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On 17th May 2018, I facilitated a #BehaviouralEconomics roundtable at #CassBusinessSchool with senior representatives from the insurance industry. The purpose was to discuss practical Behavioural Economics nudges and interventions in response to the FCA 2018/19 Business Plan.
The FCA has identified #governance and #culture as a root cause of the major #conduct failings and important in restoring public trust in financial services. The 2018/19 Business Plan sets out governance and culture as a cross-sector priority and one where the FCA would like to see an increase in the pace of change. The FCA is keen to explore how Behavioural Economics can be used in financial services to promote culture change and will form judgments on firms progress.
Publication of the Business Plan was preceded by Discussion Paper DP18/2: Transforming culture in financial services which sets out a variety of views and case studies on the subject.
At a recent conference on DP18/2, the FCA identified four key areas of importance:
- Psychological safety
- Renumeration practices (including incentives)
- Leadership and management practices
- Assessing and the management of culture
Whilst the FCA does not propose to assess mindsets and behaviours directly, to demonstrate effective supervision the FCA will need a thorough understanding of the business models, strategies and cultures of the firms they regulate.
The FCA propose to achieve this by forming judgements on the drivers of the a firm’s culture and governance, so as to avoid unnecessary harm to consumers and markets.
This raises a question as to what exactly the FCA mean by culture? Defined simply as the habitual behaviours that influence the four drivers of culture:
- A firms purpose
- Effective governance arrangements
- Approach to rewarding and managing people
If regulation is only part of the equation, how can firms achieve real culture change? The FCA has clarified indicators of good culture include, amongst others, opportunities for employees to speak out and a learning environment where feedback is acted upon.
FCA supervisors will form judgements on firms progress from each intervention, with a specific focus on the discussion that follows any measurement of culture through annual survey’s for example.
Behavioural Insights Team
The BIT provided examples of nudges and interventions that can be applied to change the choice architecture.
Inherent biases such as availability bias that anchors the importance of recent events, can be overcome by focusing on small changes that can have a big impact.
By ‘influencing the influencers’ (i.e. middle managers that can become effective changes agents), behavioural barriers can be overcome by addressing:
- Social norms – group think, biases etc. by creating the psychological space to speak up
- Employee empowerment – the importance of framing that empowers employees to take action
- Habitual behaviour – understanding how decisions are made by recognising biases
- Creating healthy competition – as a mechanism to raise the importance of an issue and the implementation of practical actions
The intangible nature of culture has led many leaders in industry to question what constitutes a healthy culture and how do they promote one? Culture and governance is particularly relevant when firms design new #products and #services, as well as the treatment of existing customers and will heavily influence whether a firm’s business model delivers of the right customer outcomes.
Achieving culture change in financial services will require leaders to adopt a #customer centric approach, that includes compassion for customers, going the extra mile and effective governance structures that identify, manage and mitigate the risk of harm.
It will also require a review of #renumeration practices that reward and manage staff, effective #whistleblowing processes and behavioural levers that go beyond financial incentives.
Darren provides Enterprise Risk Management advisory services to the Insurance and Investment Management sectors. Helping Board and C-level executives address strategic challenges, by delivering solutions that create Enterprise Value and improve business performance.
Darren is an experienced executive with over 20 years’ global experience with multinational companies, including Chief Risk Officer reporting to the Board.
Darren is an Honorary Visiting Fellow of the Digital Leadership Research Centre, Cass Business School where he also holds an Executive MBA. Darren is a Certified Fellow of the Institute of Risk Management (CFIRM) and Chartered Insurance Risk Manager (ACII) of the Chartered Insurance Institute.
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