The quoted text comes from Andrew Bailey’s recent speech in HK on “Culture in Financial Institutions”, and highlights the often overlooked link between the Senior Managers and Certification Regime (SMCR) and firm culture. It’s a wide-ranging speech, intended, I suspect, to set a new benchmark for the FCA’s approach to firm culture, and is definitely worth a read. He describes culture as an outcome but one that “emerges in large part from inputs that are (firms’) responsibility” and the aim is to build a reliable bridge between the conduct outcomes the FCA observes, the firm culture that produces them and the regulatory response. in line with this, the two case studies he uses – on Remuneration, and on Governance and Responsibility – are designed to showcase two of the major regulatory initiatives of the last few years, most recently the SMCR.

As with previous attempts to build this bridge, by both the FCA and its predecessor the FSA, this one creates a major challenge for firms and another one for the regulator. The challenge for firms is to implement reforms such as SMCR in a sympathetic way that simultaneously reflects their regulatory purpose and reinforces the firm’s own expressed values and culture. The challenge for the FCA, a significant one given the breadth of its remit - dark pools to debt management - and the complexity of its structure, is to apply this philosophy in a consistent and reliable way.

Helpfully however, the speech also provides two good steers to how to overcome these challenges, though both remain daunting. At the heart of the Remuneration case study is a discussion of agency problems that sets out how management incentives have changed over time, and the need to align these with the longer term interests of both the firm and its customers; and secondly, at the end of the speech, Andrew Bailey concludes that “Culture change in itself is a challenge, and we know it takes time.” Too often in the past, both the regulator and firms have declared premature success on culture – usually on the basis of a perceived change in the “tone from the top” – only to be bitten by reality soon after. If regulatory relationships can be re-based and then managed in light of these twin recognitions, this speech could be a real turning point.