“Physician, Heal Thyself”
- Stephen Scott
Last July, Starling Insights and the Chartered Banker Institute published a Deeper Dive collection of perspectives discussing the global progress made in the management of culture and conduct risks in the 10 years since the UK's Parliamentary Commission on Banking Standards (PCBS) and its Changing banking for good report.
Despite hundreds of billions in regulatory fines and investment in new systems and processes, it remains unclear whether banks have sufficiently mastered the conduct risk concerns that led to the creation of the PCBS in 2012. In the last several years, regulators, investors, and the public have increasingly demanded that firms attend to their culture as a means of resolving these long-standing deficiencies.
Such concerns for cultural and behavioral risk challenges are not unique to banks — they are endemic to any large, complex organization, to include financial sector regulators — and this is the subject of Starling Insights’ recently-released Deeper Dive, "Physician, Heal Thyself."
The report highlights criticisms that regulators suffer from the same cultural and behavioral ills that have plagued the firms they supervise. Industry overseers, that is, are seen by many to be holding themselves to lower standards than those which they impose on the firms they oversee.
We are joined in this report by three current and past leaders of supervisory institutions in some of the most significant financial markets:
- Michelle Bowman, a Member of the US Federal Reserve Board, argues that banking sector overseers should hold themselves to the same high standards of conduct they encourage in the industry – and that they must do so in a manner independent of political pressure and mindful of public accountability. “Accountability is no less important for bank regulators than it is for banks,” she writes.
- Charles Randell, recent past-Chair of the UK Financial Conduct Authority, observes that the 2007-08 Financial Crisis gave rise to a focus on firm culture among regulators. “Many regulators” Randell suggests, “would probably admit that they have not always held themselves to the standards they require of the businesses they regulate.” But the supervisory failures implicit in the collapse of SVB and Credit Suisse last year “have shifted the lens to the culture of financial regulators themselves,” he argues.
- Wayne Byres, recent past-Chair of the Australian Prudential Regulation Authority, emphasizes the importance of culture to improving supervisory outcomes. "Globally, supervisors have rightly recognised governance and culture as important contributors to the financial safety and soundness of regulated firms," he writes. "And yet this attention to culture within firms has not flowed into similar international efforts to strengthen the mindset and culture of financial supervisors." This must now change.
Regulators in a number of jurisdictions have trialed new approaches to culture and conduct risk supervision, and we describe several of these: new methods of assessing culture (Australia), outcomes-based regulation that encourages leaders to take ownership of their culture (UK), and the promulgation of guidelines for sound culture risk management (Canada), among others.
Firms too have sought to grapple with heretofore intractable culture-driven challenges through innovative means. But as these risks are systemic, they warrant a more joined-up approach to involve collaboration between public and private actors: firms, supervisors, academic experts, and leading technologists. Such collaboration will help to strengthen the financial system and rebuild public trust in governance and supervision.
To access the report, click here and for those who missed it then I would also recommend the recent webcast that we hosted jointly with the Chartered Banker Institute, discussing how standard-setting bodies have sought to drive culture and conduct change across the financial services sector over the past 10 years, and what more they can do going forward.