Supervisors on Supervision

“Culture is what you learn from your colleagues, and culture is what you get the sense is permitted by checking the reaction of your colleagues.”

This cultural issue should not be about business ethics; it should be about good business practices and how to build a successful business. If you can frame it the latter way rather than the former, you can build something that will have credibility with supervisors across borders and with the industry itself. It's not about moralizing; it's about good risk management.”

“An international initiative or a cooperative approach between supervisors could strengthen their own cultures to deal with culture. That would be extremely helpful because, at the moment, everybody feels like they're doing this on their own. 

To be defensive for supervisors, this helps protect you from being accused of just chasing some random personal interest. You can say, ‘No, I didn't make this up. Look, they're all doing this.’”

“What's at the core is getting to a point where supervisors don't do one of two things: either avoid the issue because they're afraid they won't be backed up, or go straight to escalation because they're afraid they will get in trouble for doing something less than enforcement. Both are an avoidance of the difficult thing in the middle, which is constructive engagement.

There's a concern around fairness. You're sitting in that company and you're thinking, why am I getting picked on. Look at these guys down the block, they're all playing the same game as me, and suddenly you're after me.”

“We talk about firm culture, but you also need to talk about team culture, and financial center or jurisdiction culture, and sector culture. In a lot of financial firms, they don't really have a firm culture; they have team cultures. I have certainly seen that myself in my own background, working in a team whose risk appetite was very different and not well-aligned with the risk appetite the CEO thought his organization had.”

“For example, it can happen that your trading desk is in a terrible place in terms of culture, which means all your risk management frameworks applying to those people are not working because half the team are trying to get around them. It’s us trying to fix your risk management system so that you see the issues and you challenge them as a firm.”

“I see the role of the supervisor here as providing input into the bilateral discussions with the firm's senior management, where you're trying to inform and improve the firm's own risk management framework.”

“For many issues, if a company says, ‘We just don't recognize what you're talking about,’ you are stuck as a supervisor. Supervisors are sometimes unwilling to recognize those issues because they're afraid of the dead end.”

“It requires a huge element of trust between the supervisor and the supervised. If you don't have that trust — that you're not on the verge of an escalation to an enforcement process — you will never be able to have this conversation and get the improvement in the risk system.”

“How does enforcement work? Taking someone to court for their culture? Fining you for having a bad culture? How do I prove that? At each stage, it looks to supervisors like an almost insurmountable problem. 

Anyone who wants to measure culture will find that incredibly difficult. You end up trying to measure a proxy rather than the thing itself. When people measure proxies, they do things like observing meetings. If you correct the proxies, you haven't corrected the culture; you've just corrected the proxies. Using proxies is not a bad thing, provided that you benchmark against reality rather than against abstract norms. 

The big mistake I have seen is to then think that fixing the proxies is fixing the culture issue. It's like saying, ‘People aren't laughing at my jokes. That's okay, we'll order them to laugh,’ and so they'll find them funny. That is not actually solving the problem.”

“If you look at supervisory technology, the investment is at a very low level in large parts of the world. We are still collecting data in a 20th-century way.”

“You start by working up a system with a few jurisdictions — say New York, Frankfurt, and London — and tell firms, ‘We will do an assessment and tell you, if we were using this as part of our risk assessment, where you would stand.’ You're not using it for capital purposes initially; you're using it to help them understand their own systems. 

The conversation goes: ‘This doesn't look right to me.’ ‘Looks fine to me.’ ‘Okay, I'm going to benchmark you against your peers. This is not just my subjective opinion.’ That puts you in a different space. You're widening who you're talking to and bringing in evidence. This minimizes the number of issues that are in that standoff category where the only way forward is de escalation to enforcement.”

“Participants in [the asset management] sector want to appear responsible and well governed not so much to their regulators as to their clients. For that reason, when a global body sets out ways in which they can work which will allow them to present themselves as ‘best in class,’ that has a commercial attractiveness.”

“Sometimes, the reason the industry does not support the strengthening of supervision is because they lose trust in supervisors not to abuse the additional resources. This can happen despite the best efforts of supervisors to ensure responsible use of their powers. So sometimes we get into a bad place in terms of the level of trust, which impacts the willingness of the industry to finance good quality supervisory technology and the ability of supervisors to build it.”

"A common evidentiary basis is what's missing.”