The Financial Conduct Authority plans to interrogate firms on diversity and inclusion by adding a sixth question to its conduct questions list.

Currently the five conduct questions, focus on “tone from within” and require every person in an organisation to be personally accountable and engaged.

Speaking at a virtual event at NYU Law School, FCA executive director of enforcement and market oversight Mark Steward said the regulator is “considering a sixth question”.

He also discussed how the Senior Managers and Certification Regime (SMCR) has changed the way firms allocate and align responsibilities.

Steward said SMCR and the conduct questions have forced firms to think about how a system or function might fail because of non-compliance.

He added: “The regime has wrought some profound changes in the way firms allocate responsibilities, align those responsibilities to relevant controls and ensure oversight as to how these controls operate down the line.

“Implementing the new regime has meant firms have built into their systems explicit reasonable steps to prevent non-compliance. This has required an assessment of what may make a particular control system or function more vulnerable to failure because it is in those places that the senior manager’s reasonable steps need to be particularly evident.

“By imposing personal liability, the regime uses self-interest – in this case the senior manager’s self-interest in avoiding liability – to avoid the bear pit of enforcement.”

SMCR launched in 2016 as an initiative to raise senior management standards in banks and since December 2019, has applied to all firms regulated by the FCA.

Steward described diversity and inclusion as “another telling indicator of culture”.

The five conduct questions currently being asked are:

• What proactive steps do you take as a firm to identify the conduct risks inherent within your business?
• How do you encourage the individuals who work in front, middle, back office, control and support functions to feel and be responsible for managing the conduct of their business?
• What support (broadly defined) does the firm put in place to enable those who work for it to improve the conduct of their business or function?
• How does the board and executive committee (or appropriate senior management) gain oversight of the conduct of business within their organisation and, equally importantly, how does the board and executive committee consider the conduct implications of the strategic decisions that they make?
• Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct?

Embedding behavioural change

Responding to questions from NYU’s Professor Arlen around how compliance can be embedded into the roots of an organisation, Steward explained that the conduct  questions are “great drivers” of a different approach because they require firms to think about behaviour at the point it might fail.

He said: “The senior managers statutory duty of responsibility is based on steps taken to avoid or prevent non-compliance which requires an acutely calibrated assessment of how a system or function might fail because of non-compliance.

“The focus on points of failure not only encourages greater awareness, it also promotes better calculations of judgement: about consequences, foresight of potential harm or damage and, in highly mature systems, the increasing risk of detection or being caught, which, in the case of bad actors, is the one risk that is often miscalculated, as the stories of Fabiana and Bill Hwang demonstrate.”