This section comprises the main body of our annual report—the “Compendium” proper, as we call it. It is broken out by global regions and specific national jurisdictions in each. Where practicable, we have broken the information out further to highlight specific regulatory or supervisory agencies, standard-setting bodies, and other industry organizations of relevance.
We highlight here the activities and priorities that were in evidence over the last year, both with regard to the supervision of culture and conduct risk concerns and in terms of expectations for the governance thereof within firms. Some markets have experienced more significant public activity, often driven by scandal and public reaction to such. Others have featured less public activity, which may or may not mean that they are actually devoting less attention to issues of culture and conduct, as regulators often engage with firms outside public purview.
We are pleased, therefore, that our efforts to curate and collate relevant information have been complemented by the many In Focus contributions that we have received from regulators and leading figures from industry associations in many of the major financial markets worldwide. You will see that input incorporated throughout this section, significantly enriching it.
Please note that the following summary seeks not to make qualitative judgments but, rather, simply to provide our readers with some organized information concerning the global culture and conduct risk supervisory agenda, identifying trends and open questions.
Every year, in the course of writing this report, we pull out a list of ten key takeaways which represent the topics that received the greatest attention in the past year, or which serve to highlight new trends and developments of particular note.
The first key takeaway from this report is the lively debate around whether banks have become “too big to manage.” While this is not a new concept, it received heightened attention following a speech by US Acting Comptroller of the Currency in January of this year, in which he warned that banks whose size appears to hamper their ability to address internal weaknesses and comply with regulations may need to be broken up or made simpler. [See the Preamble to the 2023 Compendium]
Another key takeaway from this report is a growing trend of regulation and legislation emphasizing a duty to prevent foreseeable harm and crises. An example of this comes out of the UK, where proposed legislation would make “failure to prevent” fraud a criminal offense, perhaps overriding the previous “directing mind and will” barrier to corporate prosecution. [See the 2023 Update for the United Kingdom]
One way regulators have sought to do this is through outcomes-based regulation. In this direction, Canada’s Office of the Superintendent of Financial Institutions (OSFI) recently issued a consultative “Culture and Behaviour Risk Guideline,” outlining outcomes which firms are accountable, and emphasizing how a sound culture and proactive management of behavioral risks contributes to good outcomes. [See the 2023 Update for Canada]
And when company boards and officers fail to manage foreseeable risks, they are increasingly being held personally liable in this new era of accountability. In one example, after several years of work, the Central Bank of Ireland launched a three-month consultation on key aspects of its Individual Accountability Framework (IAF) in March 2023, modeled on the UK Senior Managers and Certification Regime. The consultation clarifies expectations regarding the Senior Executive Accountability Regime (SEAR), which requires firms to set out where decision-making and responsibility sit within senior management. [See the 2023 Update for Ireland]
The CBI’s Deputy Governor, Derville Rowland, stated that the framework will "underpin sound governance across the financial sector" by setting out the good practices expected of firms and role-holders, as well as their personal accountability in this regard.
Another key takeaway from this year’s report is one that has emerged from the recent bank failures: the need for confidence cushions. Recent banking sector turmoil and unanticipated vulnerabilities have returned attention to bank capital adequacy and reserve requirements. But no capital cushion is sufficient to survive a loss of confidence in a firm’s ability to operate soundly.
The bank failures have also raised concerns about the growing rule books banks are required to follow. We must stop lying to ourselves: adding to already overwhelming regulatory-mandated activities and reporting requirements will not help us to avoid recent troubles and, perversely, may result in an increase in operational risk management failures. [See the Our View Article Bank Regulation: Are We Going to Lie to Ourselves?]
The top key takeaway from our 2022 report was that the stability of the financial sector had become a national security interest, amid the Russian invasion of Ukraine and heightened geopolitical tensions between China and the West. That theme persists into this year’s report. In one example of this, we have seen these tensions continuing to affect banks’ ability to operate in Hong Kong. If Hong Kong was long viewed as the bridge between the two economic systems, today it looks more like a portcullis at a principal gateway to the Chinese market. [See the 2023 Update for Hong Kong]
In order to manage culture, conduct, and other non-financial risks more effectively, we must adopt more meaningful metrics that offer disclosable leading indicators of this trouble so that they may be addressed proactively.
And these metrics cannot be developed with necessary efficacy by either public or private actors operating alone. Rather, we will require public-private partnerships to come to common solutions that support governance and supervisory interests alike. The Financial Action Task Force and the FSB-led Task Force on Climate-Related Financial Disclosures (TCFD) may serve as useful models in this connection. [See the In Focus Article An Interview with Randal Quarles]
Through public-private partnerships, new tools can be developed and trialed to test for their ability to help produce better outcomes for regulators, firms, and stakeholders This will foster the development and promulgation of new best practices, and broad adoption of these will facilitate horizontal peer review capabilities.
The main body of our annual Compendium begins with the United States, where we have seen all the foregoing key themes at work, making the market a good starting point for this global tour of happenings relevant to culture and conduct in the financial sector.
Other Articles in the 2023 Compendium of Regulatory Priorities Series
Introduction to the 2023 Compendium of Regulatory Priorities
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