To restore trust in financial services, regulators and supervisors remain heavily focused on the fundamental governance and cultural drivers of decision‑making and customer treatment in firms.

In 2020 across Europe, much of the attention will remain on banks which, according to Andrea Enria, Chair of the Supervisory Board of the ECB, have not “done enough so far” to reform their governance and risk management. In some countries, such as Ireland and South Africa, the focus is already spreading to other sectors. We expect a similar progression, albeit at variable pace, across other jurisdictions.

There will be continued focus on the suitability and effectiveness of the board and senior managers, including efforts to harmonise the assessment of fitness and propriety through the next review of CRD. More immediately, the ECB will continue to scrutinise how NEDs’ declared time commitment allows them adequately to oversee, monitor and challenge the business. In Ireland, firms will need to be in a position to demonstrate what action they have taken to detect and address any weakness in their fitness and probity arrangements, following concerns expressed by the central bank about a lack of industry awareness of regulatory requirements.

Supervisors will focus, with increasing intrusiveness, on the extent to which the board’s desired culture is embedded and operative across all levels of a firm, particularly in customer‑facing and risk and control functions. Whilst continuing to scrutinise the “tone from the top”, supervisors will focus increasingly on the “tone from above” in recognition that many employees take their cultural and behavioural cues from their immediate bosses. Accordingly, supervisors will scrutinise how far firms’ middle management transmit and reinforce the firm’s purpose, values and desired behaviours, as set by the board, to front‑line staff.

Supervisors will also continue to challenge on diversity, putting the onus on firms to address a lack of diversity, particularly at the board and senior management level and in succession plans. In the absence of improvement, some regulators are signalling a willingness to consider, in time, rejecting board candidates on the grounds of diversity. Gender balance will remain an important measure but supervisors will increasingly look for evidence of wider “cognitive diversity” and whether firms have in place policies to ensure the board has sufficiently diverse experiences, knowledge and perspectives.

In parallel, supervisors will look for evidence that firms are fostering cultures where employees routinely feel able to “speak up” or escalate problems without fear. Firms will need to demonstrate that they actively monitor issues being raised by employees, and take credible action to address them. Serious misconduct (e.g. sexual harassment) will increasingly be viewed as prima facie evidence of a fundamental cultural failing within firms.

In the UK, the FCA will conduct ever more searching examinations of individual firms’ declared purpose (that is, the reason why a firm exists) with the aim of probing the underlying cultural drivers and whether these are delivering acceptable outcomes for consumers, firms and markets.

Supervisors will continue to harness accountability regimes in their drive to improve firm culture. The introduction of an accountability regime was one of the key recommendations of the Financial Markets Review in South Africa, whilst in Europe, the European Commission is seeking views on the benefits and drawbacks of an accountability regime under CRD. In Ireland, the Individual Accountability Framework will look to enhance individual accountability and strengthen central bank enforcement powers in this area. The implementation of any such regimes will result in increasingly adverse consequences for firms and individuals when misconduct or other regulatory failings have occurred.

This article is part of the Deloitte's EMEA Centre for Regulatory Strategy Financial Markets Regulatory Outlook 2020.