Dear CEO | Release Date: 3rd January 2020
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued a detailed communication to CEOs of wholesale general insurance firms, outlining the supervisory strategy to combat non-financial misconduct. This letter underscores the importance of cultivating a healthy corporate culture to mitigate risks that non-financial misconduct poses to consumers, market participants, and the overall integrity of financial markets.
Importance of Addressing Non-Financial Misconduct
The FCA highlights that non-financial misconduct, including but not limited to harassment, discrimination, and other unethical behaviours, detrimental impacts the culture within financial services. Such behaviours undermine trust and stability in the financial system and are seen as indicators of broader governance failures that could lead to significant consumer and market harm.
Regulatory Expectations for Wholesale General Insurance Firms
Firms are expected to take proactive measures to identify and address the root causes of non-financial misconduct. The FCA’s strategy involves ensuring that firms establish a culture where ethical conduct is at the forefront, supported by robust policies and practices that deter misconduct.
Key Cultural Drivers Identified by the FCA
Leadership Commitment to Ethical Practices
Effective leadership is crucial in setting the tone at the top, where senior managers are expected to foster an environment that discourages unethical practices. The implementation of the Senior Managers and Certification Regime (SM&CR) is particularly noted for reinforcing the accountability of senior leaders in managing risks associated with non-financial misconduct.
Establishing a Clear and Ethical Purpose
A firm’s corporate purpose should reflect its commitment to ethical operations, aligning with broader societal values and customer expectations. This purpose must resonate throughout the firm, influencing decision-making processes and the overall strategic direction.
Managing and Rewarding Employees Fairly
The FCA stresses the importance of aligning reward systems with the firm’s ethical standards. Incentives should encourage behaviours that contribute positively to the firm’s culture and discourage practices that lead to misconduct. Moreover, robust whistleblowing procedures and fair treatment of staff are essential components of a healthy workplace environment.
Governance, Systems, and Controls to Support Ethical Behaviour
Robust governance frameworks are essential to enforce anti-misconduct policies effectively. Firms should have clear systems and controls in place that support ethical behaviour and allow for the early detection and management of potential misconduct.
Strategies for Firms to Implement Change
Enhancing Leadership Effectiveness
Firms are encouraged to ensure that their leaders are not only aware of their responsibilities under SM&CR but also actively engaged in promoting a culture of integrity and respect. This includes regular training and development to equip leaders with the necessary skills to manage and mitigate issues of non-financial misconduct.
Aligning Corporate Purpose with Daily Operations
Firms should continuously evaluate their corporate purpose and ensure that it is embedded in all aspects of their operations, from client interactions to internal management practices. This alignment helps ensure consistency in behaviour across all levels of the organisation.
Overhauling Reward and Management Structures
The remuneration and appraisal systems should be structured in such a way that they reinforce the firm’s commitment to ethical conduct and fair treatment of all employees. Performance metrics should include qualitative assessments of adherence to ethical standards.
Strengthening Governance and Operational Controls
To prevent non-financial misconduct effectively, firms need to enhance their governance structures and operational controls. This includes investing in technology and systems that support robust data security measures, employee monitoring, and compliance with regulatory requirements.
Conclusion and Future Actions
The FCA expects all firms to review their current practices against these outlined expectations and make necessary adjustments to align with the supervisory strategy. Firms are advised to engage with the resources provided by the FCA, participate in upcoming workshops and seminars, and regularly update their practices in response to evolving regulatory standards.
Key Takeaways for Firms:
- Prioritise the elimination of non-financial misconduct through enhanced leadership and robust governance.
- Regularly assess and align corporate purposes with ethical standards and operational practices.
- Engage actively with FCA initiatives and resources to remain updated on best practices and regulatory expectations.
This comprehensive approach highlights the FCA’s commitment to fostering an environment where financial services firms operate to the highest standards of integrity, thereby ensuring the protection and well-being of consumers and the stability of the financial markets.