LONDON (Thomson Reuters Regulatory Intelligence) - The role behavioural science can play in transforming conduct and culture in financial institutions is drawing fresh interest and resources, as regulators look to integrate its concepts into their oversight. In Europe, Dutch and British financial regulators have behavioural science teams, and with the Senior Managers and Certification Regime (SM&CR) in the UK having placed responsibility for firm culture firmly at the top of institutions, the evidence and mitigation techniques offered by the discipline are finding a receptive audience.
Senior leaders and regulators in the financial services sector gathered for a Thomson Reuters roundtable earlier this month in London, to share experience and expectations of the benefits of deploying behavioural science in their organisations. Henry Engler, senior editor with Thomson Reuters Regulatory Intelligence, moderated the event.
Moritz Romer, supervisor for behaviour and culture at the Dutch National Bank, Orlando Fernandez-Ruiz a technical specialist in governance, systems and controls at the Bank of England, Mikael Down, head of policy and culture at the Banking Standards Board, and Manjyot Bhambra from the behavioural risk audit team at RBS started the discussion.
Regulators are increasingly integrating a view of human behaviour and how it evolves and develops in organisations, into their supervisory tools, roundtable participants heard. Behavioural science offered a way to ensure standards at the top of an organisation could be cascaded through management layers, especially at large complex financial institutions.
Effective behavioural insight could sometimes be as simple as telling a chief executive about the leader’s inability to listen to subordinates.
RBS’s experience with having a behavioural science unit drew strong interest. Bhambra said her team carried out up to six “deep-dive” assessments each year. Board support and the team’s location in the audit function had been vital in helping ensure the work had impact within the bank, she said.
There was general consensus that the senior-managers regime had helped organisation leaders appreciate the need to tackle bad apples, individually or in groups, in institutions.
Down, who had implemented the SM&CR at the Financial Conduct Authority, said behavioural science offered financial firms a cost-effective opportunity to change the way people operate. The Banking Standards Board has been conducting an annual benchmarking survey of culture,, giving senior managers insight into how they compared to their peers.
Regulators too had found firms enthusiastic to know how they compared to their competitors.
A key questions was whether firms would act on the information provided by behavioural analysis of their business and business units, especially if it risked a team’s profitability.
The perception of a trade-off between good outcomes for society and customers, and the bottom line, was outdated, Down said. The cost of misconduct for financial firms in the decade since the financial crisis in reputation, but also hard cash — fines from regulators and compensation to customers — meant financial performance overall could be increased by ensuring conduct improved.
There was a split in what people felt would most effectively enable senior managers keep on top of culture and conduct throughout their organisations. Some wanted better metrics to help understand what was really going on, while others felt the only way to get to grips with morale and practice was to get out and speak to the people on the ground floor.
Sentiment on the value of staff surveys was mixed. One attendee said he doubted evidence from employee surveys were acted on by firms.
The behavioural scientists and regulators believed the insight and issues identified by such surveys were only one part of understanding a firm’s culture.
“I think people realise that it is the unknown unknowns that kill you in the end. What you should be doing is gathering as much information and insight as you can on your own culture. Wouldn’t you want to know how people are behaving, and why, in an organisation that you are running? Over the long term, the only organisations that are going to be successful are those that have a good handle on that,” Down said.
Looking at management information, observing teams in action, and conducting focus group interviews are all deployed alongside staff surveys at RBS. The way in which questions on surveys are constructed was also highlighted as important.
It is also important to be forward looking when risks are identified and think about how they might play out in a bank’s culture climate. Some firms are carrying out behavioural stress tests to see if their senior managers would have spotted the errors of the past if they occurred today.
One investment bank was running ethically questionable scenarios with its traders in a training environment to ensure that they made the right call if and when such situations materialised in the real world.
The possibility of financial firms collaborating where firms are facing similar issues with misconduct was raised.
The “elephant in the room” was remuneration. Regulators are increasingly asking if the incentive structures in financial institutions are driving the right behaviour. There was a view that firms should look at what type of behaviour was rewarded, and equally what they punished.
Traders hiding losses for fear of being dismissed had been a recurring pattern in recent years. In the Netherlands, how firms handle mistakes is being targeted at the board level, with the introduction of a practice that sees board members revealing their “mistake of the month”.
One delegate raised the prospect of a world in which highly paid employees were monitored 24/7 as the only definite way to ensure they were adhering to a bank’s conduct standards.
“Maybe (being subjected to) closer monitoring is what they are paid for?” he said.
(Lindsey Rogerson is senior editor UK and Europe, Thomson Reuters Regulatory Intelligence, based in London.)
This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Oct 25. 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