Bailey identifies cultural failings as a factor in recent cases of non-compliance

In a speech (5-page / 153KB PDF) earlier this week Andrew Bailey, deputy governor for prudential regulation at the Bank of England and chief executive of the Prudential Regulation Authority, said a firms' culture "is of the utmost importance to financial regulators".

"Culture has a major influence on the outcomes that matter to us as regulators," said Bailey, who will become the new chief executive of the Financial Conduct Authority (FCA) in the summer.

"My assessment of recent history is that there has not been a case of a major prudential or conduct failing in a firm which did not have among its root causes a failure of culture as manifested in governance, remuneration, risk management or tone from the top. Culture has thus laid the ground for bad outcomes, for instance where management are so convinced of their rightness that they hurtle for the cliff without questioning the direction of travel," he said.

Bailey said that the banks and other financial firms can help improve public perception that they exist to exploit customers through changes in culture.

"Firms exist to service customers who make up the public interest, which of course means that service includes the notion of not exploiting customers, a value one might expect to be given in an organisation’s culture," Bailey said.

It is not for regulators to determine the culture of firms but regulators can instead influence the cultures that exist, he said.

"We seek to ensure that firms have robust governance, which includes appropriate challenge from all levels of the organisation; and promote the acceptance that not all news can be good and the willingness to act on and respond promptly to bad news," Bailey said. "We insist that remuneration is structured to ensure that individuals have skin in the game, namely that a meaningful amount of past remuneration is retained or deferred and for senior people is at risk should problems then emerge. We require that risk management and internal audit in firms are effective and act to root out poor incentives and weak controls."

"All of this is important and central to what we do as regulators, but let me reinforce the point that culture begins and lives, and I am afraid dies, at home, with firms. It is not for us as regulators to prescribe culture, that would not work," he said.

The introduction of the Senior Managers and Certification Regime should have a bearing on firms' culture, he said.

"Responsibility is the central plank of the new Senior Managers Regime," Bailey said. "We do want senior managers to feel this responsibility in all that they do and that includes a responsibility for forming and implementing a positive culture throughout the organisation… Responsibility, as embedded in the Senior Managers Regime, is therefore an important hook to assist in firms’ shaping their own culture, and also to provide regulators with the powers to conduct supervisory oversight and to act when needed."

Expert in financial services regulation Chris Davidson of Pinsent Masons, the law firm behind Out-Law.com, backed Bailey's suggestion that there should be greater clarity in terms of the outcomes that firms are seeking from the changes they make, how progress is assessed and whether there is sufficient consistency across the organisation. Davidson said though that there would be a challenge in measuring progress on such issues.

Financial regulation expert Josie Day of Pinsent Masons said: "A firm’s culture is pervasive and can be difficult to change. Of course, changing culture is possible – with the commitment of the right people, who inevitably include directors and senior managers, – and regulators have some influence here as well. To the extent that the public still lacks trust in the way firms behave, then demonstrating cultural change can be a key part of rebuilding that trust, and for giving customers confidence that the ethos in firms has changed for the better."