Introduction
A key pillar of the Financial Conduct Authority’s (FCA) regulatory expectations from regulated financial firms is good governance and a healthy, purposeful culture,Footnote 1 aligning with the FCA’s objectives.Footnote 2 These are seen as critical to financial services firms’ ability to deliver value to clients and consumers and to support market integrity and financial stability.Footnote 3 This policy stance commands broad consensus in policymakingFootnote 4 and academiaFootnote 5 as well as in the finance industry itself, as will be demonstrated in our empirical findings. The nature of healthy culture, however, remains vague in regulatory discourse. Despite being a key regulatory objective, the FCA is cautious about providing a concrete definition of culture. Its vision of purpose is modestly designed to fit within its operational objective of consumer protection. Recognising the challenge of concretising culture, the FCA clarifies that it assesses a firm’s culture against four drivers: purpose; people; leadership; and governance.Footnote 6
The FCA’s supervisory approach is framed as outcomes-based regulation, differentiated from the much-criticised principles-based approach.Footnote 7 But the distinction between the two approaches is far from being clear and is ‘arguably one of form not substance’.Footnote 8 In the realm of regulating culture, the minimalist view espoused by the FCA not only overlooks the complexity of organisational culture types identified in the relevant literature but also reinforces the belief that outcome-based and principles-based regulation can be misconstrued as synonyms. Moreover, the FCA scarcely acknowledges in its policy documents the potential challenges that an outcomes-based approach to regulation may pose, which makes the approach unlikely to succeed.
This paper aims to fill that gap by constructing, for the first time, a comprehensive, empirically-based typology of culture in finance, drawing on findings from 29 semi-structured interviews with current and former senior managers in UK financial firms and regulatory personnel. While previous work theorises the relationship between external regulatory forces and internal culture in UK financial firms and more broadly,Footnote 9 there has been limited empirical investigation of the lived experience of organisational culture in UK finance. A recent study on culture in UK financial firms reveals the rhetorical use of ‘purposeful culture’ and the co-optation of elements of critique of finance by insiders to resist external regulation and assert finance’s prerogative of knowledge and expertise over its own domain.Footnote 10 The present study focuses on the insights regarding the typology of culture and its contribution to the FCA’s regulatory and supervisory approach. Going beyond the usual framings of organisational culture, such as Schein’s, we utilise Handy’s typology of the four archetypes of organisational culture (arising from the combination of two dimensions, namely, formalisation and centralisation), complemented by additional dimensions from Hofstede.
Although, in theory, cultural attributes take the form of sets of binaries (eg individualistic vs collaborative culture), it is well-established in the literature that multiple cultures often coexist simultaneously in complex organisations, and that the prevailing culture often combines antithetical elements from various ‘ideal types’ of culture. This aligns with our empirical findings suggesting that culture in finance is fragmented, complex and complicated. Our analysis reveals that this phenomenon results from opposing forces – regulation, public opinion, worker sentiment, competition, profit-seeking and path dependence of management practices. Hence, it transpires that culture in finance is currently in transition from an old, heavily criticised archetype (which still holds sway) towards a not yet fully realised vision of a new, transformed culture. Our analysis reveals ways to improve culture in finance and provides recommendations for developing financial regulation and broader policymaking to bring about a whole-hearted shift from principles-based to outcomes-based regulation.
This paper is structured as follows. Section 1 explains the rationale and the need to explore and establish a typology of culture in finance as a key component in designing and implementing a clear regulatory approach. Section 2 sets out the conceptual framework for the proceeding analysis by engaging with classifications of culture in organisational literature, as reflected in the finance industry. Section 3 outlines the methodology for our qualitative empirical research, based on interviews with senior managers from the finance industry. Section 4 anchors the literature in the findings from the interviews and contextualises them by reference to the different classifications of culture identified in Section 2. Section 5 highlights the policy and regulatory implications of our study. The paper ends with some conclusions.
1. The rationale for establishing a typology of culture in UK finance: a regulatory theory lens
The FCA outlines the common elements of a healthy culture, as a regulatory objective, that have been described as follows: ‘among other things, is purposeful, that has sound controls and good governance, where employees feel psychologically safe to speak up and be listened to, and where remuneration does not encourage irresponsible behaviour…’.Footnote 11 This framing demonstrates that, for the FCA, there is a close connection and even overlap between purposeful culture and sound corporate governance, including performance-based remuneration. Further, purposeful culture is seen as one of the mechanisms to facilitate the implementation of the Senior Managers and Certification Regime (SMCR), which enhances individual accountability.Footnote 12 In parallel, culture is important in the context of the implementation of the Consumer Duty; the FCA has increasingly emphasised an outcomes-based approach, as is evident in the wording of the duty: ‘A firm must act to deliver good outcomes for retail customers’.Footnote 13 The FCA has explicitly stated the rationale for this change: nurturing innovation through a flexible regime that focuses on purpose rather than process.Footnote 14 This trend will become more pronounced in the future, as the FCA responds to government expectations to enhance the international competitiveness and growth of the UK financial sector.Footnote 15
This shift was already anticipated in 2007, when the FSA articulated its approach as focusing on both principles and outcomes, supplemented by clear guidance.Footnote 16 Outcome-focused regulation came to be considered the alter ego of principles-based regulation, which has been criticised for being unduly light-touch;Footnote 17 in terms of supervisory practices, the distinction between them is arguably one of form and not substance.Footnote 18 Therefore, despite fluctuations in regulatory rhetoric, the fundamentals of the regulatory approach, as both principles-based and outcomes-based, have not changed since before the 2008 financial crisis.
Regulators, however, need to be aware of the parameters that determine the success of an outcomes-based approach as well as its challenges and limitations. This is the motivation for constructing a typology of culture in UK financial firms in this paper, as it can provide a minimum substantive content to the loosely expressed standards that create uncertainty and compliance difficulties for firms and regulators. The existing empirical literature on UK financial firms’ compliance culture shows that, since 2016, the FCA has focused more on establishing dialogue with firms and supporting them in developing a sound approach organically.Footnote 19 Our study, however, takes a step back and examines the attributes of different configurations of internal culture, as well as the tensions between the types of culture that coexist within financial firms, to elucidate which are more conducive to meaningful compliance with regulatory objectives and which are less so.
To draw conclusions about the appropriate shape of regulation from an analysis of the typology of culture, we engage with regulatory theory, especially work that provides a categorisation of regulatory approaches and an analysis of their comparative strengths and weaknesses.Footnote 20 Coglianese presents a classification of regulation based on the stages of a firm’s activity at which the rules intervene. Rules applying to the planning stage constitute management-based regulation; rules applying to the acting stage, mandating the use of specific technologies or specific behaviours, constitute technology-based regulation; and rules applying to the output stage constitute performance-based regulation. The latter corresponds closely to the concept of outcomes-based regulation.Footnote 21 All three approaches can be implemented via loose principles and hence fit within the principles-based regulation label, but they can also be implemented via a mix of principles and tight rules,Footnote 22 as can be seen in the regulation of recovery and resolution plans.Footnote 23
This categorisation differs from the view that perceives principles-based regulation as a synonym of, or at least as closely related to, outcomes-based regulation,Footnote 24 and highlights the importance of greater conceptual clarity in the design and implementation of a regulatory approach, including consideration of its strengths and weaknesses, rather than simply using a label as a buzzword.
In 2024, the FCA acknowledged that it is moving to a less prescriptive and more outcomes-focused approach: ‘an approach that responds to the environment we are living in, allows for growth and progress, but keeps consumer needs at its heart’.Footnote 25 The epitome of this approach is evident in the new Consumer Duty. Being transparent about regulatory outcomes and publishing metrics to achieve them enhances the FCA’s accountability and ensures that the FCA and the regulated firms are ‘called to action when things are not going right’.Footnote 26 Still, the FCA admits that ‘a focus on defining and measuring outcomes and acting on the results is not yet sufficiently embedded in everything we do’.Footnote 27 Outcomes-based regulation offers the obvious advantages of increased flexibility, potentially lower compliance costs, and the ability to accommodate technological change. It comes, however, with the challenge of holding accountable the professional experts who are entrusted to assess whether outcomes have been achieved.Footnote 28 If they fail, outcomes-based regulation can give rise to negative unintended consequences and new risks that can be greater than the original risks that it was meant to address.Footnote 29
In finance, technology-based regulation is not a realistic option, as prescribing specific technologies or behaviours only makes sense in conditions of firm homogeneity and a static business environment.Footnote 30 Thus, the choice of regulatory approach amounts to selecting between management-based and performance-based regulation, or a mix of the two. While both strategies work well when regulatory entities exhibit heterogeneity, the latter requires regulatory outputs to be easily observable and measurable. Therefore, the most suitable regulatory strategy for organisational culture depends on the extent to which culture can be reliably externally assessed by both the regulator and regulated firms.Footnote 31 Still, both management-based and outcomes-based regulation, when grounded in principles, can be conceptualised as types of meta-regulation.Footnote 32 This approach has been criticised as amounting in practice to little more than self-regulation, as standards are, for the most part, endogenously shaped by financial firms and acquiesced to by regulators.Footnote 33 This type of critique is even more forceful in the case of culture, given the inherently multifaceted and contested nature of ‘healthy’ or ‘purposeful’ culture as a regulatory objective.
Successful implementation of any regulatory strategy, especially outcomes-based regulation, requires a nuanced understanding of the real-world impact of regulation. This is particularly true with respect to good culture, which is inherently a loosely specified regulatory outcome, thus creating uncertainty for both regulators and firms regarding enforcement and compliance.Footnote 34 This brings to the surface the key rationale for our paper, which interrogates, conceptually and empirically, the iterative relationship between the regulatory framework and organisational culture in finance and its typology.
2. A typology and dimensions of culture: insights from organisational culture literature for UK finance
Schein’s often cited onion model of organisational culture signifies the three distinct layers of culture: an outer layer of observable artefacts and behaviours; a middle layer of espoused values and ideology; and a deeper later of basic underlying assumptions.Footnote 35 Schein’s theory resonates with the FCA definition of culture, which refers to ‘habitual behaviours and mindsets that characterise an organisation’.Footnote 36 The FCA does ‘not attempt to assess mindsets and behaviours directly’ and instead evaluates the key drivers that can lead to harm, including the competence and compliance of the firm’s leadership.Footnote 37 Yet, this approach is not granular enough to frame and dissect the lived experience of senior managers in financial firms, thus requiring the adoption of an appropriate analytical and conceptual framework.
Handy offers a comprehensive analytical framework of culture in organisational behaviour and management. Based on his personal experience, Handy provides a bird’s eye view of organisational culture by delineating four broad types of cultures: power; role; task, and person, which correspond to different assumptions about ‘the basis of power and influence, about what motivates people, how they think and learn, how things can be changed’ and are likened to different Gods from ancient Greece: Zeus, Apollo, Athena and Dionysus.Footnote 38 Different cultures (or gods) are needed for different tasks in organisations and work well in certain circumstances.Footnote 39 A cursory view of Handy’s theory gives the impression that it relates exclusively to cultures of leadership. However, Handy clarifies that his book is about different cultures in organisations and their likely futures.Footnote 40
Source: adapted from C Handy The Four Gods of Management (London: Profile Books, 2020).
Power culture is characterised by a highly hierarchical structure with strong leadership as the source of authority, where decisions flow from the top to the bottom with minimal rules and processes.Footnote 41 Role culture is founded upon an organisational bureaucracy with well-established, prescribed roles and hierarchical reporting lines.Footnote 42 Task culture assigns authority based on expertise and the objective requirements of tasks that need to be completed and problems that have to be solved.Footnote 43 In contrast to the other three cultures, where the individual is subordinate to the organisation, individual autonomy and objectives are at the heart of the existential or person culture.Footnote 44
Each culture exhibits inherent strengths and limitations. As such, power culture facilitates quick decision-making and loyalty but disempowers anyone who is not at the top of the organisation and as a result, can inhibit innovation.Footnote 45 The main benefits of role culture are operational efficiency, stability and predictability. However, it constrains adaptation to change, for instance, in consumer preferences and new technologies and, in turn, limits resilience.Footnote 46 Task culture creates an environment where expertise can flourish, while person/existential culture is conducive to experimentation and innovation and empowers all individuals throughout the organisation. However, both task and person cultures may enable activities that are not aligned with organisational objectives.
In finance, innovation, diversity and resilience matter as financial systems are complex adaptive systems and diversity is, therefore, key to maintaining financial stability.Footnote 47 Both innovation and diversity are essential attributes of a constructive and good culture in finance, contributing to resilience. Historically, power culture was prominent in finance, with some elements of task culture emerging in high-fee, transactional work. Following the 2007–2009 global financial crisis and the subsequent expansion of regulatory scope and intensity, it is evident that role culture has risen in prominence. More recently, the combined effect of regulation, societal, and market forces is leading to a growing dominance of truly employee-oriented cultures. Culture in finance is, therefore, going through a transitional phase with all four types of culture coexisting. This aligns with Handy’s theory, which observes that any organisation contains a mix of gods or cultures. If the mix is wrong, badly balanced, or not changed when needed, the result is ineffectiveness, ‘the lurking cancer of organisations’.Footnote 48 This is particularly true in finance, which is renowned for its complexity and the diverse range of sub-cultures within large financial institutions.Footnote 49
Handy’s culture theory provides useful foundations for our analysis of culture in finance. However, it is limited in that it does not take into account the public role or the social licence of the finance industry.Footnote 50 Handy recognises that a new paradigm is a whole new way of looking at things and since organisations are so entwined in daily life and daily values, they will be affected by (and affect) these changes and perhaps offer new patterns of organisations.Footnote 51 In addition, Handy’s theory also somewhat overlooks the idea that an organisation’s culture is maintained not only in the minds of its members but also in the minds of its other ‘stakeholders’, who interact with the organisation.Footnote 52 This aspect is crucial in the finance industry and the role it plays in society.
To address these gaps in Handy’s theory, we draw on Hofstede’s sociological theory, which further concretises the concept of culture, by identifying six key dichotomies. These are: process vs results-oriented; job vs employee-oriented; professional vs parochial; open vs closed systems; tight vs loose control; and pragmatic vs normative.Footnote 53 A dimension in Hofstede’s theory signifies here ‘an aspect of culture that can be measured relative to other cultures’.Footnote 54 Dimensions are to be differentiated from a typology, which ‘describes a set of ideal types’ that are easier to imagine and grasp.Footnote 55 Hofstede’s theory was initially designed to highlight differences in national culture, although it is often also used as a strategic tool by leaders and organisations.Footnote 56
The work of both Handy and Hofstede relies on a binary (either/or) classification of culture across various dimensions and, in the case of the former, on a taxonomy that consists of concrete archetypes. Our findings suggest that organisational culture in financial firms lies on a continuum and, therefore, defies a binary view of culture across any given dimension, and is not susceptible to a clear taxonomy into any single archetype. This resonates with the market, regulatory, and societal pressures that are pulling finance in opposing directions. Conceptualising the different dimensions as continua enables our analysis to expose the nuances of internal cultures and their relationship with external forces.
3. The study’s empirical methodology
As our core research question consists of deciphering the nuances and lived experiences of culture in finance, our primary method is qualitative empirical research. While not amenable to generalisations, measurements and statistical claims, qualitative methods enable detailed and in-depth study of phenomena and the development of new theories, which can be tested at a later stage by quantitative studies. As such, they are particularly valuable when examining organisational culture, a vague and contested concept where it is often hard to distinguish between causes and effects.Footnote 57 For the purposes of critique of the current regulatory framework and normative suggestions for its improvement, the empirical investigation is complemented by theoretical analysis of organisational culture and broader regulatory theory, provided in Sections 1 and 2.
Our choice of qualitative method was to conduct semi-structured interviews, based on two indicative lists of questions, one for managers and one for regulators and others. Overall, 29 interviews were conducted from July 2022 to October 2023, having obtained informed consent from each participant. The duration of the interviews ranged from just over 30 minutes to nearly an hour, with most lasting approximately 45 minutes. All interviews were conducted online via video conferencing. To protect the anonymity of our participants, we did not record the interviews. Instead, we retained transcripts using the automated transcript function of the video conferencing platform. All quotes have been edited to correct evident mistakes in the transcription and to normalise punctuation, grammar and syntax.
When constructing our sample of interviewees, we paid attention to the type of firm or sector that they have had experience with to ensure balanced representation of individuals from firms of different sizes and sectors. Most interviewees were current or former senior staff from a range of financial firms (banking, investment management, and insurance), while a smaller number were regulatory staff and other professionals who take a critical stance toward finance. As can be seen in the Table 1 below, 17 interviewees were at the time of the interview holding senior managerial positions at for-profit firms in the financial services sector broadly defined, one had a mid-level managerial position, three had previously held such positions, three were working for regulatory bodies, three were working for professional/ industry bodies, and two were freelance individuals whose work was relevant to the sector. All interviewees who were not, at the time, holding senior roles in financial firms have had some working experience at for-profit financial services firms, and many of them had experience in senior roles. Our interviewee sample reflects a balanced gender slate, comprising 15 male and 14 female participants. This implies that female participants were overrepresented in our study, as despite improvements in female representation in the finance industry in senior management roles, there remains a gender imbalance skewed towards men.Footnote 58 Such overrepresentation is easy to explain in a study like ours, where most participants are ‘culture champions’ within their organisations, given that women in finance are more likely to occupy these types of roles (eg human resources, compliance, legal, risk management, etc).
Table 1: List of interviewees with key characteristics
One way to classify the 29 interviewees would be across the following lines. One group consists of those within finance whose roles were – or had been – explicitly related to organisational culture (nine interviewees). Another group includes those with other senior management roles within finance, current or former (eight interviewees). A third group comprises those outside mainstream financial firms, who tend to have a more critical perspective (12 interviewees). While those in the first group might be expected to represent the official organisational policy on culture, which could limit the authenticity of their responses, those in the second group displayed a range of levels of awareness and attitudes towards organisational culture.
A concerted effort was made to tease out the genuine beliefs and assumptions of interviewees. Consistent with the social science methodology literature, we adopted an information gathering style of establishing rapport, using open-ended questions, asking follow-up questions and emphasising confidentiality and anonymity.Footnote 59 There was evidence from the tone of voice and flow of interviews that the vast majority of participants eventually expressed themselves with authenticity. This is also corroborated by the fact that nearly all of them provided examples of poor culture and made highly critical points about culture in finance, albeit often ascribing them to previous employers.
Our data analysis consisted of two key processes: first, the coding process, which identifies topics, issues, similarities and differences; and, second, thematic analysis, which draws together codes to present the findings in a coherent and meaningful way.Footnote 60 As part of the coding process, we coded the data from the interview transcripts line by line. We used a combination of an inductive (bottom-up) and deductive (top-down) approaches to coding, both executed manually.Footnote 61 The inductive approach entailed deriving codes directly from interview transcripts, while the deductive approach entailed deriving initial codes from the conceptual framework, as reflected in the literature reviewed in the previous section. To establish the credibility of the findings, each of the two authors of this study coded a sample of transcripts, and the two resulting sets of codes were compared and reconciled. Secondly, we conducted a thematic analysis, which involved combining our codes to produce a coherent and meaningful overview of the data. At the conclusion of this process, we systematically retrieved quotations from individual transcripts to support and illustrate each major theme and to exemplify the thoughts and feelings of the participants. We made sure not to artificially construct a coherent narrative by omitting any expressed views but rather to highlight the nuance and provide an interpretation of the diversity of views. To safeguard the objectivity of our selection method, we compared our identified themes to those identified by a third-party researcher, who was not privy to the objectives and framing of this paper and has not otherwise contributed to it: the themes were aligned under both approaches.
4. Organisational culture in UK financial services firms: lived experience vs institutional rhetoric
This section presents a selection of quotations from our interviews and contextualises them by drawing links to the FCA’s approach to regulatory and supervision. We examine how interviewees’ perceptions correspond to the four main types of culture in Handy’s theory and what they imply for the specific dimensions of culture in finance, and its regulatory implications, applying the matrix constructed in Section 3. Before doing so, it is necessary to focus on how interviewees understood the concept of organisational culture and their general attitudes towards it.
(a) The concept of culture and its importance
Asked about the importance of culture vis-à-vis incentives, all interviewees, apart from one,Footnote 62 replied forcefully that culture matters in its own right, as an independent factor that shapes individual behaviours within organisations. For instance, one person trying to highlight the importance of culture said that: ‘culture is not soft and fluffy. It’s hard and tangible.’Footnote 63 The metaphorical use of language, with soft-denoting non-financial, often ethical considerations and hard-denoting factors relevant to commercial success, is a concept we encountered in many interviews and will analyse at the end of this section. This perspective, expressed by a culture champion (Chief People Officer), highlights the value of good culture for business success, and, at the same time, also reveals a defensive attitude to dismissive sentiments regarding culture in the sector. This finding is important because it demonstrates that focusing on organisational culture makes sense from a policy and regulatory perspective.Footnote 64
While participants clearly saw culture as coming from the top, they also highlighted the existence and significance of micro-cultures and local leadership:
… there’s this perception that culture comes from the top and it clearly does. I’m a big proponent of this idea of microcultures where you have a strong leader within an organization who sets a different culture, subculture and microculture for their team or area with very clearly defined tenets of behaviour.Footnote 65
This duality between culture coming from the top and a recognition of the ubiquity and salience of local cultures might appear contradictory. This apparent contradiction can be partly explained by awareness of, and alignment with, regulatory rhetoric that emphasises tone from the top and the responsibility of senior management for developing and maintaining a good purposeful culture.Footnote 66
Culture is often understood by interviewees as two opposing forces: the ‘should be old’ and the ‘should be new’. The ‘should be’ element signifies that the state of culture in finance is in transition and exists on a continuum. The old understanding is not outdated yet, as it is still prevalent in financial firms, but most interviewees emphasise that it should be done away with. The new understanding has not yet fully replaced the old, although most interviewees claim to aspire to and strive for it.
The ‘should be old’ understanding of culture is associated with short-term profit maximisation and meeting commercial targets as the ultimate end result of financial firms. Interviewees observe that such short-term profit-making is particularly evident in mid-level management, which is tied to, and under immense pressure of, results, as an epitome of ‘reality’ and the need ‘to deliver’:
… [I see] a huge level of buy in at a very senior level to purpose, to values … driving the right behaviours and a real commitment to driving purpose and driving change. I don’t think that our middle management layers disagree with that as a purpose, but often you hear about the sticky middle permafrost (our emphasis) … where it’s just harder because they’re the ones stuck. They’re the reality of and they’re often the generation … in the millennials bucket. … They’re being stuck in the middle … a very difficult place to be … so I don’t think it’s a lack of desire, but it’s the reality of what we are expecting that population to deliver …Footnote 67
Interviewees are fully aware of the potential negative consequences of the ‘should be old’ approach – for instance, a compliance officer in an asset management firm observed: ‘I know lots of people who worked for other organisations and they still to this day have the sales targets up on the screen, who’s achieved the most sales, who’s brought in the most revenue to the business. That does not by its very nature … necessarily generate positive behaviours. In fact, it could produce other more negative behaviours …’/Footnote 68 However, it is as if interviewees see this culture as an axiom, an inertia or path dependency that is a natural outcome of the people that are attracted to finance: ‘In finance companies, most people are focused on being successful, generating finance and bottom line and numbers. The people that are attracted into it, you’re not gonna get the fluffy people so much.’Footnote 69 This results in a chicken-and-egg problem. After all, culture is shaped by the people who join the industry, and how can managers change the people who would like to join the industry when the current culture is focused on profits and bonuses? This inertia is very hard to change, so much so that although ‘… there are some very well-meaning middle managers … who tried to do the right thing. But as soon as that comes up against the commercial targets, the commercial priorities … the consumer culture and consumer prioritisation … [are] downgraded so it becomes secondary to the firm’s commercial priorities’.Footnote 70
In contrast, the ‘should be new’ understanding of culture is aspirational and positions stakeholders and societal considerations at the pinnacle of the financial firm’s purpose. ‘It’s about making money but not making obscene amounts of money to the detriment of the general populace in financial services that we’re serving’.Footnote 71 Interviewees explain that this ‘should be new’ culture is not only driven by endogenous factors; it is shaped by exogenous forces, most notably employees and customers’ demand, changing societal values and priorities and regulatory expectations. As one interviewee, working in the ESG space, observed, ‘I think this generation of leaders … are now getting much more kudos from leading government reviews on social mobility or spearheading some environmental programme or … doing something that is way beyond the kind of traditional business financial maximisation …’.Footnote 72
(b) Evidence of the four cultures in Handy’s theory
(i) Power culture
According to our findings, out of the four types of culture identified by Handy, the one that seems to have the strongest resonance in financial firms is power culture. Statements from nearly all participants confirm the significant concentration of power in the hands of CEOs and, to a lesser but still considerable extent, in the hands of senior management teams and individual traders who generate substantial amounts of money.
Regarding the relationship between CEOs and independent directors on boards, there was clear evidence that independent directors tend to be acquiescent, and that constructive challenge of executive initiatives is rare. A former insurance firm CEO deplored the fact that often, ‘… ultimately, everyone would go “yes, yes. Great idea, boss” and something gets implemented that hasn’t been thought through from all those stakeholders’ points of view’.Footnote 73 Another expressed a rather pessimistic view of boards, which resonates with broader literature on the uncertain effectiveness of independent directors:Footnote 74
They’re appointing yes men onto boards as independent board members and who are just not really questioning the rest of the board on whether they’re actually adding genuine value for consumers. By appointing their own kind of yes men, they’ve actually just really made the problem even worse.Footnote 75
At the same time, it would be incorrect to assume that all participants were comfortable with this degree of power concentration. While most treated it as natural and inevitable, there were some who took a critical stance. A Head of CSR at a credit reference agency, for instance, remarked that: ‘There are some things that require leadership, decision making … But if you constantly take problems away from people and try and fix them, you’re never going to get the right solutions. You’ve got to avoid the ivory tower of the solution approach.’Footnote 76 A few interviewees hailed constructive challenge as a hallmark of a healthy culture. One person, speaking about staff who are not at the managerial level, said: ‘They have to be comfortable to challenge, right? I know a lot of managers who hate being challenged and to the extent where they actually go with the wrong decision, just not to be wrong…’Footnote 77
Looking beyond the top level of firms, there was evidence of a strong power culture across the various levels of hierarchy, with some individuals amassing extensive power that often gives them a de facto role in shaping strategy and a blank cheque to behave inappropriately. Many interviewees, including a partner in an investment consultancy firm, highlighted the connection between money-making by individual officers and the amount of power they enjoy:
When you’ve got an organization that has a sales orientation … the glory goes to the sales guys and you can get a bit of a star culture around that … They can sort of acquire star status … and that’s quite difficult to counteract and it can, if you’re not careful, lead to some fairly toxic behaviours …Footnote 78
Similarly, a senior legal officer at a large bank stated that ‘… you have your rain makers, and their behaviours are absolutely appalling. But you know, they are kept on at any price because they are bringing in significant amounts of money and I mean really appalling behaviours that you know your classic bullying and all the rest.’Footnote 79 This finding is corroborated by previous empirical research in commercial law firms, which has identified a gendered pattern, with men typically occupying fee-generating roles and women supporting roles.Footnote 80 It seems clear that those able to generate high amounts of revenue tend to become immune to discipline, abuse their status, and behave inappropriately. Conversely, dismissing those people despite their money-making abilities is regarded as key to good culture, a point to which we will return later.
The duality of standards is reflected across different levels of seniority, with more senior people often being absolved in practice from any real responsibility to comply with internal rules: ‘I’ve seen this happen in multiple organisations this sort of two-tiered approach … one set of rules and how senior people are dealt with and how the more junior people are dealt with … if you’re senior then it’s fine’.Footnote 81
Furthermore, many interviewees emphasised that there is a correlation between the amount that individuals are paid and the power that they enjoy within the firm. This shows that remuneration has two distinct functions: it creates incentives as expected by neoclassical economic theory, but, equally importantly, it signals who is important and who is valued within the organisation. A Director of Policy at a relevant professional body, expressing a critical perspective, observed that the link between bringing revenue, achieving high remuneration and demanding power explains the poor quality of management in many financial firms:
People who are paid a lot feel that they have a right to convert that into power and make demands in terms of decision making … In those firms, you actually have poor quality of management because the most reward and the most recognition goes to those who are directly bringing revenue.Footnote 82
Thus, power culture clearly emerged as a key aspect of culture in financial firms. Power in finance is inextricably connected to money-making, and managerial power is often allocated to those capable of earning the highest income, irrespective of whether they possess the personal traits required of a successful manager.
(ii) Role culture
The interviews also revealed the prevalence of elements of a role culture that revolves around processes and manuals. Following processes was seen as important and, in some areas, interviewees identified a culture that leaves no room for mistakes, especially in non-creative, mechanical, and repetitive tasks. As a CEO from asset management explained, in areas such as regulatory compliance, ‘We have zero tolerance for failure, zero tolerance for mistakes, because the operational processes are like an industrial process’.Footnote 83
While the subject and focus of these processes change over time, a box-ticking approach remains dominant:
… in my early years I would only talk to the investment teams in the middle tranche. They would want to also talk to all of the operational functions and reporting functions. The risk function, the compliance function they want to understand how the companies run, and then in the later years they wanted to understand ESG … So everyone is just ticking the box …Footnote 84
This observation, reflected in other interviews, shows the duality in the perception of culture in finance. Processes remain at the core of financial firms as evidence of the prevalence of role culture. However, these processes and a defined hierarchy are not always viewed as a positive element: ‘I think the less hierarchy, the better from my experience. The less time individuals when they’re being recruited spend on systems, the better and the more time they spend speaking to people, they’re gonna work with. That’s a far more effective process.’Footnote 85 This observation, coming from a mid-level manager at a building society, is unsurprising given that mid-level management tends to favour flexibility and delegation of power. Similarly, the mechanics of these processes and whether they are best suited to meet regulatory expectations can be put into question. As such, one interviewee suggested that processes should not be equated with a hierarchy in a firm:
if there’s new regulation or new rules which will come out from the regulator, that would go to the chief exec and/or the head of risk and compliance … or the legal counsel in these organizations. [However] are those the right individuals to try and interpret that information, through the eyes of a consumer?Footnote 86
Still, interviewees acknowledged that in some areas, which require creativity and innovation, adherence to processes should take a backseat: ‘For the people who are working on generating alpha, their job is about creativity and innovation. … If you don’t take risk, you’ll never innovate. You’ll never be creative. So, there you are encouraging people to try things out, to fail, to talk’.Footnote 87
Overall, our findings suggest that financial firms are not monolithic. Role culture is prevalent, particularly in technical and compliance-driven areas of the industry, but without necessarily being fully aligned with the spirit of regulatory objectives, as internal processes are often reduced to performative box-ticking compliance. In other areas that require risk-taking to achieve financial targets, processes are often seen as hindering and stifling innovation.
(iii) Task culture
Moving on to a task culture, we observed instances of a culture of a group of experts, focusing on a common task or problem.Footnote 88 This type of culture defines tasks rather than roles.Footnote 89 Accordingly, success is desirable if it has been earned.
The ability to work with others is considered highly important in finance:
I don’t know if that’s the right word for culture, but it’s that sense of a collaborative approach that it’s not about celebrating individuals, although you do celebrate individuals, they have to celebrate that collaboration in the coming together of teams … in a world where we reach such complexity that it can’t reside in the head of any one person that you have to foster that collaboration to answer more complex problems?Footnote 90
An interviewee with a senior legal role at a large bank observed that restructuring remuneration to be based on teamwork can shift behaviour to a collaborative, groupwork-focused one:
The incentives can shape the culture … over the past year, they’ve sort of changed how bonuses will be more based on group and teamwork rather than individual, which … is trying to really encourage that collaboration … driving a different kind of culture rather than each man out for himself.Footnote 91
Moreover, restructuring incentives is far from being the only way to shift behaviour to a task culture. Other tools are being developed organically within financial firms. A Chief People Officer from a retail bank reported that employees are working together in an internal employee-driven platform to find solutions to practical customer-facing problems, often doing so in a non-hierarchical, peer-to-peer mannerFootnote 92
In addition, interviewees pointed out the importance of rituals and artefacts for collective identity in shaping a team/collaborative culture: ‘We have got some really small things, but actually … have been really, really powerful … So we wear [x-colour] on a Friday … It’s amazing. Everybody wears their pin … you put it on in the morning and it reminds you that you’re here to serve the customer. … And that’s one of the things that I really like about [x firm] is they’re kind of unapologetic symbols of belonging and that feeling of belonging carries much further than you imagine when you’re just talking about it.’Footnote 93 This phenomenon is well documented in other contexts,Footnote 94 and it is interesting to note that it is also prevalent in finance despite the strong adoption of rationalist narratives by industry insiders.
In summary, elements of a task-oriented culture that puts teams at its core are evident in finance, and collaboration is viewed as a valuable attribute of culture. Artefacts, as well as incentives (variable pay scheme), are seen as tools that can enhance these attributes. Interestingly, despite being distinct traits, interviewees align collegiality with a customer-centric culture. Good team players are thus presumed to be motivated to offer the best service to customers. Task culture is thus well attuned to customer needs and fits well with the concept of outcomes-based regulation.
(iv) Person/existential culture
A person culture is typical in professional firms and could be considered surprising to witness in finance where fierce external competition and powerful internal hierarchies prevail. According to Handy’s theory, a firm characterised by an individualistic culture is used as an instrument to achieve the purposes, aspirations and full potential of individuals.Footnote 95 However, Handy’s interpretation of this culture is tinted with negative connotations due to the excessive individualistic approach that instrumentalises the organisation. Nevertheless, in finance, we often observe the opposite problem, ie the instrumentalisation of people for the firm’s profit-making, even by well-meaning leaders who are genuinely caring for their staff, such as the CEO of a challenger payment services firm:
Particularly in startups …, people are wanting to create a positive progressive culture for their staff …, partly because those sorts of leaders are altruistic and self-aware people who want to create a positive environment. [B]ecause if employees are happy and if they feel fulfilled and if they think what they’re working towards does have a greater purpose, then they are more productive workers.Footnote 96
Financial firms, therefore, remain within an uncertain dichotomy between using persons as an instrument to achieve a higher target of the firm and valuing persons in themselves. This is aptly put by one interviewee:
Does it see people as primarily to be instrumentalised in service of a financial goal? So they see them as assets or resources or, in the worst case, liabilities. Or does it see people as human beings with inherent dignity, whether their employees, suppliers, customers, community members, and the relationships that the organisation creates are an intrinsic part of the value that it creates.Footnote 97
What could potentially trigger a faster shift to viewing persons as having value in themselves? There is increasing pressure and expectation from employees, particularly younger generations, to move away from the instrumentalisation of people in the name of profit.Footnote 98 The ability of financial firms to recruit talented people and reach out to younger consumers, taking into account the generational gap, amounts to a significant incentive to achieve that transformation:
You’ve got four generations within your workplace all of whom act very differently. … My fear is … financial services because they’re cash-rich, they will pay more money. … They won’t choose to innovate in that space. … But the individuals who are prepared to take that offer up are maybe not the types of individuals who are going to be connected to the next level of consumers coming through.Footnote 99
Inclusion and diversity repeatedly surfaced during the interviews as a key element of a ‘should be new’ culture.Footnote 100 However, similar to other aspects, inertia is hard to counter. Especially in asset management, ‘there’s more fund managers called Dave than there are women fund managers’.Footnote 101 Moreover, acknowledging the importance of diversity and inclusion and implementing it are often worlds apart. Senior managers struggle not with understanding the importance of these attributes to a good, purposeful culture, but rather with how to make the transition in a practical and pragmatic way.Footnote 102 ‘The majority of senior people in the business now are the product of a previous incarnation. So they are largely white men … And I would love to be able to magic up lots of not white men. They don’t exist in banking … so … How do you help us move from A to B? We will let you take, I don’t know, technology experts from technology companies who’ve never worked in FS.’Footnote 103 There is, therefore, a self-awareness of diversity and its importance; however, the path to achieving it remains unclear, and practical impediments remain in place. There is a greater role for regulators to play in embedding those elements ‘At the moment, they’re (regulators – our addition) kind of saying, well, you know what, that’s your problem. Figure it out.’Footnote 104 Alongside regulation, professionalism and professional standards in areas such as diversity and social mobility, which do not offer a competitive advantage to individual firms, can speed up the shift.Footnote 105 Interviewees suggested that regulators could play a more active role in bringing financial firms together, driving and creating opportunities for sharing and learning.Footnote 106
Further, interviewees emphasised that, as senior managers, they make a conscious effort to foster a free flow of information within their firms.Footnote 107 This can be achieved by ‘town hall meetings or employee networks’ where employees and senior managers ‘tell stories about how they’ve interacted with clients, celebrated successes that are exemplars, create the structures for people to do that at all levels of the organization …’.Footnote 108
In what Hofstede refers to as an open system, information flows top-down and bottom-up. ‘It’s really important that any organization has a listening culture. It listens to its people, not just its employees, but suppliers, customers, stakeholders, et cetera. And it has mechanisms to enable that information to come through and be reflected in decision making …’.Footnote 109 A healthy information flow helps break down hierarchies and shift power from a few senior managers to employees at all levels. Empowering employees can lead to better outcomes for consumers, further aligning a firm with regulatory expectations under the new Consumer Duty: ‘… The people on the ground are often the people that have the best ideas because they’re the ones dealing with the customers. It’s about making sure you have that flow of information happening and that you develop people to encourage them to speak up and get them to improve their influencing skills, not their skills of complying or not.’Footnote 110 Therefore, in such an environment, individuals understand how their job fits within the broader organisation and this, in turn, can motivate employees and enhance the effectiveness of decision-making processes.
It transpires, therefore, that elements of a person culture are on the rise in finance, especially in light of the increasing salience of the equality, diversity and inclusion (EDI) agenda and shifting expectations of younger generations of workforce. Such change can be positive for customers, in line with the spirit of the FCA Consumer Duty, to the extent that it empowers lower-level staff who have direct experience of customer-facing roles and are better placed to interpret and operationalise relevant regulatory norms.
5. Culture in finance in transition: the limitations of the current FCA approach and how to refine it
This section weaves together our empirical finings and theoretical insights of organisational culture and regulatory theory to expose limitations in the current outcomes-based regulatory and supervisory approach, in general, and as relating to culture in particular. We observed countervailing forces that pull in opposite directions and are constantly at odds with each other. All four types of culture in Handy’s theory co-exist in financial firms and each type is being contested. This leads to a rather chaotic and transitional picture that complicates regulatory policymaking.
Our findings suggest that, despite industry (and regulatory) efforts, power culture still dominates in finance, a trend fuelled by profit-seeking market pressure, and inadvertently supported by the heavily regulated nature of the sectorFootnote 111 as the drive to secure compliance inevitably leads to centralisation of power. While adopting some of the discourse of a person culture, financial firms do not appear genuinely committed to valuing their staff as ends in themselves, as theorised in Handy’s people culture; instead, EDI and other seemingly progressive agendas might be used to centralise power. At the same time, while person culture is not necessarily positive from a regulatory perspective, as it can also encompass individual agendas that resist accountability, it can deliver positive outcomes for customers and society when combined with professional ethics and robust regulation at the individual level.
Role culture, based on the definition of the role or the job to be done, remains prevalent in the finance industry, though in areas that require risk-taking and innovation, reliance on processes is reduced. A role culture is also comfortably aligned with regulatory expectations as set out in the SMCR. Even though the SMCR is principles-based, interviewees told us of financial firms’ constant efforts to formalise it and engage in box-ticking.Footnote 112 This observation signifies a duality of approach in the industry’s view, which prefers a principle-based approach that allows flexibility but seeks concrete guidance to create a clearer pathway to meet regulatory expectations.Footnote 113 This entails the risk of superficial, perfunctory compliance with the letter rather than the spirit of SMCR. At the same time, a task culture appears to be on the rise in finance, with firms seeking to encourage a more collaborative, team-oriented approach rather than an individualistic one.
Our diagnosis of the problem is as follows. The outcomes-based approach to regulating culture currently followed by the FCA does not acknowledge or address its challenges, as highlighted in Section 1. A successful outcomes-based regulation relies on valid metrics to measure the achievement of regulatory outcomes by regulated firms and by regulators. From the regulator’s perspective, it would be vital to conduct post-impact evaluations to assess the effects of its regulatory interventions.Footnote 114 The FCA has attempted to develop metrics to assess firms’ success in achieving a healthy, purposeful culture. However, it is doing so by assessing the drivers of culture (ie purpose, people, leadership and governance) as proxies of metrics. These drivers are assessed by examining certain areas, including ‘significant business model restructures, the approach to remuneration, speak-up culture, Board and ExCo composition, diversity, succession planning, the application of the SMCR, the effectiveness of a firm’s controls environment or its governance structures’.Footnote 115 While this is understandable given the difficulties of measuring culture, it is conceptually problematic. Neither the drivers nor the areas of assessment constitute metrics that can be used as a reliable benchmark for purposeful culture.
In light of our empirical findings around the lack of diversity, the incentives set by remuneration, and individual accountability, we argue that the FCA must articulate concrete metrics in alignment with the drivers of culture. Such metrics would enable credible implementation of the FCA’s policy on purposeful culture, and enhance its own accountability. In the context of SMCR, for instance, a key metric would be the extent to which the framework effectively holds individuals accountable when they fail to comply with the regulation. In the context of diversity and inclusion, a key metric would be the percentage of representation of underrepresented groups (gender, ethnicity and socioeconomic background) at both senior and mid-level management. In the context of remuneration regulation,Footnote 116 it is essential to measure the extent to which variable remuneration relies on non-financial performance objectives, especially those tied to positive customer outcomes. An outcomes-based approach can be facilitated by task culture, as the latter focuses on concrete tasks/outcomes and the teams that deliver them, promoting good consumer outcomes.
In parallel, in the context of culture, outcomes-based regulation should be complemented with management-based regulation. This means that the FCA must provide more detailed guidance on key internal processes, including employee attitude surveys, internal forums for workers to discuss issues, and the roles of senior management and the board in fostering a healthy culture. As with other large, global corporations, large financial firms may have a senior management position dedicated to internal culture, often called the Chief People Officer.Footnote 117 However, to be differentiated from other internal functions prescribed by regulation, such as the roles of Chief Risk Officers and internal audit, there is currently no regulatory requirement regarding the Chief People Officer.Footnote 118 Formalising this role as a key internal gatekeeper, in tandem with audit, risk management and compliance functions, would likely empower culture champions within firms and give them the leverage to counterbalance pressures from other senior managers. Such a change will shift the internal balance of power within financial firms, moving away from a power culture – in which power is concentrated in the hands of a few senior managers – towards a role culture.
Furthermore, no regulatory strategy can achieve its objectives unless complemented by an effective approach to supervision and enforcement.Footnote 119 To date, the FCA has not pursued any enforcement action based directly on poor culture, and, beyond a broad framing of its supervisory approach as judgement-based, its meaning and implications are far from clear.Footnote 120 For a judgement-based approach to the regulation of culture to be effective, it is pertinent to make the fullest possible use of the FCA’s discretionary powers under the legal framework. This would entail making substantive assessments of the quality of culture, rather than deferring to firms’ own assessments and chosen processes. A judgement-based approach is nothing new – the then FSA adopted this stance after the 2008 financial crisis.Footnote 121 In the case of culture, it requires regulators to be well-resourced and confident enough to make substantive judgements,Footnote 122 with an inevitable degree of subjectivity, as culture cannot be reduced to a set of quantitative metrics.
Our proposed approach would require the FCA to swim against the political tide of deregulation. Scholars have observed a global trend towards deregulation, as evidenced, for instance, in the realm of bank capital adequacy requirements.Footnote 123 In the UK, following Brexit and the pandemic, this deregulation trend is manifested in many ways:Footnote 124 the FCA abandoning its diversity and inclusion agenda;Footnote 125 discontinuation of the established practice of FCA ‘Dear CEO letters’; the forthcoming review of the SMCR with a clear simplification agenda; the recent introduction of a simplified capital regime for small domestic deposit takers;Footnote 126 and the review of the Financial Ombudsman Service’s role to prevent it from acting as a quasi-regulator.Footnote 127 The recently introduced secondary objective of the FCA and the Bank of England, to facilitate the international competitiveness of the UK economy and its medium- to long-term growth,Footnote 128 amplifies this trend.Footnote 129 As part of this deregulation trend, culture in finance risks taking a back seat, as the generalised concern about mission creep prevents the FCA from focusing on key drivers of healthy, purposeful culture, such as diversity and inclusion. In this environment, defining and solidifying the regulatory strategy on culture becomes all the more crucial.
The analysis of the FCA’s regulatory and supervisory framework aims to prevent culture from remaining a matter of de facto self-regulation by offering firms and regulators clear, operational guidance and defined procedures, thereby diminishing both legal uncertainty and compliance costs. Informed by the four types of culture identified in the organisational culture literature, and by our empirical findings, this approach seeks to achieve a better balance between power culture (which will inevitably play a role in any large commercial organisation) and other cultures, especially role culture.
Conclusion
Our empirical investigation on the perceptions and typologies of organisational culture in UK financial services firms generates three principal insights. First, finance industry insiders view culture as an important factor that determines the success of an organisation and its impact on society.
Secondly, financial firms appear to be in a state of transition between two very different types of culture. The old archetype is a culture marked by short-term money-making as the sole organisational goal and source of power for individuals. The new aspirational and perhaps slightly utopian type of culture is the nearly diametric opposite. In this culture, firms seek to balance profit-making with delivering tangible benefits to people and the planet, treating their employees and customers fairly as human beings, and rewarding responsible and ethical behaviour as much as, or even more than, earnings.
Thirdly, while elements of all four types of Handy’s typologies of culture – power, role, task and person – can be detected in UK financial services firms, power culture seems to be the most dominant feature of many firms, with strong elements of role culture in specific divisions that undertake repetitive work. Task culture and person culture, though not until recently associated with finance, appear to be on the rise and it seems that nurturing these types of culture can act as a counterweight to excessive concentration of power and improve outcomes.
These findings have important implications for policymaking. They highlight that financial authorities, such as the FCA, that regulate culture must adopt a renewed approach to outcomes-based regulation. Outcomes should be more clearly defined and measured, complemented by management-based regulation and a judgement-based approach to enforcement.
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