Financial sector regulators are placing increased emphasis on company culture and the conduct risks and consumer harm that it may promote. Among global peers, Singapore is setting the pace for effective governance of such risks, say Starling’s Stephen Scott and Mark Cooke.
Last month, Starling released its 4th annual Compendium – a series of reports tracing an evolution in thinking among global regulators, central bankers, policymakers and investors regarding the governance of culture and conduct related risks in the financial sector. Clear trends have emerged, as reflected in three of the key takeaways from this year’s report:
- Outcome vs. Intent: Against the backdrop of the COVID-crisis, we see the heightened significance of firm culture for regulators. Their emphasis has shifted from an examination of the inputs of good culture, governance, and risk management, to the outputs of relevant control measures. Firms are expected to demonstrate an ability to assure good outcomes ex ante.
- Forward-Looking Metrics: Past consumer, investor and social harms, coming as a consequence of overt misconduct and/or well-intended risk management failures, has led to a call for the development of leading indicators of such outcomes. These predictive metrics must move beyond standard assessments of risk management systems and processes to examine the cultural norms and ‘people dynamics’ within a firm.
- RegTech: The RegTech ecosystem has achieved greater maturity in many key financial markets. We now see more regular and coherent collaboration with RegTech pioneers among regulators, central bankers, industry associations and standard setting bodies, investors, board directors and firm leadership, at a pace accelerated by COVID challenges.
A collaborative ecosystem
Among global peers, Singapore has come to set the pace for the adoption of cutting-edge best practices in this regard. While many regulators and firms in other jurisdictions have recognised the material significance of culture and conduct risk, and though many jurisdictions have adopted ‘accountability regimes’ to assign individual responsibility – and liability – when misconduct events occur, few have been as forward leaning as regulators and firms in Singapore when it comes to adopting new approaches to related risk governance.
In a survey conducted by advisory firm Duff & Phelps, Singapore was rated by peers to have the top financial sector regulatory system in Asia. It is notable, in this connection, that in 2019 the Association of Banks in Singapore (ABS) formed a Culture and Conduct Steering Group to establish a coordinated and industry-wide effort to promote better culture and conduct among banks across the city-state. With 14 firms engaged in the work of the Steering Group, and with active support from the Monetary Authority of Singapore (MAS), this ecosystem approach to establishing industry best practices may provide a model for others to consider in different markets.
Perhaps unsurprisingly, a survey commissioned by the ABS found that more than 60 percent of respondents (consumers) reported feeling a high degree of trust in Singapore’s banking system. “Trust is foundational to banking,” observed ABS Director Ong-Ang Ai Boon in remarks contributed to the Compendium. “Perhaps rather unique to Singapore is the strong, symbiotic partnership between the public and private sectors to develop Singapore as a financial centre, with good long-term objectives and pro-growth policies and regulations,” she added, noting that high trust in the Singapore government and banks’ leadership worked jointly to promote high trust towards the banking industry as a whole.
“We will continue to step up culture and conduct supervision, especially leveraging technology to sharpen our insights and enhance our effectiveness,” MAS Managing Director Ravi Menon noted in our report. Evidencing this, MAS Deputy Managing Director for Supervision, Ho Hern Shin, described a three-pronged approach to supervising organizational culture:
- Promote and cultivate a culture of trust and ethics in the financial industry through the promulgation of good practices and active collaboration with industry;
- Monitor and assess culture and conduct within financial institutions, focusing on both “hardware” (frameworks, policies, and procedures) and “software” (tone-from-the-top, leadership, and attitudes); and
- Enforce and deter lapses in risk management, misconduct, regulatory breaches, or offences through supervisory or enforcement actions.
Ms. Ho describes the next phase of work contemplated by MAS, which will aim to strengthen culture and conduct supervisory capabilities. Namely: MAS will work to develop a framework by which to assess culture in a consistent manner across different firms; it will look to deepen its own expertise in culture supervision, having stood up an internal behavioural science unit in this direction; and MAS will monitor emerging culture and conduct related risks that may have been created or exacerbated due to the COVID crisis.
The use of new technologies will play a key role in these efforts, Ms. Ho notes. “Advancements in data science and technologies such as artificial intelligence are fundamentally changing the type of data that supervisors can efficiently collect and analyse,” she writes, “opening up possibilities for fresh data-driven insights on the culture of financial institutions.” She lists several initiatives in this connection, to include developing new dashboarding and visualisation tools. “Dashboarding and visualisation tools allow us to quickly identify trends, outliers, as well as specific issues of concern from these voluminous datasets.”
While such efforts on the part of MAS are critical, Deputy Director Ho makes clear that, “rules and regulations can only go so far in influencing behaviour, and it is the day-to-day decisions at the financial institution that determine the final outcomes in risk-taking and how consumers are treated.” As such, she adds, “the industry must also own this journey.”
In September 2020, MAS released a paper entitled “Information Paper on Culture and Conduct Practices of Financial Institutions.” The paper sets out its approach to culture and conduct, the outcomes towards which financial institutions should work, and provides examples of acceptable practices for the institutions to consider adopting. More specifically, MAS set out nine outcomes towards which financial institutions should strive. These include expectations for financial institutions to identify and empower staff who are responsible for driving culture and conduct, as well as to incorporate culture drivers and conduct risk as part of their risk management framework.”
Industry leaders have already made significant progress in this direction. For example, General Counsel for Oversea-Chinese Banking Corporation (OCBC) Loretta Yuen describes progress achieved thus far through her firm’s two-year journey towards a healthy culture and good ethical instincts. “At OCBC, we have a dedicated Board Ethics and Conduct Committee to ensure culture and conduct discussions form part of the regular agenda at board forums,” Yuen notes. Because culture building work requires cross-functional collaboration across a firm, the OCBC board committee is supported by multidisciplinary senior management committees with involvement of Heads of Human Resources, Communications and Risk Management.
“To achieve desired culture, banks must be willing to prioritise this subject matter on their corporate agenda,” Yuen maintains. “This means allocating appropriate resources to understand their ‘current state of culture’ and describe their ‘desired future state’,” she adds. OCBC has implemented several measures to better apprehend its cultural leanings and to visualise risk and opportunity through data driven dashboards.
But identifying the right metrics and putting in place monitoring mechanisms is just the beginning at OCBC. “We intend to further enhance the quality of our dashboard analysis by assessing whether meaningful connections can be drawn across metrics,’ Yuen reports. Effective horizontal collaboration and well-coordinated knowledge sharing efforts across bank functions is critical in this connection. “Done right, it will enable us to provide an even more robust and comprehensive report of our organisation’s culture and conduct state to our Board,” Yuen concludes.
“Banks must spare no effort to earn, build and guard the trust that stakeholders place in them,” argues DBS Group Executive and Singapore Country Head Shee Tse Koon in our report. “We must never forget that banks exist to serve real people, support real businesses, develop real economies and contribute to real communities,” he adds, calling this the soul of banking. “I remain convinced that the fundamental purpose of banking is noble,” Mr. Shee notes, arguing that “it is therefore paramount for all leaders in the industry to constantly steer their organisations to stay true to the original core, or soul, of banking.”
As chair of the ABS Culture and Conduct Steering Group, Mr. Shee is putting these ideas to practice through industry-wide collaborative efforts to advance Singapore’s leadership as a professionally advanced financial market. In a just-released Industry Practice Note, for instance, the ABS has announced a new collaboration around culture and conduct risk dashboarding.
The Practice Note shares information about existing dashboard tools currently in use and lists practices for the development and deployment of Culture & Conduct Dashboards among firms where such is not part of the present management toolkit. While leveraging the past experience of Culture and Conduct Steering Group members in designing and using their respective Dashboards, this new ABS initiative will explore other metrics that don’t yet feature in existing dashboards, but that could be additionally impactful.
Notably, this ABS initiative follows from the aforementioned Information Paper on Culture and Conduct Practices published by MAS in September 2020. The Paper specifically identified Culture & Conduct Dashboards as a good practice that financial institutions might adopt so as to consolidate multiple data sources and risk indicators to better inform a holistic view of culture trends within an organisation and the conduct norms that such may foster.
The Culture and Conduct Dashboarding initiative illustrates how advancement can be achieved through collaboration that joins firms, industry standard setters, and regulators around common objectives. “Real culture change is not a check box exercise that can be achieved single-handedly by one department or through a top-down mandate,” says Yuen at OCBC. Similarly, “A positive culture movement cannot be achieved through individual bank effort; it requires industry consensus, cooperation, and collaboration.”
Other jurisdictions will want to take note of Singapore’s example.
For more, please see the 2021 update to Starling’s Compendium series, available for download at this link.
Stephen Scott is a risk management expert and founding CEO of US-based RegTech firm Starling.
Mark Cooke was Group Head of Operational Risk at HSBC, former Chairman of ORX, and serves on the Risk & Governance Advisory Board at Starling.