Regulators identify weaknesses in corporate culture

In separate recent speeches ASIC Commissioner Greg Tanzer and APRA Chairman Wayne Byres discussed the importance of a good corporate culture in the financial industry in order to build trust and confidence and market integrity and to achieve financial stability and resilience in individual organisations.

But how do you implement a good corporate culture?

APRA’s Wayne Byres identified the inter-related areas of governance, culture and remuneration as areas where improvement is needed.

“Building up capital and liquidity, and ensuring loss absorbing capacity in the event of failure, will undoubtedly make for a more resilient financial system. But they will only offer a partial remedy to the problems that were experienced unless there are behavioural changes within financial firms as well.

Culture is a nebulous concept, much more difficult to define and observe than capital adequacy. But strengthening culture, like strengthening capital, is critical to long-run stability. We regularly see instances where participants in financial markets, when faced with an ethical dilemma, fail to ask themselves ‘is this right?’ Instead, the question has often been ‘can I get away with this?’ – or, more ominously, in some cases it appears no question was asked because the attitude was ‘if you ain’t cheating, you ain’t trying’. For an industry that is ultimately founded on trust, something serious is amiss, and strong and ethical leadership within financial firms is needed to set this right.

Both the industry, and the community of supervisors, is still grappling with how best to make assessments of organisational culture, and how to respond when a culture is shown to be in need of improvement. Much has to do with the incentives that individuals face and how they signal what an organisation truly values (and what it does not). It is clear that, in many cases, aspirational statements of organisational culture have been no match for the personal incentives that are created for individuals. Much of the post-crisis reform agenda has been aimed at getting the organisational interests of financial firms more aligned with those of the wider community. Getting personal incentives correspondingly aligned with organisational interests needs to be seen as equally important.”

ASIC’s Greg Tanzer emphasised that a good corporate culture achieved good outcomes for customers and management of conduct risk.

What does ASIC mean by a “positive culture”?

“In practice, a positive culture is where a business:

  • ensures the long-term interests of their customers first, both when things are going well and when they are not – for example, in any remediation process
  • ensures that products that are designed to provide utility to a specific target market, take into account the needs of that target market and are appropriately tested
  • ensures the right products and services are sold to the customers they were designed for, not just to any customer – who may not understand or be suited to the product
  • has controls in place to support their culture – for example, how products are developed, approved, marketed, distributed, monitored, and reviewed
  • has a recruitment, training and reward structure that is aligned to and reinforces the culture of ‘doing the right thing’ and ‘good outcomes for customers’
  • provides an environment that encourages staff to challenge accepted practices and raise issues when mistakes are made or when things don’t seem right.”

Areas ASIC is planning to target include:

  • remediation policy and procedures
  • reward and incentive structures, including promotions
  • recruitment and training policy
  • whistleblowing policy
  • conflicts of interest
  • nature and level of complaints and complaints handling
  • staff engagement
  • corporate governance framework to support customer-centric culture (e.g. board oversight over product approval processes).
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