Subject FCA'S 2015/2016 THEMATIC REVIEW OF CULTURE IN BANKS Decision To terminate early the FCA's 2015/2016 thematic review of culture in

banks following the completion of the Initial phase of retali banks work Date of final decision Final Tracey McDermott, CEO decision si n-off Decision Jonathan Davidson, Director of Supervision - retail and authorisations Paper Megan Butler, Director of Supervision - Investment, wholesale and approval specialists ------Aut ho r s Jacqui Boyd, Annex

Decision summary

Summary We recommend ending the thematic review of culture In banks (wldely referred to Internally as 'the Culture Project') at the Initial phase and propose a communication plan to deliver key messages.

In July the project team was asked to pause and re-consider the planned work in light of the significant overlap with work which the Banking Standards Board started that month. We also took the opportunity to consider the broader FCA approach to culture. Now, our Intention Is to consult more widely, beginning internally, to develop a FCA-wlde view on culture; Including what we mean by culture and what our overall vision for culture is. This will then inform the approach we take to address cultural Issues In the different sectors, Including retail and wholesale banking.· · ·

The thematic work on culture Is a commltment In the FCA's 2015/2016 Business Plan and has been communicated to firms, Industry bodies and the FCA panels. Consequently, our rationale for a change of approach should be communicated externally wlth a primary message that the FCA continues to prioritise the Importance of good firm culture.

It is Jmportant to note that the work completed to-date on the project will be of use to supervision and to inform the FCA's future approach to work relating to culture. The team will also look to provide any feedback to Individual firms.

Background In our 2015/2016 Business Plan we said that we would conduct a thematic review on whether culture change programmes In retail and wholesale banks are drlving behaviour that promotes consumer protection and market integrity. The plan was to assess two groups ofImportant Indicators to see what they tell us about how 'tone from the top' Is being reflected and reinforced in day to day practices. These Indicators were:

• remuneration, appraisal and progression/promotion . decisions taken about middle management/Mos and heads of trading desks, and • how staff concerns are raised and acted on.

The thematic review covered 16 UK banks, both the retail and wholesale sectors and would Include desk-based and onsite revlew work. We

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expected to publish our findings Q3 2016 Including good and poor practice.

Key The project team has discussed the thematic work, and the broader reasons for approach to culture, with senior management and key advisors. The proposal consensus was that, whilst the FCA should continue to do work In relation

to culture, continuing the thematic project as scoped should be deprlorltised.

Several proposals were considered to make changes to the thematicwork. However, discontinuing the thematic review was viewed as thebest option to address key concerns:

• Traditional thematic work is unlikely to be the mosteffective way to drive culture change - emerging views from our discussions are that non- traditional approaches may be moreeffective in driving culture change, for example acting _as a catalyst to help firms address the challenges of culture change. The Intention is to consult more widely, Initially internally, todevelop an FCA wide view on culture including what we mean by culture and what the FCA wishes to achieve in relation to culture. This will give a clear framework and common language which everyone across the FCA can use, and can Inform the approach we take to address cultural Issues In the different sectors, including wholesale and retail banking .

• Limitations of thematic approach for retail banks - the initial discovery work for retail banks has shown that it is verychallenging to form views as to the effectiveness and lmpact ofbalanced scorecards and appraisal process in driving the rightbehaviours in firms.

• Alignment of culture work and supervision for retail banks - Retail Banking Supervision has a good understanding of where the major retail banks are with their culture change programmes; there Is a common view that for most of these firms, despite clearefforts, more work needs to be done - and that traditional supervisory activity, of the sort contemplated by the thematicwork, is likely to be less effective than other approaches tosupport culture change in banks such as the FCA acting as a catalyst and a facllltator for banks' continuing efforts.

• Alignment of culture work and supervision for wholesale banks ­ Wholesale Banking Supervision has visibility of and updates on culture change projects in firms across the sector. It plans to address broader culture change issues as part of Its 'S Questions' Interviews and other BAU Initiatives. Smaller, focused Investigations to (a) assess key cultural building blocks and (b) the adequacy of senior management engagement and oversight of those will still occur. Communication of any regulatory observations or insights can then be aggregated and targeted broadly or narrowly as appropriate.

Alternative The alternative to this decision is to continue J'."ith the current culture thematic review. We do not recommend this In the light of the overlap with other initiatives on the retail banking side, and the proposal to develoo ari FCA wide view on culture and related work.

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- --Key considerations

Communica The culture thematic review has been discussed externally and has been tion presented as addressing a key concern about poor culture In UK banks

(for example In the 2015/2016 business plan and In letters to Mark Garnier MP). If the thematic work ends, we will need to communicate this carefully so that It Is clear that our focus on culture In firms continues. The comms plan annexed to this paper outlines key messages. It has been aareed bv the communications deoartment.

Impacts on There are no other thematic projects, supervision strategies or other publications which are dependent on the culture project. business areas

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Objective - what do we want to achieve?

• Ensure that relevant stakeholders are aware that the culture thematic work has ended sooner than planned, and why, and

• Assure stakeholders that firm culture remains an Important focus for the FCA and we remain active In this area.

Key messages - the elevator pitch: what do we want people to take away?

• . After we announced our thematic work and started the Initial discovery phase we became aware of an Increasing number of other initiatives which overlap wlth the scope of our review, in particular the specifics of the work begun by the Banking Standards Board. Consequently we paused to re-consider whether our planned work would be the most effective way to contribute to this important Issue. We are also considering the FCA's broader approach to culture to see how we can add most value.

• As a result we have declded not to continue with this thematic review beyond the Initial discovery. We will use the Initial discovery work, along with continuing research on culture, to Inform our approach to reviewing culture In banks. We will provide lndlvldual feedback to the firms Involved In the discovery phase; however, we will not be publishing our findlngs due to the limited nature of our work.

Stakeholder communication summary

The communication team has advised that communication about discontinuing the thematic project would ideally take place at the end of October to allow adequate briefing for TSC and press enquiries.

There have been several references to the themat ic work in letters to Mark Garnier MP

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including from Martin Wheatley. Consequently, we will need to write to Mr Garnier directly to make him aware of changes.

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When? Following agreement and notification Particlpating firms, the PRA and the to FCA Board. End of October. Banklng Standards Board/BBA

What? Brief direct letter/email confirming key messaoes. When? Following agreement and notification

FCA Consumer Panel, Practitioner Panel to the FCA Board/next consumer panel and Markets Practitioner Panel meeting. End of October.

What? An update and outline discussion with '1 the oanel. I When? Following agreement and notification

Mark Garnier MP to FCA Board. End of October.

What? A letter from FCA CEO confirming key messages and outlining how the FCA does/will address concerns raised by Mr Garnier now that the thematic work has stoooed. When? What? No proactive external

Media communication on changes.

What? Confirm thematic review ended and FCA 2015/2016 Annual Report explain why.

When? Following agreement and notification Internal stakeholders to the FCA Board

. End of October.

What? Confirm key messages to supervisors for participating firms.