Andrew Bailey has given a speech at the Hong Kong Monetary Authority (HKMA) Annual Conference for Independent Non-Executive Directors in Hong Kong. He spoke about the culture in financial institutions, setting out what he meant by culture, what he sees as the respective roles of firms’ governing bodies and management and public authorities, and two case studies around remuneration and governance to illustrate the changes FCA is seeing.
Mr Bailey stated that culture is an outcome of many elements of the behaviour of institutions. Actions speak louder than words with governing bodies and management being shapers of culture. The expansion of the scope of the role of corporate governance has included a much broader definition of where corporates are expected to act in the public interest. The culture of firms therefore now includes the outcome of more public interest influences than used to be the case. This is most evident in the responses to the financial crisis. When the UK Corporate Governance Code was introduced, it was interpreted possibly unnecessarily narrowly. Now, corporate governance tends to be regarded as covering everything that companies do.
Mr Bailey gave bankers’ remuneration as an example of what FCA thinks about culture in firms and the influences on it. He looked at how the expectations and incentives became increasingly linked to risk taking. He laid the blame for the global financial crisis at the door of a rapid increase in pay and bonuses for bankers and company executives from the 1980s onwards. He stated that while the regulator will not try to cap bonuses or control the level of pay, it is interested in the structure of remuneration and the incentives it creates. The influence they do have will affect the culture of firms. He also gave the example of the SMR which is intended to ensure senior bankers are responsible for the actions of their junior staff.
When considering whether a firm’s culture is appropriate, FCA will look at whether practices such as recruitment, performance management, reward and capability drive positive behaviours and create a culture that works in the long term interests of the firm, its customers and market integrity. However, Mr Bailey recognised that there is no ideal culture and FCA cannot prescribe what this is.