The FCA’s 5 Conduct Questions Programme

 

 

The Financial Conduct Authority (FCA) has published its latest Industry Feedback on its 5CQ Programme (5CQ). This is the third annual report since 5CQ was introduced in 2015 for wholesale banks as a tool to help improve their conduct risk management and drive cultural change.

Although this report looks at 50 firms in the wholesale banking sector, the FCA emphasises that its content is relevant for all firms in the financial sector and should be of interest to boards, non-executive directors (NEDs), all staff and other stakeholders.

The report is split into three sections:

Section 1 identifies the FCA’s high-level observations over recent years on strategic factors that may help firms reframe, extend, or energise their efforts.

 Section 2 gives an update against each of the 5 questions, providing specific examples of good and weak practices.

 Section 3 sets out the FCA’s assessment of ‘speak up’ cultures and whistleblowing initiatives.

The 5 Conduct Questions that make up 5CQ are:

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?

There is no prescriptive FCA definition of conduct risk, firms are expected to develop their own definition and strategies, putting in place a tailored conduct risk framework to address their particular risk exposures. In doing this, firms should take into consideration a number of conduct risk drivers that have their roots in the firms’ structures and behaviours.

The key conduct risk drivers, which could create a risk of harm to consumers or market integrity are:

Governance – Poor governance arrangements cannot effectively identify and mitigate risks of harm caused by its business activities.

 Conflicts of interest – A firm that does not routinely review its business model cannot effectively recognise potential conflicts of interest.

 Systems and controls – A firm that has inadequate systems and controls cannot effectively identify risks of harm caused by its activities.

 Business model – A firm’s business model can itself be a driver for conduct risk.

 Culture – Tone from the top shapes how conduct risk is approached and managed.

 Key messages in this report include:

• Good conduct and culture is increasingly recognised as a competitive advantage.
• Framing conduct as an integral part of broad corporate goals has a positive impact on effective implementation.
• Non-financial misconduct needs much more attention from staff at all levels.

Non-financial misconduct is an inherent risk in any industry. Serious misbehaviour is toxic to a working environment and can lead to bad outcomes for customers, staff, other stakeholders and the firm. This area clearly requires management attention and a broader change in firms’ mind-set.

While there is much more to be achieved, this report notes that firms have continued to make significant progress in their conduct initiatives. Despite this progress, nevertheless, non-financial misconduct has emerged as a significant concern, which remains an issue where firms’ risk identification, response and mitigation is underdeveloped. Clearly, more managerial attention is needed. Both the more generalised speak up culture and the whistleblowing channel need improvement.

With regards to remuneration, the FCA states that it cannot overlook the gender pay gap, which in some firms, was quite marked, and that it is important that firms consider the fairness of its remuneration policy. Commission-based remuneration still dominates the wholesale/agency brokerage sector.

E-learning remains popular amongst firms, however, the FCA is concerned that some firms may not be providing sufficient conduct risk training or adequate follow-on support.

Why is 5CQ important to you?

The FCA strongly encourages firms and senior management to be ambitious when designing conduct programmes, and ensure that good practice becomes the resilient norm throughout their organisation. As part of its routine supervision, and as part of 5CQ, the FCA will continue to engage with firms on their conduct across the wholesale financial services sector. The FCA has also indicated that it will increasingly test and challenge management and staff on conduct progress, with focus on four important drivers of behaviour: purpose, leadership, people (approach to reward and management), and governance.

Senior management of all firms should review this report and take it into account to inform their continuous work on conduct, governance, and culture, and as part of their engagement with the FCA.

Finally, the report includes a non-exclusive list of 8 questions that the FCA indicates it “might ask boards and executive management and that they might investigate in their firms.” That list is reproduced here:

1. Are conduct and related programmes suitably framed against your firm’s purpose and longer-term competitiveness and sustainability?
2. Do your conduct and related programmes include sufficient efforts to strengthen and support good behaviour rather than just reduce or eliminate bad behaviour?
3. Is there an adequate bottom-up exercise to identify and help prioritise conduct risks throughout your whole firm?
4. Do you have strategic HR programmes that focus adequately on developing the individual human skills that underpin conduct and culture change in line with the ambitions of the firm for itself and its staff?
5. In the shorter term, do your business managers and each of your lines of defence sufficiently recognise the variability and changing mix of conduct risks across your firm, and act on this?
6. In the longer term, does your firm adequately capture insights from bottom-up exercises, training programmes and crystallised events at an organisational level, such as in your overall corporate strategy, policy, and updated training?
7. Looking at the evolving use of technology and digitisation, are you giving enough consideration to conduct risks that can arise as a result?
8. Are you and management doing enough to address non-financial misconduct and personal misbehaviour?

If you require any assistance in understanding how 5CQ might apply to your business please do not hesitate to contact us.