How should a board develop an appropriate culture and values?

How should a board develop an appropriate culture and values?

Culture and Values

An important aspect of a Board's role is to set “the tone from the top" with regard to the culture, ethics and values of the business. This is particularly important as both the PRA and the FCA will expect this form of leadership to reflect and be seen to determine the firm's conduct and regulatory behaviour.

This aspect of leadership will be reflected in several ways. Perhaps the first indicator will be the amount of time allocated to Board discussion on customer focused issues such as products, compliance, complaints, claims, conflicts of interest and remuneration.

The Board should be putting the welfare of its customers at the heart of the firm's business. This stance should be reflected in all its dealings, including when reporting down through the business, so that operationally all staff mirror the same customer-centric attitude. Profitability is fine as long as it is not at the expense of customers. The Board's culture should reflect this principle as the base point and not pay lip-service to customers' interests merely as a facade for thinly disguised commercialism.

All Directors, in their capacity as Approved Persons, will not only be expected to follow this mantra but be seen to influence the Board and the business so that the required stance is maintained. The Executive Board members should be challenged by NEDs in all associated areas of discussion.

Grant Thornton's published guidance on Culture and Conduct is appended by way of an electronic link.

The CII published a paper in Q1 2016, entitled “Ethical culture: Developing a culture of responsibility in a regulated environment which is also appended by way of an electronic link. This updated CII guidance is specifically aimed at insurance professionals in the area of ethics. It reflects the impact of the new SIMR and focuses on the “beyond compliance aspects of the individual responsibility requirement and the culture of firms.

Also, in early 2016, Deloitte published their paper on “Global Human Capital Trends in which they argue that “Organisational design emerges as the top UK trend but culture and leadership remain a concern.

FCA Principle for Business 1 states that a firm must conduct its business with integrity, encompassing the following:

Business model and future strategy

Whilst reflecting viable commercial activity, business models should also reflect customers' interests and as part of the on-going monitoring of implementation and fulfilment, the Board should also satisfy itself that customers' interests are maintained.

Treating Customers Fairly (TCF)

TCF is a main plank of customer focus and this concept should feature regularly within Board debate. There should also be management information supplied either separately or within a compliance report to gauge the firm's on-going behaviour towards customers.

The six required TCF outcomes are:

  1. Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture
  2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly
  3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale
  4. Where consumers receive advice, the advice is suitable and takes account of their circumstances
  5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect
  6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint

Where the firm does not have direct dealings with the ultimate customer, the regulator will expect the firm to be mindful of the intermediary chain. Additionally, prudent action should be taken to support the principle of TCF by passing on appropriate information such as product detail and explanations; particularly where it is perceived that the quality of the chain may be lacking in some respect. The firm will be expected to have an interest in customer facing issues such as contract certainty, complaints and conflicts of interest.

The FCA will seek to ensure that wholesale markets are efficient, orderly and fair and that retail customers do not suffer undue detriment from wholesale activities.

In December 2016, Grant Thornton published a useful insight into this topic entitled “Fair treatment of long-standing customers in insurance.

Conduct Risk

As an example of the FCA's increasing focus on conduct supervision in the insurance sector, proposals on conduct risk were introduced at the beginning of 2015. The FCA expects regulated entities to:

  • Have a properly implemented customer-centric strategy
  • Develop a Board-led culture which supports that strategy with good consumer outcomes
  • Create products that operate in the interests of customers, and use behavioural techniques to ensure that customers understand them
  • Adopt a prospective view on the products that are sold, stress-testing and ensuring that products are appropriate for customers

Boards of Directors will be held liable by the FCA to ensure that their organisations comply with the following types of conduct risk issues:

  • Fair treatment of customers
  • Role of the Board, management and staff in adopting an appropriate culture that is customer focussed
  • Creation of product oversight groups
  • Effective and proportionate product controls
  • Assessing and recording product risk
  • Product design: for both “general and “high product risks
  • Obtaining assurance from others
  • Product sales
  • Product service: general
  • Product service: handling and determining claims
  • Product service: complaints
  • Conduct management information
  • Product review
  • Distributor appointment, review and audit
  • Third party administrators (TPAs)
  • Training

Conflicts of Interest

The FCA requires that a firm manages conflicts fairly, both between itself and customers and between a customer and another client.

Examples of conflicts that may have an impact upon customers are the firm's remuneration policy whereby some staff may be incentivised on quantity and not quality. Additionally, intermediary commission earnings may determine the product offered or carrier used rather than identifying the customer's genuine product needs.


Remuneration structures should not encourage poor customer behaviours. The amount of commission earned should not override specific customer needs. Firms should not pursue premium turnover at the expense of customer satisfaction and service.

A firm's Remuneration Committee (frequently composed exclusively of NEDs) should be mindful of such potential conflicts and again put customer considerations at the heart of their thinking.

Remuneration Committees are increasingly involved in the sometimes “sensitive task of working with major shareholders or institutional investors when it comes to agreeing levels of Executive pay and allied packages.

They may be required to “sell packages to investors and in the publically quoted sector, in particular, may have to face criticism or adverse comment from the press for the decisions they support.


Complaints should be dealt with promptly and fairly. Lessons should be learned from the experience and other potential complaints that have yet to be discovered should be identified, considered and addressed.

Delegated Underwriting or Cover schemes

Customer fairness must be considered at all times regardless of issues such as loss ratios, profitability, contingent earnings and whether an intermediary becomes an agent of the insurer when exercising such delegated authority.

Control Functions

The three Control Functions (Compliance, Risk Management and Internal Audit) should all be reporting to the Board at regular intervals. In particular, the firm's attitude towards customers and relevant controls should be robustly reflected within all these areas and their reports to the Board.

Client Money (as an Intermediary)

There are very prescriptive rules for the protection of client money within the FCA Handbook under the CASS5 section. Each firm must have a robust system of client money controls with a designated Approved Person ultimately responsible for the process.

Grant Thornton's Publication on Culture and Conduct

Grant Thornton's “Fair treatment of long-standing customers in insurance"

Ethical culture: Developing a culture of responsibility in a regulated environment

Deloitte paper: Global Human Capital Trends

Delegated authority: Outsourcing in the general insurance market

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