Firm culture, often reflected through its “treating customers fairly” (TCF) Principle of Business, has been a preoccupation of the regulator since the FSA’s creation in 1998. However, it has always been elusive to define, and its association with SMCR presents the industry with a choice. 

Andrew Bailey first made this link in March 2017, and here Jonathan Davidson makes it explicitly for consumer credit firms. These make up more than half of regulated firms by number and have only been subject to FCA regulation for four years. So the link is no surprise, and it’s a good moment to reflect back on the problems the regulator encountered when it began trying to address poor firm culture in the early 2000s. 

Looking back to the pre-crisis years, it’s worth recalling that, to the extent the FSA shifted its focus from prudential to conduct regulation, it had a credible motivation for doing so. The FSA was dealing with what felt like a blizzard of mis-selling standards – first pensions, followed by mortgage endowments, precipice bonds and split capital trusts. As these scandals were picked over, each betrayed signs of poor firm culture, most strikingly around perverse incentives and poorly managed conflicts of interests.

The regulator had already published a paper on “treating customers fairly after the point of sale” and was about to start regulating the mortgage and general insurance intermediation markets (M&GI). So a major initiative on TCF, directed specifically at improving firm culture was an obvious move. 

Firms’ push back mainly focused around two challenges: that regulatory standards were being raised retrospectively; and that the FSA couldn’t tell firms what TCF meant in practice. Neither has gone away in the intervening years. 

The first was easy to answer – recent revelations around firms’ selling practices had highlighted the need to flesh out what the FSA had believed was a widely-understood principle. 

The second, however, was harder. Poor firm culture was simple to identify after the event but much harder before it. And, while some important aspects of culture might be relatively common across a sector, others were firm specific. After an extended stand-off, while the FSA insisted that defining culture was a matter for individual firms, it finally agreed to define a TCF framework. 

The result of the FSA’s retreat was the five “TCF outcomes”, which still pop up occasionally in FCA documents.These had two major drawbacks:

1. Because they were, at root, descriptions of process, they became a conversation between firms and regulators, with little positive impact on customers. Part of the reason was the regulator’s belief that the complexity of financial services made it nearly impossible for customers to judge if firms were treating them fairly. 

2. Measuring the outcomes drew both regulator and firms into an unhealthy spiral of firms producing and the FSA trying to assess forests of MI focused on TCF. 

The end arrived in 2009, in the middle of the crisis, after some seven years, when the TCF programme was closed down and absorbed into “business as usual”. Everyone involved was exhausted.

Firm culture remains one of the most treacherous areas for regulators to tackle, but SMCR is a much more promising framework than the TCF outcomes. However, culture is often fluid and intangible, dependent on much more than conduct rules and clear accountability. And changing culture for good is usually a slow and difficult process.

Looking back to 2005, firms’ insistence on the regulator defining what good culture looks like may well have been a mistake. It passed an important area of autonomy to the regulator, and contributed to the cost of subsequent mis-selling, notably PPI. 

Consumer credit firms, performing a critical role in the UK economy, now face a similar choice: how far do they want to engage with the FCA and their customers to try and build a lasting consensus on what constitutes good culture?