Culture & Conduct: the Global Regulatory Agenda

The UK FCA has been a definitive leader in driving the global supervisory agenda in relation to culture and conduct risk, say Jeff Kupfer and Stephen Scott at Starling Trust Sciences.

On 30 March, Starling released its annual Compendium, a report on global regulatory activities aimed at promoting improved culture and conduct in the banking sector. Benefitting from input from regulators in Hong Kong, Singapore, Australia, the UK and the Netherlands, the report outlines several key trends:

1) The culture/conduct-risk supervisory agenda continued to gather momentum throughout 2018 and looks set to expand in 2019, as persistent bank conduct scandals in the news headlines have resulted in increased regulatory focus on shortcomings in the banking sector in most major markets.

2) The dialogue regarding culture and conduct risk has shifted markedly away from a debate regarding whether culture was a relevant supervisory matter, to the now dominant consensus view that it indeed is. The focus today is on how supervisory guidance on this matter is best operationalised, and what firms are expected to do to better measure and manage their culture and conduct risks.

3) Throughout 2018, most major markets witnessed the increasing adoption of individual accountability regimes , modeled after the UK’s Senior Managers & Certification Regime. We expect to see this trend become further entrenched in the year ahead.

4) It is increasingly clear that regulators are emphasising the value contributed by behavioral science in the supervisory context. In this regard, we now see several jurisdictions adopting the pioneering approach of De Nederlandsche Bank – the central bank of the Netherlands – to employ teams of behavioral and organisational psychologists who conduct “deep dive” examinations into the cultural and behavioural predilections among firm leaders and employees. Much of this is done through extensive surveys, interviews and observations made during management and even board meetings.

5) We are beginning to see the emergence of an “ecosystem approach” to improve governance and supervision in relation to culture and conduct risk, and an associated global dialogue that includes international standard-setting bodies, institutional investors, industry associations and firms.

6) Reflective of this, the past year saw a marked increase in cross-border collaboration and knowledge-sharing among regulators around these issues, and we fully expect to see that trend build momentum over the course of the next year, as regulators and their supervised entities work towards establishing a new set of best practices for culture and conduct risk management.

7) There is a clear frustration regarding a lack of established, industry-standard metrics by which to gauge culture and conduct risk, both for internal governance purposes and for reporting to regulators and other interested stakeholders. Regulators and firms alike are struggling to determine how they may best evidence success in this regard and are beginning to trial RegTech tools in this context.

The UK’s Financial Conduct Authority (FCA) has been a definitive leader in driving these trends. It initially established firm culture and conduct risk governance as a priority in its 2016/17 Business Plan, and this was emphasised in its 2018/2019 plan, released last April. Responding to questions from Starling about its 2018/19 priorities, the FCA pointed to considerations of firm culture as sitting at the heart of its system of supervision.

Culture in financial services is a priority for the FCA. As a regulator we can’t specify what type of culture financial services firms should have, but what we can do is help firms to identify what is going to be a healthy culture and how to get there. We are working with the financial services community to speed up the pace of culture change by sharing multidisciplinary perspectives of healthy cultures, and supporting firms to solve their cultural challenges by focusing on key drivers of behaviour.

– Jonathan Davidson, FCA Executive Director of Supervision – Retail and Authorisations

The centerpiece of the FCA’s efforts around increased accountability is the Senior Managers and Certification Regime (SM&CR), which has been applied to the UK banking sector since 2016. The regime was extended to insurers in 2018 and it will be implemented for all FCA regulated firms during 2019.

The goal of the SM&CR is to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. For example, the FCA has established a set of Conduct Rules, intended to set minimum standards of individual behaviour in financial services. These rules will apply to almost all employees who engage in financial services activities, or in linked activities, within a firm.

Senior-most people (“senior managers”) who perform key roles (“senior management functions”) will need to win FCA approval before being permitted to assume their roles. Every senior manager will need to have a “statement of responsibilities” that clearly states what they are responsible and accountable for – and obligated to take reasonable steps to prevent breaches in their areas of responsibility.

The FCA’s approach has been mimicked by regulators elsewhere. For instance, the last year saw the development of a Bank Executive Accountability Regime (BEAR) in Australia, a Senior Executive Accountability Regime (SEAR) in Ireland, and proposed guidelines issued by the Monetary Authority of Singapore (MAS) with a view to implementing a similar accountability regime.

In Hong Kong, a Managers-in-Charge (MiC) regime instituted by the Securities and Futures Commission (SFC) in 2017 was complemented in 2018 by a Hong Kong Monetary Authority (HKMA) initiative aimed at Bank Culture Reform, which anticipates close engagement with bank executives and board members who hold specific responsibility for culture reform oversight. We expect this trend to continue throughout 2019 and beyond.

In the coming weeks, in collaboration with Regulation Asia, we will be producing a series of articles further discussing some of key themes and findings from the Compendium, a full copy of which is available here.

Jeffrey Kupfer and Stephen Scott are co-founders of Starling Trust Sciences, a US-based RegTech firm that applies behavioural science, machine learning and network analytics to identify and mitigate culture and conduct risks before they escalate into crises. They have been invited to present their research and ideas at the SEACEN Policy Summit for APAC Central Bank and Monetary Authority Leadership (Kuala Lumpur, 13-14 June) and at the SEACEN/Financial Stability Institute High Level Meeting for regional Directors of Bank Supervision (Hanoi, 26-27 June).

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