Mark Carney, Bank of England governor, suggested last week that financial compliance should focus more on incentives than fines.
Speaking at the Bank’s Markets Forum, Carney talked of London’s position as a role model of good corporate conduct and addressed some of the challenges facing the industry.
The City as role model
Carney said that since the financial crisis of 2008, ‘the UK has played a leading role in addressing misconduct in domestic and global markets’ and that the City of London has a ‘particular responsibility’ for tackling misconduct given its position as a leading financial centre.
Good progress has been made, he said, in building ‘fair and effective markets’. But he also touched on the need to ‘maintain focus as memories fade and the temptation to turn inwards returns’.
Creating the right focus
Carney spoke of the need to create what he termed ‘real markets’ – which he defined as professional, open, resilient, fair and effective – designed to serve their end users rather than being ends in themselves.
One of the key aspects of this, he said, will be a ‘move from an excessive reliance on punitive ex post fines of firms to greater emphasis on more compelling ex ante incentives for individuals’
Ultimately, the industry needs ‘a more solid grounding in improved firm culture’.
In other words, while the financial crisis spawned numerous laws and regulations aimed at improve the ethics and robustness of the sector, there needs now to be more incentive for individuals to follow the rules, rather than ways of punishing them after the event.
How to incentivise good practice
If you are trying to implement this approach in your own organisation, where do you start? Our 5 questions offer advice:
1. Reduce opportunities for bad behaviour
This is cited by Carney as the start point. This means putting in place a culture where good behaviour is expected and poor ethics aren’t tolerated. This approach needs to start at the top – read more about why the board is central to a good corporate culture.
2. Make sure your reward structure incentivises ethical conduct
Carney said that good practice ‘requires compensation rules that align risk and reward’. Do your compensation practices support treating customers fairly and promoting the FCA’s desired consumer outcomes?
3. Ensure firms and individuals take responsibility for their conduct
Carney cited the Senior Managers & Certification Regime as an example of regulation that increases individual accountability, saying that it ‘re-establishes the link between seniority and accountability, strengthens individual accountability, and reinforces collective responsibility.’
The notion of individual accountability is one that extends beyond the SMCR to all areas of business. In a culture of good conduct, regulatory compliance shouldn’t just be down to your team – read about why compliance is everyone’s responsibility.
4. Make regulatory compliance built-in, not bolt-on
Cultivating an approach that embeds good governance is an ongoing theme for the regulator, and underlies its ethos. Earlier this year, the FCA announced an updated approach to supervision of firms which, in its words, moves towards a ‘more forward-looking and pre-emptive’ attitude to supervision.
Find out more about what a ‘culture of compliance’ is and how can you achieve it.
5. Explore automation as a way of mandating Compliance team approval
Even though your team is there as a backstop against poor conduct, humans are fallible and inevitably, regulatory breaches can slip through.
This can be particularly true in the case of marketing and communication materials, where it can be easy to let your financial promotions get out of control. Find out how you can build in Compliance team approval to your promotions and how technology can help Compliance teams to minimise the risk of regulatory breaches.
Building a culture that incentivises good conduct, rather than penalising poor behaviour, isn’t always straightforward. But with the backing of the Regulator and the Bank of England, it seems clear that this is the way conduct regulation in the UK is heading.
To find out more about how you can develop this ethos in your firm, you can download our whitepaper, How to embed a compliance culture into your business. It’s free and you can get a copy here.
Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.