurements that are transparent, to build openness, confidence and to drive accountability.
Crucially, succeeding also means that you understand why you’re doing it, why it’s so important.
From our perspective, it’s quite straightforward.
Strong, healthy cultures help to foster good conduct.
In more tangible terms, it translates to healthy, stable, and competitive markets and good outcomes for consumers.
And that is our purpose as a regulator.
https://www.fca.org.uk/news/speeches...re-and-conduct
