The incoming chief executive of the Financial Conduct Authority used his last speech as chief executive of the Prudential Regulation Authority to stress the importance of good culture at both regulators and regulated firms.
Andrew Bailey said because supervisors cannot ask a firm to show its culture, the regulator must instead tackle all the elements that make up companies’ day-to-day workings.
“Culture has a major influence on the outcomes that matter to us as regulators. My assessment of recent history is that there has not been a case of a major prudential or conduct failing in a firm which did not have among its root causes a failure of culture as manifested in governance, remuneration, risk management or tone from the top,” he said.
Managers can be so convinced of their rightness, they become blind to dangers facing their firm, Mr Bailey warned.
“We talk often about credit risk, market risk, liquidity risk, conduct risk in its several forms. You can add to that, hubris risk, the risk of blinding over-confidence.”
With no one rule able to determine a firm’s internal culture, regulators must work to ensure companies have robust governance, which includes appropriate challenge from all levels of the organisation, he said.
He welcomed the new senior managers regime, though cautioned it was no “magic bullet”.
“The basic difference between the role of the regulator and management of firms is our objective is framed exclusively in terms of the public interest,” said Mr Bailey.
But he said firms also exist to service customers who make up the public interest, including the notion of not exploiting customers, a value, he said, which can be expected to feature in an organisation’s culture.
“Today, the public perception of banking, and some other areas of finance, remains too much towards the exploitative ‘greed is good’ end of the spectrum.
“Major changes have occurred since the crisis which have improved behaviour in firms, but public opinion broadly does not recognise these developments and tends to think that nothing has changed.”
Cultural change is “a big challenge for regulated and regulator”, he said. He called on firms to build a clearer idea of what they want to achieve, how progress is assessed and whether there is sufficient consistency across the organisation.
Mr Bailey will take up his new role on 1 July, despite MPs complaining about the lack of transparency in his appointment.