Banks and financial services companies should overhaul their pay and incentive structures in order to change the culture that caused the financial crisis, the FCA head has said.
Speaking in Hong Kong today (16 March), Andrew Bailey, head of the regulator, said that company culture had been “one of the major root causes of conduct failures” in recent years.
He said that increasing alignment of company executive pay with share price in the form of stock options had led finance chiefs to take greater risks, as those with higher option exposures chose riskier policies.
“This set up the role of remuneration as a cause of the crisis,” he said.
He said that it is critical that boards and regulators think through the consequences of their pay structures.
“The objective here is to align structures with incentives, and create the culture that people have skin in the game. We are also acting to stop people evading this discipline by moving jobs and cashing in deferred remuneration – the problem known as rolling bad apples,”
Mr Bailey was talking about how to change company culture, whcih he said had been a major cause of the banking crisis..
He said that by tackling remuneration and governance, banks could change their culture. “It is for firms to ensure that their desired culture is consistent with appropriate conduct outcomes, to identify the drivers of behaviour within the firm,” he added.
He said that cultural change was important to restore public trust in financial services in the light of the problems of the last decade, but that finding a way to change it wasn’t easy.
“Good culture and trust arguably go hand in hand – good culture makes it more likely that a firm and its people will be trusted,” he said.
“Culture can be remarkably resilient in the face of attempts to change it,” he said. “This is because culture comes from the past and is embedded in the legacy of a business.”
“The culture of a firm is developed and reinforced over years, even decades, and is passed down from one generation to the next.”
Mr Bailey has said previously that bank bosses need to be less arrogant, because such a culture “laid the ground for bad outcomes for instance where management are so convinced of their rightness that they hurtle for the cliff without questioning the direction of travel.”
