Regulators and policymakers around the world remain focused on culture and conduct risk. Indeed, Ian Johnston, Chief Executive of the Dubai Financial Services Authority, has gone so far as to suggest that conduct risk could be considered the "new" prudential risk. In an article for Starling Insights, Johnson wrote "Until events of the past couple of months, I would have said ‘no’. But perhaps the Credit Suisse matter shows that a string of misconduct episodes might sufficiently affect the reputation of an institution that confidence could be eroded. And we know where that can lead."
The Federal Reserve Bank of New York has a continuing focus on governance & culture reform which is part of the supervisor’s efforts to understand and influence industry norms to help create a safer and more trustworthy banking sector. Five key messages coming out of its 2023 Governance and Culture Reform Conference highlight the issues with the most emphatic and deceptively simple takeaway being to motivate desired behaviors, and making the point that it is important to appreciate organizational staff and do so publicly. This often is easy to say and hard to do. There was general agreement that even the simplest acknowledgment can make a difference. Neuroscientist Mauricio Delgado confirmed that even a thumbs-up emoji or a smiley face can be more motivating than some forms of monetary compensation.
At the same time, several speakers observed that failing to acknowledge staff efforts can breed toxicity and resentment, leading to suboptimal decision-making and ultimately creating the context for poor conduct.
The challenges of monitoring culture and conduct risk within a firm are not to be underestimated. The vast majority of financial services firms have robust methodologies, infrastructures and systems for collecting and monitoring quantitative data. What is far less developed and standardized is the approach to collecting and analyzing qualitative data. In July 2023, the Financial Markets and Standards Board (FMSB) published a spotlight review entitled ‘Conduct & Culture MI: Boundaries of Current Practice’
The review notes that financial services firms have invested heavily in risk management frameworks, technical infrastructure and data to support analysis of conduct and culture and to help bring about positive change in their organizations. In addition ‘managerial focus has been intense and conduct, as recent events have demonstrated, continues to be a material challenge for governance.’
The review seeks to establish current practice around conduct and culture management information among a selection of large firms in global financial services providing useful context for individual firms and the industry as a whole.
One of the key messages from the FMSB review is that firm-wide and end-to-end coordination of data collection, analysis, reporting and follow-up can help deliver more complete reporting on culture and conduct metrics. The only way that can happen is if firms can comprehensively capture all relevant content. The use of video, chat, emojis and GIFs in communications have all increased significantly in the last few years. Firms will need to be able to capture all elements of communications including contextual information and review them in their native format to be able to fulfill the letter and the spirit of regulatory obligations. In simple terms, firms would not be able to monitor for the positive benefit of the thumbs-up emoji or a smiley face if they were not able to capture the emoji in the first place or where it was used in a conversation.
As the review concludes, ‘firms are now increasingly ambitious, seeking to strengthen their analytical abilities and improve their understanding further.’ And those analytical abilities will be enabled by the ability to robustly capture all content across all forms of communication within a firm.
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