Supervisors on Supervision

“Culture is a concept you can't touch, feel, or even see. Yet it has a profound impact on shaping organisations’ identities and ways of working. Because culture is viewed as abstract, this frustrates how we talk about culture as a system, which is intellectually unsatisfying because it seems to avoid the obvious realities.”

“Regulators face constant scrutiny and accountability for their judgments because they are often made in public or their consequences become public. As a regulator, the process in which you get an understanding of whether your judgments are good ones or not is pretty clear, which is not a fashionable viewpoint. And when you get it wrong, it's also pretty clear as well. 

When we talk about judgment, from a supervision perspective, what we are really talking about is conduct. We're not talking about judgments that are made in good faith but turn out to be wrong. We're rather talking about judgments that don't get made at all when they should be. We're talking about things that don't happen when they should happen. We're talking about people who follow a course of action following an agenda that conflicts with the sense or spirit of what is important or valuable, either from a corporate perspective or a regulatory one. And that includes dishonest conduct.”

“There is confusion around the taxonomy of culture because the word ‘culture’ is confusing and slippery. When we say culture, we’re not talking anything about theatre, literature, poetry, music. We're talking about conduct and governance, specifically in the sense of how organisations and their agents do and should behave. 

Culture needs to be anchored into something that's more real and more obvious. It must be connected to governance, the conduct rules and tools that firms can use, the standards that define the corporate expectations and how those standards are expressed, both in word and deed. 

If Regulators therefore couch culture in terms of governance, it would be easier to talk about in ways that everybody understood and in ways that could be defined and applied without the academic or philosophical debates about what it really is. 

If we're serious about culture, we should find ways to hardwire it into the regulatory framework itself. We cannot afford to just talk about it abstractly, because as long as we do that, we are not going to make any tangible difference in the way in which firms actually think and act.”

“In order to ensure that you have the right culture, you need to positively create it. You need to be proactive in building the right culture. You can't just do nothing. And the obligation to ensure that you have integrity as your cornerstone within the framework of your enterprise is exactly that — an activity, not a pious expression. It's hardwiring something that you then have to demonstrate to your own satisfaction as well as to the satisfaction of the Regulator if they come knocking on the door.”

“One way of measuring culture is to work out in a firm whether any problems or issues have been identified at the earliest point in time when they could have been identified, and then whether they've been resolved at the right level. 

This backward-looking exercise can be conducted on a regular basis to determine if systems and controls are actually working in the right way. And it should be designed in a way to discourage problems from being pushed into the bottom drawer or problems being noticed and not talked about. 

The problems referred to here will most of the time be small problems. But you want small problems fixed quickly as inevitably what is a minor issue today will become a bigger problem if unchecked. You want big problems escalated to the right person who's senior enough to fix them as quickly as possible. This is measurable and just one way of gauging culture within a firm.”

“Everyone talks about tone-from-the-top as if it magically translates into something within the firm without ever actually investigating whether that's the case or not.”

“Culture isn't a theoretical, philosophical topic. It's a hard reality, an obvious reality that needs to be examined from a regulatory lens. And the conduct rules can serve as the conduit to hardwire culture within the regulatory framework as they are the things that are enforceable when things go wrong. They're the things that can create a structural framework within a firm that a firm itself can apply to its own conduct and its own values. 

Integrity is also an obligation and a value that people need to demonstrate and express in some tangible way. It's something that firms need to be able to examine and assess by asking themselves the following set of questions: Do we have the integrity that we're meant to have? Do our staff have the integrity they're meant to have? And how do we know that? What assurance do we have? Is negative assurance enough, or do we need more positive evidence that the people that we trust in these positions of responsibility actually have the integrity that they need to have?”

“During my time at the FCA, we used a useful tool in supervising banks that approached this challenge in a useful way: the Five Conduct Questions. The questions were extremely simple and powerful ways in which firms could interrogate themselves in a way that then allowed them to provide helpful information to the regulator. 

The FCA produced a report every year about how these questions had been answered by firms. Looking at each of those reports in succession, they start off talking about tone from the top as the way in which firms were proactively implementing this kind of approach. Then they started talking about the tone from above, which is the tone from your immediate line manager. And then finally, they started talking about the tone from within. And this is starting to really get to grips with the culture within the firm. 

It's one thing to have an idea about how your CEO or line manager might respond in a situation. It's another to be clear about how you might respond on your own and why. Whether stated directly or not, the development of tone from within via training, self-reflection, and self-challenge can be a precursor to wider corporate change. Now I think that's starting to create something really specific, tangible, and real within a firm that's valuable not only to the firm, but to the regulator as well. 

Good supervision should be in the interrogative mood, to use a grammatical term. It's not an interrogation in the sense that it's like a cross-examination, but it is an interrogation in the sense that supervisors need to be on the front foot asking questions. And the five conduct questions are exactly that. And they're a useful tool for firms to use to start to build some evidence about what sort of culture they really have.”