“Tone from within” – shining the spotlight for conduct risk identification onto individuals – latest FCA feedback on the 5CQ

The FCA recently published its Industry Feedback for 2019/20 on its 5 Conduct Questions (5CQ) Programme.

Originally launched in 2015, the 5CQ Programme informs the FCA’s strategy for the supervision of wholesale banks’ conduct and culture. The FCA publishes a report on the 5CQ each year.

This year the FCA’s focus was on individuals, and instead of annual conduct meetings (which typically involve top management executives and global heads) it hosted roundtable sessions with individuals at vice president level (or equivalent) – which it refers to as ‘the Engine Room’ – across a number of wholesale banks. Continue reading

Singapore and Hong Kong regulators propose enhanced enforcement powers to tackle bad apples

The Monetary Authority of Singapore (MAS), the Singapore Exchange Regulation (SGX RegCo), and the Stock Exchange of Hong Kong Limited (SEHK) have all published consultation papers reaffirming the regulators’ continued focus on culture and conduct, and keeping ‘bad apples’ out of financial institutions (FI) and public companies.

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Royal Commission into the financial services industry in Australia: lessons for the UK?

As financial institutions in Australia face into the culture and conduct storm that has engulfed the UK for the past decade, UK firms can be confident that they have already largely negotiated the regulatory waves which have followed the Banking Royal Commission in Australia. However, culture and customer treatment are themes that continue to be relevant on both sides of the world. In an article for Butterworths Journal of International Banking and Financial Law, Jenny Stainsby considers the implications of the Royal Commission’s recommendations for UK firms.

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FCA publishes its latest Industry Feedback on its 5 Conduct Questions Programme

Authors: Clive Cunningham, Harry Millerchip, Katie McGrory


The FCA recently published its Industry Feedback for 2018/19 on its 5 Conduct Questions (5CQ) Programme (which can be accessed on the FCA’s website, here).

The 5CQ Programme was introduced by the FCA in 2015 for wholesale banks as a tool to help firms improve their conduct risk management and drive cultural change. This year, the 5CQ Programme was rolled out more widely across other wholesale financial services firms, including brokers.

The Industry Feedback is divided into three sections:

  • Section 1 identifies the FCA’s high-level observations over recent years on efforts by firms to improve culture in the wholesale banking sector;
  • Section 2 address each of the 5CQs in turn and provides an update on industry progress, outlining specific examples of firm behaviours observed by the FCA during its supervision work; and
  • Section 3 sets out the FCA’s assessment of ‘speak up’ cultures and whistleblowing procedures in wholesale banks.

In this blog post we provide a brief overview of the content of the Industry Feedback; the key themes; and next steps in the 5CQ Programme. Although the Industry Feedback looks at the wholesale banking sector, the FCA has emphasised that it is broadly applicable to all firms in the financial sector and will be of interest to boards and non-executive directors (NEDs) of firms (among other stakeholders).

The Industry Feedback reflects the key priorities raised in the FCA’s Business Plan for 2019/20 (which can be accessed on the FCA’s website, here). The 5CQ Programme fits into the FCA’s broader focus on culture and governance, particularly with the upcoming extension of the UK Senior Managers and Certification Regime (SMCR).

Overview of the FCA’s Industry Feedback

Overall, the FCA concludes that firms have made significant progress with their conduct initiatives since the 5CQ Programme was introduced. As part of the 5CQ Programme, firms initially focused on correcting bad behaviours and problematic internal processes and procedures by implementing new policies and procedures, training and surveillance. The FCA now wants firms to focus on encouraging and protecting positive behaviour in its own right. Good culture and conduct are increasingly recognised as a key driver in corporate growth and a differentiating factor for customers.

The FCA highlighted a number of key themes and issues, including the following:

  • although firms in the wholesale financial services sector have improved their conduct, non-financial misconduct remains a serious issue – the treatment of a firm’s own staff should be included in its definition of ‘conduct risk’;
  • risk identification efforts are often top-down rather than bottom-up. Identifying risk (including conflicts) remains a weakness;
  • close proximity of senior managers to the trading floor will not necessarily prevent or improve conduct risk management;
  • there is little evidence of firms restructuring remuneration (eg. commission-based) to avoid or manage potential for harm; and
  • firms are establishing new committees to focus on conduct risk.

Industry progress

We set out some of the FCA’s key messages on industry progress on the 5CQ Programme below. The FCA also outlines specific examples of good and bad initiatives and responses to its 5CQ Programme, which may be of interest to firms. See Section 2 of the Industry Feedback for more detail.

The 5 Conduct Questions Key messages on industry progress
What proactive steps do you take as a firm to identify the conduct risks inherent within your business?
  • A firm’s definition of ‘conduct risk’ must be tailored to its own history and circumstances. It should focus on the risk of ‘good’ conduct deteriorating in addition to existing ‘bad’ conduct.
  • Firms are increasingly supplementing a top-down approach to identifying and managing conduct risk, with bottom-up initiatives.
  • Training provided by firms is shifting from conduct risk awareness to scenario-based training (without clear outcomes) to help encourage staff to better identify conduct risk and develop their own understanding of acceptable (and unacceptable) behaviours.
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?
  • Firms should consider reframing ‘Tone from the Top’ as ‘Tone from Above’, acknowledging the importance that most staff give to messages from their immediate manager (not just senior management).
  • Firms are reporting a significant and positive impact of SMCR on governance and conduct.
  • Most firms have introduced conduct elements to performance conversations and remuneration structures; however, in practice the FCA believes this is having only a modest effect on remuneration. Firms need to continue to focus on managing the link between conduct and remuneration.
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?
  • Internal infrastructure has improved and there is evidence of an increase in positive feedback loop.
  • Centrally-led and overly complex governance structures remain a challenge to improving culture and setting clear accountability.
  • Some firms may not be providing sufficient conduct risk training or adequate follow-on support for NEDs.
How does the Board and ExCo (or appropriate senior management) gain oversight of the conduct of business within their organisation and equally importantly, how does the Board or ExCo consider the conduct implications of the strategic decisions that they make?
  • Investment in data aggregation and analysis has enabled firms’ management to gain better oversight of conduct.
  • Firms should ensure these systems also focus on encouraging and protecting ‘good’ conduct – not just remediating ‘bad’ conduct.
Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct?
  • Horizon-scanning and assessments for risks that might undermine conduct objectives are generally underdeveloped.
  • Business line representatives should be present at horizon-scanning sessions (ie. horizon-scanning should not be conducted for the whole of the firm without business involvement).

‘Speak up’ and whistleblowing

The FCA also commented on the status and health of ‘speak up’ cultures and whistleblowing structures and procedures. It emphasised that ‘speak up’ initiatives and whistleblowing procedures will continue to attract periodic testing and validation as part of the FCA’s routine supervision. The FCA’s key comments include:

  • staff at firms need to feel comfortable to speak up, and share concerns and mistakes without fear of blame or retribution;
  • ‘speak up’ initiatives should be about day-to-day conversations, discussions and challenge across the whole firm. They should be framed inclusively and designed to encourage participation – not (as the FCA observed in some firms) as “speak up, or else”;
  • the FCA identified some uncertainty about the division between different channels of escalation (ie. ‘speak up’ initiatives versus whistleblowing). Firms have acknowledged they need to be clearer about the division;
  • non-financial misconduct (including sexual harassment, bullying, favouritism and exclusion) is a significant problem which needs to be tackled with buy-in from staff at all levels, including senior management. Some firms reported that their whistleblowing channels had seen an increase in the number of non-financial misconduct cases. Firms expect this has been caused by increased media coverage and firm initiatives which have encouraged reporting, rather than a deterioration in behaviour; and
  • many firms had no sense of what a normal level of whistleblowing events should be. The FCA recommends that firms establish case level expectations.

Next steps

The FCA will continue to engage with firms on their conduct across the wholesale financial services sector, both as part of the 5CQ Programme and as part of its routine supervision. The FCA has indicated that it will increasingly test and challenge management and staff on conduct progress.

As part of its wider rollout of the 5CQ Programme, the FCA noted that few firms had the range of conduct initiatives which it has seen in the larger wholesale banks. Firms should be engaging with changing their conduct as an ongoing matter of priority (and not just in response to the rollout of the 5CQ Programme).

Firms in the wholesale financial services sector (and more broadly) should review the Industry Feedback carefully and take it into account as part of their ongoing work on conduct, culture and governance, and their engagement with the FCA.

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Harry Millerchip
Harry Millerchip
Associate, London
+44 20 7466 6447
Katie McGrory
Katie McGrory
Associate, London
+44 20 7466 2669


On 6 July 2018, the Monetary Authority of Singapore (MAS) issued a Consultation Paper which, among other things, proposes requirements for Financial Institutions (FIs) to conduct and respond to reference checks on representatives (Reference Check Consultation Paper). Submissions on the Reference Check Consultation Paper close on 6 August 2018.  Continue reading


On 26 April 2018, the Monetary Authority of Singapore (MAS) issued a Consultation Paper on its proposed, and much-anticipated, senior manager accountability regime in the form of ‘Guidelines on Individual Accountability and Conduct’ (Guidelines).

The Consultation Paper comes soon after the release of the Financial Stability Board’s (FSB) Toolkit for firms and regulators to use to strengthen governance frameworks to mitigate misconduct risk. The Toolkit encourages regulators to develop and monitor a responsibility and accountability framework.

A brief summary of the Guidelines is set out below. You can also read our bulletin on the FSB’s Toolkit here. Continue reading

Asset managers and their senior management (including MICs) warned of action for regulatory non-compliance in Hong Kong

Boards and senior management (including Managers-in-Charge of Core Functions (MICs)) of asset managers have been called on by the Hong Kong Securities and Futures Commission (SFC) (31 July 2017 circular) and the Hong Kong Monetary Authority (2 August 2017 circular) to ensure they maintain adequate management oversight of their firm’s business activities and to ensure maintenance of appropriate standards of conduct and proper risk management measures, after the SFC identified a number of potential regulatory concerns.

The SFC has said that it will continue to closely monitor asset managers and will not hesitate to take action against any licensed corporations and their senior management for failure to comply with regulatory requirements.

Our recent e-bulletin highlights the SFC’s concerns. If you have any questions or would like to know how this might affect your business, please feel free to contact William Hallatt, Hannah Cassidy, Natalie Curtis, or your usual Herbert Smith Freehills contact.

New SFC guidance on client agreement requirements

In the light of the queries raised by Herbert Smith Freehills following industry consultation, the Securities and Futures Commission (SFC) has issued guidance (FAQs) on the application of new paragraph 6.2(i) of the client agreement requirements under the Code of Conduct for Persons Licensed by or Registered with the SFC (Code), i.e. the mandatory suitability clause (Suitability Clause), to corporate finance mandates.

 The FAQs also deal with the application of the Suitability Clause to client agreements in respect of asset management activities, discretionary investment management services and where certain types of funds are the client, in addition to addressing some procedural matters relating to compliance with the new client agreement requirements more generally.

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Singapore: MAS withdraws approval from Singapore branch of an international bank for serious AML and conduct breaches

The Monetary Authority of Singapore (MAS) announced this week that it has withdrawn approval from the Singapore branch of an international bank due to serious breaches of anti-money laundering (AML) requirements, poor management oversight, and gross misconduct by certain bank staff. MAS also imposed financial penalties on the bank and referred members of staff and senior management to be assessed for possible criminal prosecution.

Termed by MAS to be the “worst case of control lapses and gross misconduct” seen in Singapore, this is the first time in over thirty years that MAS has taken such stringent action against a bank to withdraw its license. The case serves as a strong reminder to financial institutions that MAS is a vigorous regulator that will not hesitate to take strong action in respect of regulated financial institutions that are found to have breached regulations or fallen short of expectations.  To read more from our team in Singapore and Hong Kong, click here.


UK: Fair and Effective Markets Review publishes its final report

The Fair and Effective Markets Review (FEMR) has published its final report, setting out 21 recommendations to help restore trust in the wholesale Fixed Income, Currency and Commodity (FICC) markets.  The report follows the consultation which concluded on 30 January 2015.  The BoE has launched an open forum which will build on aspects of the FEMR report.

The recommendations are as follows: Continue reading