The Regulatory Read: Culture Audit in Financial Services (2021)

The Regulatory Read: Culture Audit in Financial Services (2021)

HUMINT: “category of intelligence derived from information collected and provided by human sources

North Atlantic Treaty Organisation (“NATO”) (2013)

What is your most valuable commodity? Participants active in the financial markets today may respond “Brent crude”. However, ask the military and they are very likely to answer “HUMINT”, the NATO code for human intelligence. Adherents of “behaviour at risk” (“BaR”) pioneer Dr Roger Miles agree, “it remains essential that intelligence is gathered sentiently, on a human-to-human basis” asserts Ruth Steinholz in Miles (2021), exhibiting scepticism of any aspiration towards a technological panacea in the management of conduct risk. Many who have sat in the trenches of trading firms would agree. Intuition and nuance cannot be machine read, at least not yet. However, how can these footsoldiers provide actionable metrics to their generals in senior management to help win the seemingly never-ending culture war?

In the first review of our new Regulatory Read series we provide a short synopsis of a book that offers a plan of attack to financial professionals seeking answers to this question. In truth, the contributors to Culture Audit in Financial Services may disassociate themselves with ‘regulatory’ label used in this series. This is because one of the central tenets of behavioural economics is the rejection of a purely ‘classical’ approach to managing risk in the financial markets. Relying on the enforcement of laws, value-at-risk models or other ‘blunt’ instruments will not address the twin dangers of overconfidence and power of the tribe, contend behavioural economists. As these have been root causes of many of the biggest risk incidents the financial industry has suffered, from the collapse of Barings Bank to the 2007-08 crisis, the authors of Culture Audit in Financial Services advocate for a HUMINT led approach to meeting the sector’s biggest challenges. Featuring contributions from BaR thought leaders such as Christian Hunt, Rachel Wolcott and Hani Nabeel; trust, emotional intelligence and psychology take centre stage in this compact cultural armoury.

Who should read this book?

  • Executive leadership / “c-suite” functions who are ultimately responsible for outlining a firm’s conduct risk framework.
  •  Non-executive directors who are tasked with testing the outcomes of the conduct risk framework presided over by the executive board.
  •  Senior management functions (“SMFs”) and their certified deputies who may not sit on the firm’s board (or equivalent) but who are responsible for setting the ‘tone in the middle’.
  •  Staff in control function roles: compliance, risk (particularly operational risk) and internal audit who interact with the conduct regime, e.g., to report to regulators.

Why should I read this book?

  • To gain an introduction to behavioural science and how it is influencing regulators around the world.
  •  To see things from a different perspective, even if you are cynical about the applicability of behavioural science to managing risk in the financial markets.
  • To rethink the effectiveness of your systems and controls.  Could a ‘nudge’ environment achieve the same, or better, outcomes as a ‘control’ environment, and meet with less resistance?

What topics are covered in the book?

  •  An overview as to how competent authorities transformed into ‘conduct regulators’ in the aftermath of the financial crisis.
  •  An outline of the concept of ‘social licence’ and the ‘psychological contract’ between organisations and their stakeholders.
  •  Insights into the importance of the ‘informal’ organisation and limitations of the ‘legal’ organisation.
  •  The role of the ‘floorwalk’ in the conduct regulators’ supervisory toolkit.
  •  A crash course in behavioural science, with helpful signposts to further reading to develop understanding.
  •  An outline of the main types of misconduct and cultural failure and their drivers, e.g., misaligned incentives.
  •  Psychological safety and why it is important to keep employees onside.
  • How to design effective management information for reporting on cultural issues.

How readable is the book?

  • Do not be deterred by the textbook style cover! The book is very easy to read and makes a conscious attempt to avoid alienating jargon. Afterall, it is aimed at newcomers to behavioural science. Anecdotes from real life situations are deployed to provide context and maintain interest.

How long does it take to read the book?

  • You could comfortably finish the book in a week if you dedicate one-two hours’ a day to reading.

Cost

  •  Available in paperback from Amazon at a price of £41.99.
  •  ISBN: 1789667755

Overall rating

4/5

It would be wrong to view this as ‘just another compliance book’. Actually, it is not a ‘compliance book’ at all in the traditional sense. On the contrary, it offers a blueprint for a completely new approach to managing risk. Only time will tell if this blueprint is able to survive ‘culture fatigue’ and drive meaningful, and lasting, change in financial services institutions.

A.C.Culley & Co. has substantial experience of implementing conduct risk management programmes at investment firms. Please contact us today on enquiries@acculley.com if you would like any assistance with your conduct programme.

References

2013. Nato Glossary of Terms and Definitions. AAP-06 ed.: North Atlantic Treaty Organization.

MILES, R. 2021. Culture Audit in Financial Services: Reporting on behaviour to conduct regulators, New York, Kogan Page.

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