Culture and Governance: When the regulator acts as an agent of change

Looking at the recent Woodford Funds saga, where unauthorised illiquid securities have somehow been forced into a UCITS Funds, one cannot help but wonder whether any lessons have been learned in the aftermath of the 2008 financial crisis. Why are scandals resulting from a lack of strong conduct and governance still taking place? Are there any hopes of culture may change in the Investment Management industry?

At AlgoMe Consulting, we believe in looking at the glass half-full, and yes, we believe change is possible. We have outlined in our introduction article the fundamental cultural changes we believe the investment industry must undertake[1]. In this article, we are exploring how the regulator can act as an agent of the culture changes required in the industry.

In the UK, the FCA is doing this by extending the Senior Managers Certification Regime (SMCR) [2] to the Asset Management industry, after it previously was introduced to the banking industry. The FCA 2017-18 Business Plan[3], set out its objectives; to promote the right cultures, behaviours and effective governance across the industry and to deliver appropriate outcomes for consumers, markets and competition constituents. As such, SMCR zooms heavily on ensuring integrity and accountability become an integral part of the culture of the industry.

SMCR and conduct

What we find remarkable in the model proposed by the FCA is that the onus and responsibility of good conduct is now borne by the key individuals, Senior Managers who form the highest committees in the Asset Management industry, namely the Board of Directors and the Executive Committees. What is equally remarkable, is that this concept of individual responsibility and accountability is extended to other individuals working directly with these Senior Managers, or other individuals who significantly influence the outcome for the firms’ stakeholders[4]. The model proposed by the FCA does not take away the responsibility of committees, instead, it strengthens the existing model by extending the responsibility to individuals sitting on these committees. There is no hiding place: The FCA will ensure individuals observe good conduct in their firms. This is an example of the-tone-comes-from-the-top at its best.

Interestingly, the FCA refrains from defining strictly what good conduct or integrity means. They rely on the members of the industry to understand the principle and know how this should be implemented. We believe that this is strong signal : The focus of the FCA is not to redesign the code and its principles of conducts already in place in the industry, as they are deemed to be strong enough; rather, the focus is on deploying a tool which encourages a closer observation of these codes of conduct.

While SMCR may be seen as yet another regulatory regime imposed on the industry, we side with those who see clear benefits for good or improved governance in our firms. If the model works correctly, Board and Executive Committee members will be privy to stronger reporting and better data analysis of the risks they have the responsibility to oversee. Moreover, we also believe the quality of the Board conversations will change in nature, and could focus more on strategic delivery and specific cultural issues, as the provided Board papers  would have hopefully gained in quality before reaching the boardroom or even better more pro-actively been dealt with by the responsible individual. Risks will remain, but we believe they will be better understood, anticipated, managed and mitigated.

SMCR and culture

The cynical may see SMCR as yet another enforcement regime by the regulator. We take a different angle in observing this: Assuming SMCR is implemented successfully and monitored carefully by the FCA, at which point can we say that it has been efficient i.e. at which point can we say that the cultural changes that it is encouraging have now taken place? In other words, how can you measure the improved culture of the industry to “maximise the outcome for the stakeholders,” as the FCA would put it? Culture is a difficult concept to measure, we can imagine some measurable indicators that tell us that things may have changed in the industry: A stronger sentiment of pride to belonging to the Investment industry; a stronger staff engagement score; a qualitative strong annual sign off of SMCR responsibilities of individual companies or even across the industry; more positive headlines relating to the industry in the news; these are only few but possibly good pointers towards an efficient implementation of SMCR.

Overall, we are encouraged to see the FCA implement a solid tool aimed at supporting and encouraging a change of culture in the investment industry, which hopefully will influence positively the governance models, and also the behaviour of all industry participants. For some companies more than others it might be an initial burden to put in place, however it will be interesting to monitor the initial quality of implementation when December arrives, but equally how it will change cultural behaviour and company reporting in the coming years.

[1] “Why does culture matter for the Investment Management industry?” (July 2019)

[2] Senior Manager and Certification Regime

[3] FCA’s 2017-2018 Business Plan

[4] Hence the concept of “Certification Regime” for the non-Senior Managers qualifying under SMCR