On 26 April 2021, the FCA published a speech delivered by Mark Steward (Executive Director of Enforcement and Market Oversight) on 31 March 2021, on compliance, culture and evolving regulatory expectations. Extracts from the speech are set out below.
The speech highlights:
- The Senior Managers Regime (SMR) has changed the way firms allocate responsibilities, align those responsibilities to relevant controls and ensure oversight as to how these controls operate down the line.
- The 5 Conduct Questions (5CQ), which start with ‘tone from the top’, are increasingly focussing on ‘tone from within’ which requires every person in an organisation to be personally accountable and engaged.
- Every employee of a regulated firm is subject to individual conduct rules, which impose broad obligations.
- The SMR and 5CQ questions require firms to think about how a system or function might fail because of non-compliance, and they inject a sharper focus on conduct risk into the fabric of an organisation.
- As demonstrated by enforcement cases, failures are not necessarily failures of compliance, but the consequence of choices made by individuals.
The SMR regime
The SMR regime has wrought some profound changes in the way firms allocate responsibilities, align those responsibilities to relevant controls and ensure oversight as to how these controls operate down the line. Implementing the new regime has meant firms have built into their systems explicit reasonable steps to prevent non-compliance. This has required an assessment of what may make a particular control system or function more vulnerable to failure because it is in those places that the senior manager’s reasonable steps need to be particularly evident.
Self-evidently, to be reasonable, those steps must be properly implemented and they must be effective. By imposing personal liability, the regime uses self-interest – in this case the senior manager’s self-interest in avoiding liability – to avoid the bear pit of enforcement. This is a virtuous circle: what protects senior management from liability also reduces (though cannot guarantee) the risk of non-compliance more generally within firms.
The 5 Conduct Questions or 5CQ
The FCA has undertaken a uniquely nurturing role in this transformation and developed a new tool, the 5 conduct questions or 5CQ, expressly to help firms implement more effective change programmes as well as helping the FCA to interrogate progress.
The 5CQ are addressed to firms and require self-reflective answers to the following:
- What proactive steps do you take as a firm to identify the conduct risks inherent within your business?
- How do you encourage the individuals who work in front, middle, back office, control and support functions to feel and be responsible for managing the conduct of their business?
- What support (broadly defined) does the firm put in place to enable those who work for it to improve the conduct of their business or function?
- How does the Board and ExCo (or appropriate senior management) gain oversight of the conduct of business within their organisation and, equally importantly, how does the Board or ExCo consider the conduct implications of the strategic decisions that they make?
- Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct?
The FCA are considering a sixth question which will interrogate firms on diversity and inclusion, another telling indicator of culture.
Embedding behavioural change
The Senior Managers Regime and the FCA’s 5CQ questions are great drivers of a different approach because they require firms to think about behaviour at the point it might fail. The senior managers statutory duty of responsibility is based on steps taken to avoid or prevent non-compliance which requires an acutely calibrated assessment of how a system or function might fail because of non-compliance. The focus on points of failure not only encourages greater awareness, it also promotes better calculations of judgement. The focus on points of failure not only encourages greater awareness, it also promotes better calculations of judgement
In summary, the FCA believes that the Senior Managers Regime is a cogent framework for injecting sharper focus on conduct risk into the fabric of an organisation. The rules here do not exist as externalities, they are under the skin of the firm. And the 5CQ approach is one that is also engaging firms with the challenge of transformational change, starting with the ‘tone from the top’, burrowing down and into the firm’s roots.
