On 5 February 2020, the FCA signalled its increasing focus on the role that ‘purpose’ plays in generating good customer outcomes by publishing a Discussion Paper (DP) intended to stimulate industry-wide action. The FCA’s approach is designed to bring about a transformation in the business models and culture of firms which should play a fundamental role in reducing potential harm to consumers and the wider market.
In order to understand the culture of firms, the FCA assesses the effectiveness of four drivers in reducing the potential harm that could arise from a firm’s business model and strategy. Purpose is one of those drivers (please see below for further information).
A focus on purpose and the outcomes it drives will remain a priority for the FCA. If a firm’s purpose and associated business model is contributing to, or exacerbating, the risk of potential harm, it can expect increased supervisory scrutiny.
The FCA is not requesting formal feedback or actively seeking further opinions from the industry. Its aim is to encourage discussion and inspire firms to take steps forward in creating more purposeful cultures. The lack of request for formal feedback indicates that the FCA is certain this is the correct direction.
The paper illustrates how the FCA intends to supervise firms in the future and the ever-increasing role that assessment of culture will play. Firms should review how clearly the purpose of their firms are articulated and demonstrated across all areas of their business. Firms should use the ideas in the DP to challenge and question their purpose and how they can have a more ‘purposeful culture’. Given the majority of UK firms now operate under the Senior Manager and Certification Regime, Senior Managers should be clear of their role in supporting the firm’s purpose.
The paper presents findings from a working group of industry, regulator and academic participants exploring three facets of purpose, and a series of essays to encourage discussion.
The group considered three overarching questions:
The remainder of the paper consists of a series of essays written by different organisations which explore the key components of purpose. The essays are split between:
Whilst all essays should be of interest to firms, the FCA has helpfully included a matrix to assist in identifying the most relevant and/or impactful essays.
What is ‘purpose’, how does it fit in with culture and why is it important?
The FCA describes purpose as "what a firm is trying to achieve – the definition of what constitutes success’. It is the reason why firms exist – their driving force – and the motivation for people to go to work for them day in day out."
The FCA further defines culture as “the habitual behaviours and mindsets that characterise a firm”.
To signify the importance the FCA places on a focus on culture, and the outcomes it can generate, culture has featured in every single annual business plan/risk outlook that the FCA has published (i.e. each of the last nine years). However, we have seen its profile and prominence incrementally prioritised to such a degree the FCA now views supervising a firm’s culture as pivotal in effective supervision. The FCA has stated that:
“Firms’ cultures have been a major root cause of conduct failures, and our work supporting firms in delivering real and sustainable culture transformations will help prevent harm caused by inappropriate behaviours"
In order to form a view on culture, the FCA assesses these habitual behaviours and mindsets by looking at four main drivers, namely a firm’s:
Whilst the last three of these drivers are relatively straightforward, the increasing number of references to the more ethereal ‘purpose’ is generally less well understood by firms.
Put simply, a focus on purpose means a firm (and its employees) understanding the firm’s ‘reason for being’, not just from the perspective of shareholders and leaders, but crucially, also from that of customers and employees.
By forcing firms to think about this at the most fundamental level, the FCA is seeking to drive the right culture at firms and to ensure an appropriate focus on delivering good customer outcomes.