Regulatory Initiatives to Address Culture & Conduct Risk in Banking

In its latest annual Compendium, Starling draws on survey findings and commentary from regulators to identify ten culture and conduct trends in the banking sector.

US regtech firm Starling has released its annual Compendium for 2020, a report on global regulatory activities aimed at promoting improved culture and conduct in the banking sector.

Building on the 2019 report, the latest Compendium presents Starling’s findings from comprehensive survey responses and other commentary from the UK FCA (Financial Conduct Authority), HKMA (Hong Kong Monetary Authority), MAS (Monetary Authority of Singapore), EBA (European Banking Authority), and DFSA (Dubai Financial Services Authority), among others.

The key trends outlined in the Compendium include:

  • CEO turnover was far higher in the past year, driven by misconduct challenges, where the banking sector saw the resignation or removal of CEOs at Westpac and NAB in Australia, HSBC in the UK, Credit Suisse in Europe, and Wells Fargo in the US.
  • Personal liability and individual accountability have been continually emphasised in schemes modelled on the UK’s SMCR (Senior Managers & Certification Regime), such as in the US, where the OCC (Office of the Comptroller of the Currency) imposed multimillion-dollar fines on ex-Wells Fargo senior executives.
  • Culture supervision, and how to operationalise supervisory attention to conduct risk, has been a key theme f0r some regulators over the last year, alongside an emphasis on how financial institutions are expected to audit such risks and evidence their success in related risk management and culture reform efforts.
  • Cross-border collaboration has continued to expand significantly, allowing regulators to actively share lessons learned and benefit from each other’s experiences – such as through the GFIN (Global Financial Innovation Network), which grew from a few dozen to over 50 participating entities.
  • Behavioural science is being increasingly applied by global regulators to discover how culture drives propensities towards misconduct, and how best to drive good culture, good conduct, improved firm performance, and beneficial customer outcomes.
  • Anticipating customer outcomes through leading indicators of potential harm has increasingly informed supervisory priorities and initiatives and allowed for proactive interventions.
  • Standardised metrics are under development to help make culture measurable, thereby increasing its relevance in the supervisory context and allowing for better management of culture and related conduct risks.
  • New technologies, including in relation to data collection and analytics, have been a focus for regulators, as they seek to bring greater scale, timeliness, and efficiency to their supervisory capabilities.
  • ESG mandates have become especially prominent in the last year, reflecting a growing emphasis on good governance and beneficial social outcomes among institutional investors.
  • Social capital is increasingly being featured in politics and public policy debates, as the Covid-19 crisis demands collaborative efforts to craft solutions that are beneficial for all stakeholders, implying a low tolerance of firms that engage in misconduct and cause social harm.

“We hope that this 2020 update to our annual Compendium will help to prompt further informed discussion among banking industry executives and their regulators regarding the role that culture plays in driving misconduct risk,” says Stephen Scott, Founder and CEO of Starling.

“In particular, the Compendium offers insights on how misconduct risks can be better managed, supervised, and mitigated, how we might come to benefit by leading indicators of such risks through the use of data technologies, and how employee conduct may be managed proactively to drive desired performance outcomes.”

The full report is available for download here.

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