What you’re missing: The risks of ignoring corporate culture in third-party due diligence

There may be blind spots in your governance research the FCA is increasingly unwilling to overlook, writes City Hive’s Bev Shah

By Bev Shah, founder and chief executive of City Hive

Traditionally, wealth and asset managers have anchored third-party due diligence in the numbers – performance, capital strength, systems resilience and financial controls. These remain essential, but today they’re no longer enough.

If you are not incorporating corporate culture and behavioural risk into your assessment of the asset managers and service providers you rely on, you are leaving a blind spot in your governance framework – one the Financial Conduct Authority (FCA) is increasingly unwilling to overlook.

In 2025 and beyond, culture is no longer a “soft” consideration. It is a hard regulatory expectation, a conduct risk driver, and a determinant of client outcomes. Firms that fail to recognise this risk are not only behind the curve — they are potentially in breach of the FCA’s Principles and the Consumer Duty.

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Culture: The hidden driver of conduct and operational risk

Every enforcement case the FCA brings ultimately comes back to the same root cause: culture.

Weak challenge in investment committees, tolerance for poor behaviour in high performers, dismissive attitudes toward client fairness, and failures of accountability – these are all cultural failures, not procedural ones.

When you invest through third-party managers, their culture becomes part of your risk profile. Their values, incentives and behaviours directly influence how your clients’ money is managed. If that culture promotes excessive risk-taking, conflicts of interest, or opaque governance, your firm carries the reputational and regulatory fallout.

Ignoring culture in due diligence means you are effectively blind to one of the largest non-financial risks your firm faces.

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What the FCA expects you to know

The FCA has been explicit: firms must understand and manage the risks in their value and distribution chains. Under SYSC 8, you are required to conduct appropriate due diligence and ongoing oversight of all third-party relationships. Under Principles for Businesses 2 and 3, you must exercise skill, care, and diligence, and organise your affairs responsibly.

Consumer Duty goes even further. It demands that firms act to deliver good outcomes for retail clients, and that those outcomes are supported by governance, leadership and culture.

If you appoint external managers or advisers, you are accountable for ensuring they uphold the same standards of conduct, transparency, and client-centric behaviour that the FCA expects from you. You cannot outsource responsibility for culture.

Failing to test and evidence cultural alignment means you cannot credibly demonstrate that your oversight arrangements are robust – a point the FCA will probe during authorisation and supervision.

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The illusion of due diligence

Due-diligence questionnaires focused on regulatory status, AUM, policies and compliance certifications. While these provide comfort, they do not tell you how people behave within those organisations.

A manager can have a flawless compliance manual and still foster a culture that rewards aggressive sales, discourages dissent or prioritises short-term returns over client interests.

Without a structured assessment of culture – examining leadership behaviour, governance tone, accountability, and incentive structures – you are relying on paperwork, not evidence. That is not diligence; it’s box-ticking.

The cost of cultural blind spots

Failing to evaluate and monitor culture exposes your firm to multiple categories of risk:

a) Conduct risk

Poor culture breeds misconduct. If your delegated managers tolerate inappropriate behaviour or poor client treatment, you inherit those outcomes. The FCA increasingly views principal firms as responsible for conduct across the chain, not just within their own staff.

b) Operational and reputational risk

Cultural weaknesses often precede operational failures. A firm with a culture of fear or silence is unlikely to escalate issues early. When problems emerge — valuation errors, liquidity breaches, conflicts of interest — you face the headlines and client losses.

c) Supervisory risk

During FCA authorisation or periodic reviews, expect the question: “How do you assess culture and behaviour in your outsourcing and delegation arrangements?” If your answer is limited to “We review policies and financials,” you have a gap the regulator will challenge.

d) Strategic risk

A misalignment of culture between you and your managers can undermine long-term strategy. For firms promoting sustainable investing, ethical wealth management, or client-centric values, a partner with an incompatible culture erodes credibility and brand equity.

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5. What good looks like

Incorporating culture into third-party due diligence does not require reinventing your entire process. It means treating cultural assessment with the same rigour as financial risk.

Good practice includes:

• Defining what ‘good culture’ means for your firm — the values, leadership behaviours, and governance standards you expect from all partners.

• Embedding cultural indicators in your due-diligence and ongoing monitoring processes: leadership integrity, challenge in committees, employee engagement, staff turnover, transparency, and incentive alignment.

• Testing what you can verify, not what you are told — interview senior leaders, review governance minutes, speak to former employees, analyse behavioural data where possible.

• Integrating results into your risk rating: a weak cultural assessment should affect your overall risk appetite for a manager, just as a poor financial control rating would.

• Documenting oversight: ensure the ACD board or investment committee receives and challenges cultural assessments periodically.

By doing this, you can evidence to the FCA that your firm not only understands culture as a driver of risk but actively manages it.

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6. Aligning culture with Consumer Duty outcomes

The Consumer Duty requires firms to act in good faith, avoid foreseeable harm, and enable clients to pursue their financial objectives. Those outcomes are cultural in nature — they depend on behaviours, incentives, and decision-making norms.

If the third parties managing your clients’ assets do not share your cultural standards, you cannot credibly deliver the Consumer Duty. The FCA will expect you to demonstrate how your oversight ensures those standards are maintained across the entire distribution and investment chain.

Ignoring culture, therefore, is not simply a missed opportunity — it’s a failure of the Consumer Duty itself.

7. Culture as a competitive advantage

Finally, firms that take culture seriously don’t just avoid regulatory pain — they gain strategic benefit. Cultural alignment with external managers strengthens trust, reduces surprises, and supports more resilient performance through market stress.

It also builds credibility with clients and regulators alike. In an environment where the FCA increasingly assesses firms through the lens of culture, those who can evidence it will stand out as leaders in governance and stewardship.

The bottom line

If your due diligence focuses solely on financials and compliance checklists, you are managing half the risk.

The FCA’s message is clear: culture drives conduct, conduct drives outcomes, and outcomes determine compliance. Without understanding the culture of those managing your clients’ money, you cannot claim to be managing risk – or delivering the outcomes the regulator now demands.