Keeping your eye on regulation and compliance in remarkable times.
At the start we witnessed a good deal of shock and some panic whilst firms grappled with a change to way that they did business, historic operating models were unravelled and rebuilt overnight. Business Continuity Plans (BCP) were dusted down and enacted with varying degrees of success.
Large and medium sized firms seemed well prepared, perhaps their structure provided the organisational framework that enabled them to swing into action quickly. Smaller firms often quietly got on with it. Inevitably though there were some that had not taken the need for a BCP seriously and the enforced swift changes presented an almighty hill to climb. A few may not make it back down the other side!
The FCA is always focused on ensuring that regulated firms have a robust and sustainable business model that protects customers, BCPs form a fundamental part of this and it’s evident already that there’s a degree of scrutiny taking place to understand where the weaknesses may be apparent. We can expect more interest, not less, in the coming months as the strain on firms and their customers intensifies.
In financial services, it is important to remember that regulation does not go away during this pandemic and that cutting corners with compliance is not advisable. Firms should be conscious of the need to ensure the fair treatment of customers and to make sure that the increasing number of vulnerable customers are supported appropriately.
The regulator will expect firms to continue to foster healthy, purposeful cultures and not to let the challenges of the pandemic detract from that. A healthy and responsible organisational culture at a time like this would implore staff at all levels to behave ethically. Therefore, the importance of ethical behaviour should be emphasised by the leadership team and embedded throughout the organisation.
As a reminder, directors have a legal duty under s.172 of the Companies Act 2006 to consider the interests of the company’s stakeholders when making decisions, and the consequences those decisions may have on the stakeholders. A company’s stakeholders include its shareholders, its employees, its customers, its suppliers/creditors, the environment, and the wider society. Decisions and actions taken by directors should consider not just the short-term but also the longer-term impacts on the business. Business ethical standards and reputational risk should remain important considerations, particularly as to how a firm treats its staff and customers.
Back to an earlier point, a robust Business Continuity Plan is part of a director’s responsibility and not only a regulatory requirement.
There have been many great uplifting stories of people pulling together with firms supporting their employees in all manner of interesting and creative ways to really help them deliver excellent service to customers at the time when they need it most. Not always the case though. In the early days of lockdown, we witnessed a few attempting to manipulate the situation, putting the spotlight on both the ethics of the individuals and management culture. Using COVID-19 (or any other crisis) as a chance to downsize by redundancy predominantly to cover up for an absence of a performance management process is not what the FCA would consider to be a positive culture.
Firms that attempt to exploit a crisis are likely to suffer reputational damage, which may have lasting impacts when the crisis is over. Consider the retail sector, for example. Some small businesses were reported to have bought essential items in bulk during the early stages of the crisis, before selling it on at inflated prices, contributing to panic buying and shortages, and thereby compounding problems for the most vulnerable in society. Customers will remember those who gave a helping hand in difficult times, but they will also remember those who tried to exploit them and may punish them by taking their custom and loyalty elsewhere.
During the current crisis, of course, firms have the option of furloughing staff with state subsidies, thereby reducing the number of job losses. However, firms should only utilise the scheme where it is justifiable to do so either due to the nature of the job role, the individual circumstances of the employee, or where the financial position of the firm necessitates it. If a firm continues to be profitable and is able to pay large dividends to its shareholders, and the employee is in a position to continue working, is it ethical for taxpayer’s money to be used to subsidise 80% of that employee’s pay?
Employees who would normally work in an office environment and now find themselves working from home should also behave ethically and avoid the temptation to ‘take it easy’ and treat the situation as a holiday as this is unfair on the employer and hardworking colleagues. Most will respond positively and do the right thing; this does however present many management challenges for those firms unaccustomed to such a situation.
Over recent weeks as firms have found their preferred (sometimes new) way of operating, it’s evident that this adjustment is settling down with opportunities to work smarter bubbling to the surface. Technology has been embraced more than ever with video conferencing and now online document sharing the norm. With the increased use of technology comes the inevitable cyber attacks with no shortage of victims. Working from home may lull staff into a more relaxed approach, precisely why everyone should be on their guard and continue to follow the firm's IT and data security policies.
The COVID-19 pandemic has presented a plethora of issues. Business ethics, organisational culture, reputational risk management and long-term decision making are among them and should be considered carefully.
Good tests for business ethics, include asking yourself the following questions before deciding to do (or not do) something:
- How would I feel if my colleagues, friends and family found out what I had done (or failed to have done)?
- How would I feel if this were reported in tomorrow’s newspapers or all over social media?