The Butterfly Effect

Chaos Theory meets the Senior Managers & Certification Regime

The Butterfly Effect

7 Dec 2018

David Ryder

Have you heard the one about the butterfly that flapped its wings in Brazil and caused a tornado in Texas? No? Well, this story is often used to explain how chaos theory works, especially how small change in one place can cause large differences in another.

Have you heard the Financial Conduct Authority (FCA) talk recently about the importance of culture, ethos and governance?

No? Well, maybe as a business owner, board member or senior manager this is something that should be on your reading list.

And here’s why…

When forming an overall opinion of a firm, The FCA will look at four key drivers:

  • A firm’s purpose
  • Leadership
  • Approach to rewarding and managing people
  • Governance arrangements

Why? Because culture and governance is at the heart of how the FCA authorise and supervise firms. Through a solid framework of ethos, governance and systems & controls, firms can more easily embed the right culture and drive correct behaviours in all levels of its business.

An effective framework will help identify, manage and mitigate the risk of harm to the firm, its staff, its clients and the wider industry. You might think this all sounds a bit ‘fluffy’, but the reality is that this is serious stuff for the Regulator.

Have you heard about the Senior Managers and Certification Regime (SM&CR)?

No? Well, if you haven’t, you need to get quickly acquainted. The SM&CR is the tangible evidence of just how serious the FCA take the importance of culture and governance.

The SM&CR kicks in for FCA regulated firms in December 2019. The aim of the SM&CR is to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence and placing full accountability in the laps of senior management.
As part of this, the SM&CR aims to:

  • Ensure responsibility for a firm’s actions sit firmly with senior management.
  • Encourage a culture of staff at all levels to take personal responsibility for their actions.
  • Make sure firms and staff clearly understand and can demonstrate where responsibility lies.

Culture in financial services is widely accepted as a key root cause of the major conduct failings that have occurred within the industry in recent years. Given its negative impact historically, it cannot be underestimated how improving a firms’ culture is a priority for the FCA as they look at Transforming Culture in Financial Services

For our part, Paradigm will be imparting knowledge and providing consultancy support, training and hands on assistance over the coming months to ensure both firms and individuals are ready for this ‘paradigm shift’ in the way in which the conduct of firms, and its staff, is managed.

Now consider that butterfly… what happens if your business doesn’t set the right tone at senior level? Think about the ensuing chaos that could possibly erupt elsewhere in your business if your firm’s overarching ethos and culture is not set down correctly.

It’s a scary thought isn’t it? …and one that gets scarier when you realise that the responsibility for all of this is in your hands!