HKMA shares initial observations from banks’ self-assessment on culture

The Hong Kong Monetary Authority (HKMA)’s executive director for banking conduct, Mr Alan Au, recently delivered a speech on bank culture at the 1LoD Summit in Hong Kong.

To briefly recap:

  • In March 2017, the HKMA launched its bank culture reform with a view to fostering the right culture and values in banks, focusing on three pillars – (1) governance, (2) incentive systems and (3) assessment and feedback mechanisms.
  • Following that, the HKMA announced three supervisory measures for bank culture in December 2018 – (1) self-assessment by banks, (2) focus reviews and (3) culture dialogues – with a view to gauging the progress of bank culture reform in Hong Kong (see our bulletin of December 2018 for further details).
  • The first phase of the self-assessment exercise was launched in early 2019, requiring 30 authorised institutions (AIs) (including major retail banks in Hong Kong and selected foreign bank branches with substantive operations in Hong Kong) to submit their self-assessment outcomes within six months.

Although the HKMA is still in the process of reviewing the self-assessments submitted by the 30 AIs, Mr Au took the opportunity of the 1LoD Summit to provide the HKMA’s initial observations on how the AIs have approached culture reform, and highlight some good practices and common issues of concern observed.

AIs (whether or not they are among the 30 AIs who have submitted their self-assessments) should take note of the observations and guidance provided by Mr Au and enhance their culture initiatives as appropriate.

Going forward, the HKMA plans to further progress its culture supervisory measures, including:

  • sharing more observations from its review of AIs’ self-assessments;
  • commencing focused reviews to dive deeply into certain key areas of banking culture, such as incentive systems of front offices in specific business streams of retail banks;
  • continuing its culture dialogues with Als, which it commenced in 2019 (during which it had in-depth discussions with the leadership at a few AIs’ on the effectiveness of their culture enhancement efforts and provided its supervisory feedback on conduct and culture).

Common emerging themes from initial review of self-assessments

Mr Au noted that it is encouraging to see that AIs generally agree with the need to foster sound culture, and have been implementing a range of culture enhancement initiatives.

The HKMA has identified some common themes from the self-assessments which it expects AIs to take note of:

  • There is limited information on how global or regional headquarters are taking into account local circumstances or are providing support to local offices in implementing culture enhancement initiatives, whether the Hong Kong office is the regional headquarters or the downstream entity.
  • There is limited information on incentive systems designed to promote sound culture and prevent incidents of misconduct.
  • Most AIs have only shared case facts with employees when discussing misconduct cases overseas or in other banks, without going deeper to understand the underlying root causes of those incidents in order to prevent the same from happening within the organisation.
  • Most AIs have incorporated backward-looking but not forward-looking indicators in their dashboards for assessing culture.
  • A few AIs only relied on a single source of data (such as results of employee surveys) to assess culture (it is preferable to combine quantitative and qualitative data from multiple sources to allow for the different culture indicators to be triangulated).

Further details of HKMA’s observations and examples of good practices

Pillar 1: Governance

The HKMA is pleased to see that all 30 AIs invited to the self-assessment exercise have a framework for board supervision of culture. All locally incorporated banks have a board-level committee chaired by an independent non-executive director to oversee culture-related matters, and overseas incorporated banks have board-level oversight at either a global or regional level on such matters.

It is important that AIs’ leadership cascades the “tone from the top” through effective and continual communication and training. Mr Au gave examples of the ways in which two of the AIs communicated their culture expectations in a language that can be easily understood by staff:

  • A series of videos covering conduct-related themes were broadcasted to all staff at an AI that creatively intermingled fung shui elements. The videos had a different conduct-related focus every month, and featured a local fung shui master or celebrity together with a member of the AI’s senior management team.
  • An AI tailor-made summary sheets of its culture and behavioural standards for various business functions. These were designed in a way that made culture issues resonate with the day-to-day work at each of the business functions.

Pillar 2: Incentive systems

The HKMA encourages AIs to provide incentives (both monetary and non-monetary) for desired behaviour as well as disincentives for undesirable behaviour.

Mr Au gave examples of the systems two AIs used:

  • An AI established an online platform that provided peer recognition systems for employees to recognise each other for positive behaviours under a set of criteria, such as “speaking up” and “doing the right thing”, and gave out monetary rewards to employees who have accumulated a certain number of recognition points.
  • An AI put in place a “red flag” mechanism as a core part of its consequence management framework, setting out various types of breaches and their corresponding “red flag scores” for the purposes of tracking employees’ undesirable behaviours. When an employee exceeded a pre-specified threshold for the “red flag score”, his or her performance rating and compensation may be adjusted downwards.

Pillar 3: Assessment and feedback mechanisms

Many AIs have just set up their culture dashboards and are still at an early stage in determining the right indicators. One AI was noted to have developed a dashboard which incorporated multiple data sources, including feedback from their employee survey (in which the employees would rate perceptions of themselves as well as other colleagues) and other quantitative data which allowed for the different data sources to be triangulated.

While all AIs involved in the self-assessment had certain whistleblowing mechanisms in place, it is important that they also provide adequate protection to employees who speak up.

  • One of the AIs operated a 24/7 dedicated hotline with live operators who can connect to translators in multiple languages to make it convenient and comfortable for staff to raise concerns or report promptly, both during and outside office hours.
  • Another AI expressly set out in its policy that retaliation against whistle-blowers may give rise to disciplinary action that could entail termination of employment.
William Hallatt
William Hallatt
Partner, Head of Financial Services Regulatory, Asia, Hong Kong
+852 21014036
Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133

FCA warns CEOs to tackle non-financial misconduct

The FCA has warned CEOs that how a firm handles non-financial misconduct is indicative of a firm’s culture. It is the FCA’s view that embedding healthy cultures includes, therefore, taking steps to address the discrimination, harassment and bullying that remains “prevalent” in firms.

In a ‘Dear CEO’ letter (the Letter), which follows recent incidents in the wholesale general insurance sector, the FCA considers the need for fundamental change in firms’ culture and calls on leaders to bring about that change. Continue reading

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.

Continue reading

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

HKMA set to turn up the heat on bank culture in 2019

On 19 December 2018, the Hong Kong Monetary Authority (HKMA) announced that it will introduce supervisory measures (Supervisory Measures) focused specifically on measuring authorised institutions’ (AI) progress in implementing reforms to their culture. The Supervisory Measures include requiring AIs to complete and return self-assessment forms regarding their culture to the HKMA, and undertaking on-site reviews focused specifically on culture. For our full briefing on the supervisory measures, please click here

William Hallatt
William Hallatt
Head of Financial Services Regulatory, Asia, Hong Kong
+852 2101 4036
Gareth Thomas
Gareth Thomas
Partner, Hong Kong
+852 2101 4025
Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133
Emily Rumble
Emily Rumble
Associate, Hong Kong
+852 2101 4225


On 20 April 2018, the Financial Stability Board (FSB) released its long awaited toolkit (Toolkit) for firms and regulators’ use in fighting misconduct risk. The Toolkit forms part of the FSB’s workplan to mitigate misconduct risk, and builds on existing measures such as the FSB’s guidance on sound compensation practicesContinue reading