Banking & Finance

Culture and governance is one of the cross-sector priorities of the Financial Conduct Authority (FCA).  In 2015 the FCA  introduced the 5 Conduct Question (5CQ) programme for wholesale banks.  5CQ were five overarching questions for firms to use to challenge themselves and focus their efforts.  It was intended to act very much as a coaching tool to help firms to improve their conduct risk management and, ultimately, drive cultural change.   FCA has been at pains to note, however, that conduct and governance are issues for all regulated firms, not just banks. Considering and addressing these issues is therefore a key responsibility to be addressed by every firm’s leadership. The 5CQ should also be considered carefully in setting roles and responsibilities for firms’  staff within the senior managers regime.

What are the 5 conduct questions?

1. What proactive steps do you take as a firm to identify the conduct risks inherent within your business?

2. 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?

3. 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?

4. 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?

5. Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct?

FCA Feedback on firms’ approach to 5CQ to date

In the FCA’s 2019 feedback report the FCA  makes some very interesting observations as follows:

  •  they note that conduct is not just a question of monitoring compliance with rules and avoiding breaches and have suggested that firms should

pay more attention to developing and safeguarding positive behaviour in its own right. This would reflect that firms more fully recognise that conduct is part of the corporate engine driving growth. It is a potential differentiating factor in competition for customers and potentially in restoring the reputation of financial services firms as positive contributors to the fabric of society

  • non-financial misconduct (such as, for example, sexual harassment and workplace bullying) has emerged as a significant concern for the FCA which feels that firms’ risk identification, response and mitigation remain under-developed. they note that:

A firm which effectively addresses non-financial misconduct, encourages people to speak up and be heard or challenges behaviour and responses is demonstrating an aspect of a healthy culture

Highlighted aspects of good practice

FCA has highlighted a considerable number of points of good practice, including the following:

  •  declaring ‘zero tolerance for conduct risk’  can make staff fearful and reluctant to disclose problems, re-positioning as ‘zero tolerance for unmanaged conduct risk’ where staff are positively encouraged to be alert and respond to risks can be preferable.
  • there can be a benefit in reframing initiatives to focus more on rewarding efforts such as identifying and resolving policy deficiencies, rather than solely punishing breaches as they happen.
  • a “bottom-up” approach creates the opportunity to harness a wide range of different professional competencies and develop new insights and can generate strategic value by introducing new risks or competitive business responses that top-down approaches are unlikely to have identified.
  • staff training should focus on developing a sense of what should or should not be acceptable, rather than relying on centrally provided instruction which might not cover an emerging risk. Training scenarios which do not have a clear outcome  (“grey issues”) help develop judgement and makes staff appreciate the value and importance of discussion, challenge and the relevant, prompt escalation of issues.

There is much food for thought for the asset management industry in the FCA’s report.  Click here for a copy

Karen Fountain

Partner at Brodies LLP
Karen is a partner at Brodies in the corporate team. She has over 20 years' experience of advising leading financial institutions, funds and intuitional and strategic investors across the globe with a broad range of matters.
Karen Fountain