The Conduct Chronicles – “Are we winning the Culture War?”
Emma Parry explores the need for firms to invest more into their work cultures to ensure the prevention of both financial and non-financial misconduct.
Written by a human
In July 2023, the Financial Markets Standards Board (FMSB) issued its Conduct and Culture MI report which outlined that, across a range of large firms, ‘75% of conduct metrics track sticks (e.g. breaches) but the shift in focus to carrots (e.g. safety, well-being) is growing’. Remarkably, some are tracking as many as 125 different metrics.
The report also highlights that firms are increasingly focusing on ‘drivers of behavior’ with firms using behavioral science techniques and tools to better understand how employees make decisions. However, even the FMSB report acknowledges that ‘not all problems are explained solely by behavior and may have more to do with poorly designed processes that invite circumvention or infrastructure that is not fit for purpose.’
Notwithstanding the above, it’s worth reiterating that the FMSB report covers only ‘large firms’ and would not, therefore, cover smaller firms where governance failures, repeated regulatory shortcomings and consumer detriment have been identified and called out by the Regulator. A case in point are online brokers offering high-risk Contracts for Difference which have been subject to a litany of Dear CEO letters and enforcement actions, starting from as early as 2016 and with the latest letter issued in March 2023 in line with the implementation of the UK Consumer Duty obligations.
So, where does this leave us as it relates to the often referenced ‘culture war’? Whilst firms, and indeed regulators, have evolved their capabilities in measuring conduct and culture, given the enforcement actions and criminal cases still hitting the headlines, it’s clear that there’s more work to be done.
Non-Financial Misconduct (NFM)
In addition to the focus on culture as it relates to market misconduct, the UK FCA has now turned its attention to non-financial misconduct (NFM), which covers discrimination, sexual harassment, victimisation and bullying.
Underscoring the seriousness of its intent, the FCA has already issued its first letter setting out a NFM sector-wide review. In February 2024, it circulated a notice to insurance firms requiring them to provide NFM data covering ‘incidents that took place at the office, working from home, working offsite, and social situations related to work.’
Emphasising that it expects firms to have effective systems in place to identify and mitigate NFM risks, the FCA reiterated that ‘should allegations or evidence of non-financial misconduct become known, we expect a regulated firm to take them seriously, have the internal procedures to investigate them promptly and fairly, and to take appropriate action when allegations are upheld.’
With the request covering incidents occurring in any work-related capacity – i.e. events, off-site training or client entertainment – it’s no surprise that some firms are a little concerned about their ability to capture, or indeed to have captured data about, potential incidents. Simply repurposing surveillance solutions in the hope of detecting cases will not be enough. If they haven’t already, firms will need to invest in speak up platforms and/or whistleblowing solutions ensuring there are mechanisms and resources in place to capture, investigate and resolve potential incidents.
The Role of Psychological Safety
Critical to a firm’s success in capturing details of potential misconduct, is whether employees feel comfortable and confident in speaking up. This is the ‘speak up culture’ we are increasingly hearing firms and regulators discuss. It’s a culture where feedback and escalations are listened to and acted upon.
Conversely, if employees are too scared to speak up for fear of retaliation, those speak up and whistleblowing platforms will simply gather dust, while management and the Board are blissfully unaware of issues running rampant across the firm.
In its September 2023 Insurance Market priorities letter, the FCA emphasised that ‘internal cultures that promote complicity over challenge or in which allegations are ignored are regulatory concerns, affecting the objectives set for the FCA by Parliament.’
Returning briefly to the FMSB report, it highlights that ‘45% of firms still treat psychological safety as a topic outside of conduct.’
This disconnect between psychological safety and culture is concerning. If firms have a culture where employees do not feel confident, nor indeed comfortable, to speak up for fear of retaliation, then those firms will almost certainly miss opportunities to discover misconduct, including NFM.
Sadly, the threat of retribution is not an unrealised, nor indeed theoretical, risk. The truth is that the financial services industry is awash with cases where whistleblowers have been the subject of retaliation.
Pav Gill: Wirecard Whistleblower
A recent and explosive case is that of Pav Gill, the whistleblower behind the monumental Wirecard scandal, who found himself facing the brunt of unnerving intimidation tactics.
Pav escalated evidence of ‘round tripping’ across Wirecard’s AsiaPac entities. Round tripping is a fraudulent accounting technique where money is returned after being transferred to different companies or locations. The technique gives the impression of legitimate business conducted with suppliers and customers. In Wirecard’s case, it gave the illusion that the various AsiaPac businesses were profitable when they weren’t.
Events escalated to the point whereby the company was insisting Pav go on a business trip to Jakarta. The trip had no legitimate business reason. This turn of events was particularly sinister as Wirecard’s Finance Vice President frequently bragged about how he married into a family of drug dealers in Indonesia. Eventually, Pav received two tipoff calls from unidentified colleagues in Germany who said:
“I understand you’re being told to go on a business trip to Jakarta, but we would recommend you don’t go because you won’t come back.”
Pav refused to go on the trip, and four days later he was forced to resign.
Pav’s experiences provide a sobering, and undeniably chilling, insight into what can happen to whistleblowers. And while regulators around the world are busily redrafting and strengthening their whistleblower protection legislations, it’s worth highlighting that several of Wirecard’s senior executives are still fugitives and remain at large.
Cognitive Diversity
Integral to fostering a speak up culture, is the critical role of cognitive diversity – that is – creating a culture that is inclusive. Cognitive diversity welcomes and embraces differing views, experiences and contributions. It helps to foster confidence and freedom of expression, with feedback and escalations listened to and acted upon. Importantly, there is transparency (within legal privilege) on actions that have been taken.
This is ultimately one of the most powerful means of uncovering potential transgressions – be it, market misconduct or NFM. More powerful still is that it provides firms the ability to discover and address potential misconduct – at the source – before it becomes headline news.
