Regulator keen for significant culture change in financial services - Stuart Murdoch

Stuart Murdoch is a Partner, DLA Piper, which provided legal services to COP26

The Glasgow Climate Pact – agreed at COP26 in November 2021 – has been regarded by some as disappointing. But, to me it felt like a watershed moment. Back in November, as I wandered around Buchanan Street, The Centre at Livingston and Lothian Road, everyone was talking about climate change.

It wasn’t just politicians jostling to be at the centre of the debate. Corporates, scientists and everybody else were anxious to be part of the conversation. Could Glasgow eventually be seen as one of the most successful COPs since Paris? Not because of what was agreed at the conference, but because of the tangible progress that has and can be achieved before Sharm al-Sheikh takes over the baton for COP27.

For big financial services (FS) firms, being at the centre of the climate change debate and – more importantly – climate change action, demonstrates how far they have come in their rehabilitation following the depths of the global financial crisis. A large Scottish bank was a principal partner of COP26.

From 2008, bankers were vilified for destroying the global economy. Fast forward to 2022 and big FS firms have a lot to shout about in terms of their responsible and sustainable business credentials.

Certain major FS institutions have announced science-based targets for the reduction of harmful emissions. UK firms are funding solar, wind and tidal farms plus electrification, energy storage and carbon capture projects. Most big banks helped to implement the new ‘confirmation of payee’ rules which help prevent payment fraud.

UK fund managers are leading the way in ESG investment by offering easy access to socially responsible funds to the growing throng of ethical investors. And almost all big FS firms have made demonstrable progress with the long-standing and structurally entrenched issues of diversity and inclusion, social mobility, corporate governance, gender pay gap and parental responsibility.

The sector regulator, the Financial Services Authority (as it was), was a high-profile casualty of the global financial crisis, having been seen as ineffective in anticipating or avoiding the crash. Its conduct supervisory role was assumed by the Financial Conduct Authority (FCA) in 2013. Since then, it has dished out fines of more than £3bn and overseen customer remediation totalling many multiples of that (including over £38bn for PPI alone).

A recent FCA clampdown has been in relation to defined-benefit pension transfers where some financial advisory firms encouraged final salary pensioners to give up guaranteed regular payments for life in return for a lump sum to invest. So far, one thousand pension transfer firms have been stopped by the FCA. However, with billions of pounds of compensation still potentially due, the FCA is still having to work hard to encourage victims to make claims.

Despite having its sleeves rolled up to tackle pension transfers, the regulator is actually trying to drive culture change rather than always being forced to throw its weight around. But what does culture change really look like? For sure, it means positive customer interactions and outcomes at key customer service touchpoints, but frontline customer service is seldom the root of serious detriment. Product design is one of the biggest elements and many FS firms have been consciously and conscientiously creating new services which strike a balance between reasonable profit and real customer value.

The FCA’s latest culture change tool is the proposed new Consumer Duty. This is intended to catalyse a significant shift in firms’ behaviour to focus on good customer outcomes. The FCA wants firms to think about how best to avoid customer harm and how to help customers to pursue their financial objectives all of the time, not just when dealing directly with them.

FS firms are welcoming this development with open arms, which is a shift from the industry’s perceived past resistance to new or enhanced regulation. For many, regulatory standards are no longer the benchmark, they are (at least aspirationally) the bare minimum.

It seems that FS firms are starting to conclude that sustainability and profitability are not mutually exclusive. Changing investor attitudes might empower FS boards to focus on the "triple bottom line" including a fair financial reward whilst also looking for a return which is beyond merely making a profit.

Stuart Murdoch is a Partner, DLA Piper, which provided legal services to COP26