A firm that considers culture as an integral part of its functionality is considering the wellbeing of those who contribute to it, which is felt, and thus, reciprocated. A healthy culture is built internally, though it is not just the personnel within a company that feel the effects of a cultivated environment. Like a stream, culture flows through to clients who interact with an organization – a healthy culture inspires belief in personnel, which sets the tone for good behavior and encourages productivity. This is then exuded externally and contributes to a firm’s ultimate success.
That’s not to say that precautions aren’t necessary. Of course, firms can’t guarantee that misconduct will never occur. In this sense, strong policies, thorough training, surveillance, and – when necessary – disciplinary action, are all proponents of a well-functioning firm.
Financial regulators are supporters of this notion – in particular, the Financial Conduct Authority (FCA) has made clear the increasing weight it will be placing on non-financial misconduct through a series of actions over the past year. Equally, the culture conversation seems to just be beginning across the pond with U.S. regulators.
Culture around the corner for U.S. regulation
We’ve seen U.S. regulators briefly allude to conduct and culture before, such as in a speech from Commodities Futures Trading Commission (CFTC) Commissioner Christy Goldsmith-Romero about “tone from the top.” Yet, as seen by a flurry of action from multiple governing bodies, it seems that a deeper focus is in the cards.
Director of the Securities and Exchange Commission’s (SEC) Division of Enforcement Gurbir Grewal echoed Commissioner Goldsmith-Romero’s thoughts on the benefit of a fostered “tone from the top” in a speech on “The Five Principles of Effective Cooperation in SEC Investigations.” Coinciding with self-policing, Grewal stressed that when leaders within an organization not only support but demonstrate a culture of compliance, it reinforces the expected standards of behavior:
“Are the leaders in an organization supporting a culture of compliance? Are they emphasizing both the need to stay within the lines and the importance of doing so?”
Another regulator to chime into the conduct and culture conversation with a varying perspective, though no less impactful, is the Office of the Comptroller of the Currency (OCC). In its recovery planning guidelines, the OCC stated that recovery planning is a matter that is influenced by non-financial misconduct just as much as financial misconduct:
“Focusing a recovery plan exclusively on financial risks while neglecting non-financial risks overlooks the very real threats that non-financial risks can pose to a bank’s financial strength and viability.”
While firms are careful to account for the risks that financial situations can trigger, such as a disparity in profitability or liquidity ratios, the OCC’s guidelines highlight that operational and strategic risks can often be overlooked. Beyond formulating a plan to bounce back from hits to financial stability, growing non-financial risks, such as increasing pressure to digitize and innovate to meet consumer needs or economic and environmental uncertainties are factors to reflect on.
Firms and individual executives are not the only ones that are expected to uphold a certain standard of conduct – earlier this month, CFTC Commissioner Caroline Pham made a statement about her thoughts on the recent misconduct allegations against the CFTC for false statements in court over a period of six months.
Beyond contesting this misconduct and recommending that the case be reassigned to the Department of Justice to avoid the “inherent conflict of interest” that arises from the CFTC’s Division of Enforcement arm taking the Commission on as a client, Pham mentioned that she had raised concerns over the “multiple instances of personally disparaging remarks” made about parties under investigation.
Pham concluded by saying that “the culture at the CFTC needs to be reformed,” proving that a lacking culture can impact even the watchdogs that regulate it, and resultingly can be detrimental to an organization’s character and functionality:
“The Commission must swiftly deal with these allegations that are a serious blight on the CFTC’s reputation and credibility. We must restore our good name and be beyond reproach in order to effectively carry out our mission.”
We have seen the regulatory focus on conduct and culture play out in enforcement action too. In two incidents unmasked by the Financial Industry Regulatory Authority’s (FINRA) admonishment, brokers sidestepped FINRA Rule 2010 and Rule 2111. In one instance, a certified financial planner shared exam content with others who were taking the assessment, which violates the Rule 2010 guidelines of observing “high standards of commercial honor and just and equitable principles of trade” related to their conduct.
Similarly, registered representatives for Merrill Lynch misguided clients and did not consider their best interests when providing purchasing recommendations. This violates Rule 2111 on suitability, as well as the SEC’s Reg BI rule relating to carefully considered client interests, and proves that the involved individuals failed to uphold ethical considerations and respectable conduct when handling business operations.
Conduct carries on with the FCA
The FCA has set the scene and is continuing the act as seen through recent speeches and surveys highlighting non-financial misconduct as a major priority. Over the past year, we’ve seen the FCA target non-financial misconduct through its proposal of more distinct rules to boost diversity and inclusion.
As well as this, the regulator issued a letter and survey to insurance firms requesting information related to non-financial misconduct incidents within the organization with a view to help the regulator understand when and how these situations occur so as to accurately shape developing guidelines. In a fireside chat between Global Relay and the FCA’s Head of Secondary Market Oversight, Jamie Bell, it was stated that this wave of letters will not be the only one.
Joint Executive Director of Enforcement and Market Oversight Steve Smart referenced the non-financial misconduct survey in a recent speech, once again reiterating that conduct is the FCA’s “middle name” and that it should not be dismissed as ancillary to financial misconduct:
“Aside from the damaging impact on recruitment, retention and overall workplace culture, non-financial misconduct can undermine financial performance and confidence. It can also undermine the standards and reputation of the industry when you have the wrong people in positions of trust.”
Healthy culture, happy regulators
The significance of proper conduct is a sentiment that’s been emphasized across varied settings and environments, and regulators have made it clear that the financial industry is no exception. As regulatory representatives have stressed, a strong workplace culture within each individual firm has a wide-scale impact.
Joining the FCA, it seems that U.S. regulators are beginning to clamp down on firms’ management of non-financial misconduct. Considering the rapid speed with which enforcements are stirring, the conduct and culture conversation is now beginning, and its best firms make sure they are following along.
