The culture and regulation intersect: Considerations for financial services leaders

In response, we’ve seen the introduction of clear guidance and policy including the Consumer Duty, the Diversity and Inclusion Policy Statement, and the revised UK Corporate Governance Code. While the regulator has steered clear of becoming prescriptive about what a positive culture looks like, organisations are increasingly expected to demonstrate not just that plans are in place to enhance culture, but that they are effectively embedded and positively shaping healthy working environments, aligned to regulatory expectations. This requires firms to adopt a proactive, holistic, and evidence-based approach to culture management, and to engage widely with customers, employees, leaders, shareholders, and regulators, to ensure their culture is fit for the future.

Despite significant efforts directed towards cultural initiatives over recent years, the regulators’ perspective is that the dial has not moved enough. This is evidenced by recent statistics on diversity at Board level across the financial services industry and ongoing media coverage of toxic workplace cultures.

To evolve healthy cultures that balance the expectations of everyone, from the regulator to colleagues within an organisation, there are some points to keep in mind:

Shared ownership of culture

Whilst culture has traditionally been seen as the remit of ‘People’ teams, for positive change to take place, culture must be owned by leaders. This requires a collective effort not just to role model expected behaviours, advocate initiatives, and reinforce company values – but to have a deep and detailed understanding of the experience of teams and the impact they have as individuals. This may happen through active participation in creating culture, for example by participating in networks to support belonging, or being open about personal experiences to create a safe environment. Equally, this extends to addressing poor culture and behaviours appropriately too.

Most financial services firms have already elevated cultural discussions, supported by management information and effective governance at the Board level. However, by defining a desired culture, benchmarking against peers, aligning to company values, and regularly reviewing this through colleague listening, firms can identify areas of strength and opportunities for meaningful improvement. Many also incorporate specific cultural targets into each leader’s performance metrics.

A well-balanced cultural equation

Where regulators choose to focus attention often has a disproportionate impact on change initiatives, creating over-emphasis on certain elements of culture. This can cause firms to lose sight of their unique strengths; negatively impacting the broader culture. Additionally, the reactive nature of focusing on problems at hand, often identified through the regulator, hinders a long-term perspective of how organisations want to shape their culture. For example, this could include how they incorporate customer needs and the wider economy into the lived culture of the organisation.

While the regulators have rightly focused organisations energy on risk culture, many report seeing a corresponding reduction in entrepreneurial mindsets. Some organisations now seek to rebalance, bringing greater risk taking and bolder decision-making back into the cultural equation. This can be done by introducing experimentation within agreed risk parameters – creating a safe environment in which to stimulate innovation, without fear of repercussions.

To help reconcile any potential tension between organisation-specific cultural focus and regulatory focus, firms should see regulatory attention as a component part of the broader strategic landscape, rather than the driving force. Risk culture should not be different or separate – rather a component of the overall culture and identity of the firm. This will enable organisations to retain their unique strengths and focus efforts proportionally.

By integrating regulatory requirements into operations in a way that complements distinct values and objectives, organisations can foster a culture that both meets regulatory standards and unlocks potential. This balanced approach allows organisations to navigate the complex landscape of regulation while maintaining their individuality and driving innovation that is right for them.

Inclusion underpins a generative culture

Sociologist Ron Westrum defines a ‘generative culture’ as one which demonstrates high levels of information flow and group co-operation; with empowered individuals who feel free to speak up, share ideas openly, and collaborate effectively. It’s been suggested that organisations with a generative culture consistently outperform those with other cultural archetypes.

Psychological safety is a key underpinning attribute of a generative culture, and a pre-cursor to this is inclusion. Regulators have put increasing emphasis on diverse, equitable, and inclusive cultures that better reflect their customers. Prudential Regulation Authority CEO Sam Woods has said: “Diversity and inclusion play an important role in guarding against groupthink within firms. Firms in which a broad range of perspectives is welcomed and encouraged will manage their risks better, advancing the PRA’s objective of safety and soundness.”

Whilst progress has been made in financial services, with increasing gender diversity at Board level, there is still work to do to achieve progress in minority ethnicities, neurodiversity, and those with disabilities. Whilst the FCA and PRA have proposed measures with a focus on developing strategies using data and monitoring, gaining access to the required data continues to be a challenge for firms.

By creating inclusive environments that value diverse perspectives, firms will better reflect and serve their customers – but also move towards generative cultures improving accessibility to data and insights and creating value for all stakeholders.

The involvement of regulators in the financial services industry has progressed Board-level conversations about culture, which is a real positive move in an industry where there is progress to make. To continue on the right trajectory, industry leaders must engage in continuous dialogue across the sector embracing regulatory guidance, and committing to fostering cultures that are compliant whilst simultaneously stimulating growth, innovation, and performance.