A Compendium of Regulatory Priorities Aimed at Culture and Conduct Challenges in the Financial Sector
This section comprises the main body of our annual report — the “Compendium” proper, as we call it. It is organized 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 within each nation. No other body of work that we know of offers this degree of granularity and comprehensiveness regarding the matters we address in this series of reports.
Here we describe the activities and priorities that were in evidence over the last year, both with regard to the supervision of culture and conduct risk concerns in the industry, and in terms of expectations for the governance thereof within firms. This year’s report also considers deeply questions of culture and conduct risks as they have plagued supervisory bodies themselves.
Some markets have experienced more significant public activity, often driven by crisis or scandal. 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 view. We’ve done our best to capture whatever was publicly available.
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 many of the major financial markets worldwide. You will see that input incorporated throughout this section, significantly enriching it.
Please note that the summary contained within the Compendium-proper seeks not to offer qualitative judgments of our own, but rather to provide our readers with some organized information concerning the global culture and conduct risk supervisory agenda, identifying trends and open questions, and invariably reflecting the various and at times conflicting qualitative judgements on offer from those whose views we seek to curate.
Every year, in the course of writing this report, we pull out a list of ten Key Takeaways which represent the topics that appear to have 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 reflects the discussion around governance failures exposed by the 2023 “banking turmoil.” In October 2023, the Basel Committee on Banking Supervision (BCBS) published its report on the regulatory and supervisory implications of the 2023 bank failures. The BCBS argued that they exposed widespread shortcomings in risk management and culture, highlighting the need for more effective supervision to assess such concerns.1
A second Key Takeaway is the focus on supervisory failures, which some argue permitted for the governance and cultural failures that produced the turmoil. In its own post-mortem, the International Monetary Fund (IMF) argued that supervisory agencies must attend to their own cultures to better ensure that supervisors take more timely action to compel firms to resolve these governance deficiencies.2 [See also the article 2024 Update | Global Regulators]
A third Key Takeaway from this conversation has centered around whether the supervisory and governance deficiencies at the root of last Spring’s bank failures were systemic or idiosyncratic in nature. Viewed closely, the consensus view that emerges here suggests that we should view these deficiencies as “uniquely similar.” Daniela Jaramillo, Head of Sustainable Investing in Australia for Fidelity International, explains here why she believes culture-based risks have real financial implications, and are systemic in nature. [See also the Ground Breakers article Workplace Misconduct: The Underestimated Systemic Risk Implications for Investors]
Whether you agree that shortcomings in culture and conduct risk governance and supervision are systemic, they are clearly prudential in nature, as evidenced by their role in the downfall of Credit Suisse, a G-SIB. Herein, Sharon Donnery, Deputy Governor for Financial Regulation at the Central Bank of Ireland and newly appointed member of the ECB’s supervisory board, explains why culture and conduct risks warrant prudential attention. [See also the In Focus article An Interview with Sharon Donnery]
Another Key Takeaway from the occurrences of the past year is that supervisors are susceptible to the same culture challenges as the firms they oversee — “As Above, So Below.” The clearest example of this is the culture crisis at the US Federal Deposit Insurance Corporation, which has captured headlines and Congressional attention in the US. [See also the article 2024 Update | United States]
In an attempt to drive governance and culture improvements in the financial industry, regulators globally have established tests to determine whether applicants are “fit and proper” for their prospective leadership roles. Some of these regimes include a focus on character, among them most recently the NY Department of Financial Services. [See also the In Focus article An Interview with Adrienne A. Harris] But while character is certainly important, contributors here argue that it is perhaps more important to attend to cultural context, as this has greater influence on employee conduct.
These fitness and probity regimes are just one example of judgment-based supervisory aims that have faced industry push-back over the past year. Without reliable objective metrics, the assertion of subjective supervisory judgments that imply real economic consequences raises questions of due process. This argument is taken up herein by Greg Baer, CEO of the Bank Policy Institute — a US-based banking sector advocacy group. [See also the In Focus article Rethinking Bank Examination]
We have also noted here an apparent conflict between regulators’ calls for enhanced accountability and their emphasis on the cultivation of “speak-up” cultures. This is a key concern surrounding the efforts to establish accountability regimes, as in Ireland, [See also the 2024 Update | Ireland] or to upgrade existing regimes, as in Australia. [See also the 2024 Update | Australia]
In their attempts to confront all of the foregoing challenges, many firms and supervisors turn to a long relied-upon set of tools: whistleblower hotlines, surveillance and monitoring, etc. While perhaps representing good hygiene, at best, these tools afford advanced hindsight rather than the leading indicators of risk that would permit for proactive corrective interventions.
If we want to develop lasting solutions to these problems, we will need to look to predictive behavioral analytics. For more on the potential of these tools to transform our management capabilities, please reference the views offered here by numerous contributors from The Academy, each a prominent figure in their specific fields of study.
The main body of our annual Compendium begins with the United States, where we have seen all the foregoing key themes at work, making that market a good starting point for this global tour of happenings relevant to culture and conduct risk in the financial sector. We hope you will find this to be a valuable desk-reference and of course we welcome any constructive feedback. Please don’t hesitate to reach out to us at [email protected].
Cameron Lawrence
Director of Research
11 June 2024
Other Articles in the 2024 Compendium of Regulatory Priorities Series
Introduction to the 2024 Compendium of Regulatory Priorities
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