Regulation

Look for the silver lining

November 2007

It’s said that every cloud has a silver lining; but it is sometimes difficult to remember that when the Financial Services Authority introduces yet another stick with which to beat firms! But hang on to the thought, because I strongly believe that the latest Treating Customers Fairly (TCF) initiative, the FSA’s ‘culture framework’, can bring real benefits to regulated businesses. Let me explain.

Since the FSA originally raised awareness of TCF in 2005, the attitude of firms has been ambivalent. “Of course” they care about their customers and “of course” they treat them fairly. But they don’t see why they need to be made to jump through yet another set of hoops to prove it to the FSA. Moreover, many firms don’t really see a genuine business benefit to the steps they have to take, and new measures have been introduced with gritted teeth. They are seen as an unnecessary additional burden.

On the other hand, firms do not want confrontation with the FSA, so they will do whatever it takes to satisfy the regulator. The detailed response of most firms has been what it usually is to the FSA regulation: to introduce new processes and procedures that can be put before the regulator to gain a tick of approval. And to be fair to firms, this is the approach the FSA has encouraged by the way it has conducted its checks in the past; the so-called “tick-box” approach that has focused on process rather than outcomes.

Cultural framework

However, since it first highlighted the concept in 2005, the FSA has been consistent in saying that it expects businesses to embed TCF at a cultural level. And in various updates since, the FSA has pointed out that while there seems to be genuine engagement around TCF at the most senior levels within organisations, there is little evidence of it being embedded on the front line. Now, in two papers released this year, the FSA has made clear that it intends to test whether this embedding is happening by using a ‘cultural framework’.

The framework sets out a number of behavioural drivers and sub-drivers to be found in most companies. The FSA will examine how these drivers are managed in each firm during its ARROW visits and will highlight those it thinks present a risk to TCF. As a result the FSA will be making judgements about the impact of, for example, a firm’s leadership on how fairly it treats customers. Amongst other things, the FSA will be looking at what values the firm espouses and whether these are evident in practice; how well performance is monitored, and how well people are developed.

This is radical stuff; surely the FSA cannot seriously be suggesting it will look at how effectively a business is managed? The answer is yes; at least in so far as it needs to in order to decide whether it implies a risk to TCF.

And the FSA feels confident about this approach because it has been tested and found to work. In piloting the framework the FSA visited 21 firms. The results reinforced to the FSA that the approach was valid and that the framework was equally relevant for most types of business. It was also pleased with just how effective the framework was in highlighting potential TCF issues. Somewhat tellingly, the FSA points out that it found more bad examples than good.

Training

The FSA is now committed to the framework and my firm has helped design a training programme that all the FSA supervisors will undertake before conducting ARROW visits in the future. The training covers what evidence supervisors should look for and how to go about gathering it. This gathering of evidence to review the operation of the behavioural drivers within a firm will be an addition to the existing ARROW process. Clearly, it would not be practical for the ARROW team to review every aspect of a firm, especially a large bank, say. So each visit will focus on only one or two parts of the business from a TCF perspective.

The main difference in approach between previous ARROW visits and the additional TCF culture review is that the TCF review will focus more on ‘outcome’ than on ‘process’. For example, a firm may think it has a comprehensive performance management process, but it is what happens in practice that the FSA will be most interested in. To find that out, it will seek to corroborate what it has been told, through management information and by interviewing people at lower levels of the organisation than has been the norm in recent years.

The fact that the FSA will seek corroboration in this way doesn’t mean it doesn’t believe the senior people within the business; it is simply conscious that there is “many a slip ’twixt cup and lip”. That despite the CEO’s best intentions, what actually happens at the sharp end of a firm may not be what he expects or even what he genuinely believes to be the case. And for me this is one of the benefits of the FSA culture framework initiative. It helps firms get to the nub of what is actually happening day to day. If the management practices in your business are posing a risk to treating your customers decently, wouldn’t you want to know that?

Firm’s own assessment

Of course most businesses will wish to carry out their own assessment before the FSA does. Unfortunately, it is not an easy thing to do. To form a judgement on each of the behavioural drivers the firm will need to review evidence. And knowing what evidence to gather, how to analyse it, how to probe deeper, what questions to ask, and of whom, are not obvious. The FSA supervisors are receiving dedicated training to enable them to do it; and they have the advantage of being able to build on their previous experience of conducting ARROW visits.

Moreover, to gather and analyse that evidence across a whole business, especially a large and diverse one such as a bank, is no small undertaking. The FSA will use risk profiling to decide where to concentrate its efforts but I suggest that a firm needs to check for itself most, if not all, of its business streams.

So I think it makes sense for a firm to build the necessary expertise and experience in a small group of people that can operate across the whole business. Those people will need to be objective, have a broad picture of the business, and be analytical. They will also need a mandate from the very top of the organisation, because their job will be to question and challenge every aspect of how the business is managed. If you take a look at the framework, you will see that there are, amongst others, the drivers “leadership”, “strategy” and “decision making”. So to probe these effectively is to question the most senior managers about the fundamentals of their role. Perhaps we need to add to that list of attributes nerves of steel!

Once the firm has selected the people it intends to carry out the work, what is it that they need to do? Well, in short they need to understand how the behavioural drivers within the business operate in relation to TCF. In essence, the drivers are the factors within a business that influence or shape the behaviour of its people. Many of these will be levers that the firm has designed deliberately, to have a desired effect – bonuses paid on certain results for example – other drivers will be operating at a more ‘sub-conscious’ level.

Desk research

In carrying out the review the first thing to look for is relevant management information. If a business wants a specific set of behaviours from its people – always to put the fair treatment of customers first for example – it should be able to tell whether that is happening by monitoring the right data. Some of this will be regular quantitative data, some will be regular qualitative data, and some will be the result of one-off reviews. So the starting place is desk research. Is the firm reporting on the right things? What is missing? What do the reports tell us? What controls are in place? Are the reports acted upon?

That desk research should extend into looking at policies and procedures. What are people told about the firm’s vision and values? How are people paid? What training do they receive? What do individuals’ objectives look like? How is performance managed? What do appraisal records tell us? And so on. The list of items to be researched is not endless but it is clearly extensive.

And all the time, the reviewers should be asking themselves the question the FSA supervisors will be asking when they carry out their review: “Does this driver imply a risk to TCF and if so, how?”

Talking to people

However, the desk research is only the start of the process because, with the best will in the world, it will not supply all the answers. So the reviewers will need to speak to people within the business to find out what happens in practice, and to probe more deeply the areas where it appears there might be a risk to TCF.

There is another reason why this is necessary too. A firm’s deliberate attempts to influence behaviour or to impose certain policies and procedures will not always produce the desired effect. A management team may have the best of intentions and may genuinely believe that what is written in a policy document is what happens in practice. But those of us that have worked in the corporate world will know that is not always true. It is essential to go and check out what is really happening at the grassroots level, and at levels in between. The aims of senior management are often derailed, both deliberately and unwittingly, by middle managers who have their own agenda, don’t understand what is required of them or don’t have the capability to make it happen.

To seek the necessary information in interviews requires a high level of questioning and listening skills and an ability to probe deeply and draw information from people. It’s fascinating work and it is remarkable how quickly patterns emerge. Remember what I said earlier about how revealing the FSA found the process to be.

Revealing

As I said before, a TCF culture review is not an easy exercise. But if it is done well it can be deeply revealing. It can help a business learn a great deal about how it currently manages behaviour. Clearly, the FSA’s interest in this is from a TCF perspective. And even in that respect, there is the potential for a significant pay-back to a firm. Genuinely to improve the way the business treats its customers must make sense from a commercial perspective.

But it can go much further than that. Understanding how behaviour within the business is managed is invaluable knowledge. It means that the business can improve the way it manages its people to achieve any of its key business aims. If it is capable of applying a culture framework to assess how well TCF is embedded, it will be capable of applying it to determine how well the business manages sales, customer care, cost control or any other of its key aims.

I think that’s so important it bears repeating. Understanding the behavioural drivers in your business can not only help you to treat your customers fairly, it can also help you achieve your other key business aims.

I believe that the FSA’s culture framework is an opportunity for businesses to develop internally the expertise and experience to be able to manage their behavioural drivers. And for those firms willing to embrace the opportunity, that is the silver lining.

John Hunter is a director of Intouch Consulting