NEW YORK (Thomson Reuters Regulatory Intelligence) - Traditional tools to combat misconduct and enhance internal cultures at banks, such as “tone at the top” messages from leadership and compliance surveys, are failing to achieve desired results, says Martin Wheatley, the former chief of the UK’s Financial Conduct Authority. Better use of data can help meet culture goals, despite limitations and challenges posed by privacy concerns, he said.
One of the major hurdles for the financial industry, Wheatley said in an recent interview with Regulatory Intelligence, is accepting that conduct is not an issue that one can easily measure, a reality that frustrates many who are used to quantifying other areas of risk.
Wheatley will be taking part in a regulatory forum on culture and behavioral science in New York on April 9, hosted by Thomson Reuters and behavioral sciences firm Starling, in cooperation with Ethical Systems. (Click for link to forum registration: here)
“There is recognition that conduct is an issue but people are still grappling with it ... They are struggling to find a concept and a methodological way to deal with it,” said Wheatley, who had a front-row seat to the industry’s conduct problems when in 2013 he led the newly created FCA, after its predecessor the Financial Services Authority was split in two.
“The problem with conduct is that it doesn’t fit into a quantifiable model,” he said. “You can’t have a quantified risk appetite like a VAR figure for conduct risk.”
Wheatley left the FCA in July 2015 after then-UK Chancellor George Osborne said “different leadership” was needed. He had previously served as chief executive of Hong Kong regulator Securities and Futures Commission. Wheatley’s UK reign at the FCA saw record fines imposed on some of the world’s largest banks, working jointly with U.S. regulators to investigate misconduct in Libor and foreign-exchange benchmark-rigging scandals.
His concerns over the pace of cultural reform echo those of other major regulators. William Dudley, president of the Federal Reserve Bank of New York, told a Reuters forum on banking culture that more needed to be done. “I’m pleased that there has been substantial progress, but I’m not satisfied with the progress,” Dudley told the audience.
In Wheatley’s view, traditional means to combat misconduct, while necessary, have had limited impact. While it is imperative that senior management and boards of directors convey a strong message about the importance of conduct and culture, innovation is needed.
“People are finding that traditional tools, such as messaging from senior management, training, or surveys, are not getting you to the point where they understand what is going on in their organizations,” he said.
Since leaving the FCA, Wheatley has maintained a relatively low profile, and has taken up advisory roles with technology companies that are applying analytics and other forms of technology to behavior. Many banks have increased their surveillance of employees through the use of machine learning, artificial intelligence and other forms of “big data” analyses.
While some have argued that such monitoring may have limits in terms of employee privacy, Wheatley believes that data has a role to play in helping managers better understand what is going on in their organizations.
“By looking at data you’ve got a greater degree of insight,” said Wheatley. “There is obviously a fine line between what could and should be private. . . It really comes down to defining what is an acceptable level of intrusion.”
And while regulators have an important role to play in stressing the importance of strong cultures, there are limits in what they can do given the nature of the problem, a view shared by other authorities.
“The problem with culture is that it’s not about compliance. It’s a value, not a rule,” said Wheatley. “Culture is not a rulebook, it’s a set of values ... I do think that this is one of the big problems.”
Regulators, such as Dudley of the New York Fed, have also stressed that it is not for them to prescribe what a good culture should look like, particularly given the diverse characteristics and businesses of each institution.
“It’s very difficult to quantify what is meant by a right culture,” Wheatley added. “Anything that comes from the regulator is met with a theory that it’s all about compliance.”
Given the complexities involved, each organization must come at the conduct and culture problem in its own way.
“There is no silver bullet to the culture problem ... There are a whole series of things that needs to be done,” he said.
(Henry Engler is a North American Regulatory Intelligence Editor for Thomson Reuters Regulatory Intelligence. He is a former financial industry compliance consultant and executive, and earlier served as a financial journalist with Reuters. Email Henry at email@example.com)
This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Mar. 13. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters