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#Governance, Risk and Compliance

Regulating culture

International Compliance Association

culture , regulating , regulator

In a recent speech at the New York Federal Reserve, Barclays Chairman Sir David Walker argued that: “Regulators cannot and should not try to regulate culture, which is a matter for the individual entity”.

While there is broad agreement about the importance of improving organisational cultures within the financial sector in order to avoid a repeat of the financial crisis, the question of the proper role of regulators within that process remains a more complex and contentious issue. So what are some of the differing perspectives?

The case against…
The case often made against the regulation of culture is that a “command and control” model, involving the imposition of rules and regulations by an external authority (with sanctioning powers in the event of non-compliance) results simply in a “culture of obedience” amongst the regulated community. In other words, firms and individuals may be driven to follow the letter rather than the spirit of regulations, out of fear of sanction as opposed to any sense of sympathy with the ethical or normative principles underlying those regulations. This results in a “tick box” approach rather than a proper embedding of cultural norms within the organisation (i.e. lip service rather than meaningful longer term change).

Instead, it is often held that true cultural change is best brought about from within an organisation, through the creation of robust governance structures and the appointment of the right individuals within senior positions who can drive and maintain an appropriate tone from the top.

A recent report published by thinktank ResPublica proposed that the key to “virtuous banking” lies in a combination of internal measures (governance structures which include codes of conduct, the requirement for employees to take the banker’s oath, and increased shareholder activism), and the external measures of competition (including customer satisfaction and increased rights for small business customers) and diversity.

Nevertheless, within such a view there may be some role for the regulator, for example in the vetting of senior appointments, given the importance of senior figures in establishing the tone from the top, and in ensuring that those senior figures are effectively held to account.

The case for…
By contrast there are those who might argue that the idea of banks acting by themselves to institute cultural change (and moreover maintaining desirable cultures over longer periods of time) is wishful thinking, and that instead the firm hand of regulation is preferable. They might point to the efforts made by Barclays itself which, in the wake of the LIBOR scandal, appointed Sir David Walker as Chairman and Antony Jenkins as Chief Exec in a bid to restore trust in the bank.

The bank has since set out to transform its culture, with some high profile statements about how it intends to do so. However, in many ways the process has proved akin to turning the oil tanker, as illustrated by the recent lawsuit by New York Attorney General Eric Schneider against the bank over alleged “dark pool” activities which were purported to have taken place on Mr Jenkins’ watch. Similarly, the bank enraged shareholders at the start of the year, with Mr Jenkins insisting that the payment of large bonuses to certain staff was necessary to avoid a “death spiral” (i.e. the loss of key “talent”). This was in sharp contrast to Sir David’sinsistence upon his appointment that “if people are only doing it for the money they are probably not the people we need” and will have led some to question how much had really changed, culturally, at the bank post-Diamond.

Where do you stand?
Where individuals sit between these two perspectives may depend to some degree on how optimistic / cynical they are. And in practice, as is typical, the “right” answer may be found in finding some balance between the two positions. Although the debate is not an entirely new one it is nevertheless one that compliance practitioners should be engaging in. With that in mind, your views are, as always, most welcome.


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