Culture is King by Saker Nusseibeh, CEO, Hermes Investment Management | Banking Standards Board

Starling Team
In a recent article posted on website of the UK’s Banking Standards Board, Hermes Investment Management CEO Saker Nusseibeh reflected on culture in the financial sector.  He describes the Financial Crisis as a defining event and warned that we must not forget the lessons learned during this time.   (Notably, most now working in finance were not in the industry at the time of the Crisis.)

Nusseibeh goes on to explain the role poor culture played in this Crisis:

“[The] central cause of the financial crisis was poor culture.  A culture in which people were incentivised to increase risk, not manage it.  A culture where client outcomes were secondary to personal outcomes.  A culture where effective oversight was a chore, not an imperative.  A culture where employees could not bring their whole selves to work, creating discontent and impacting effectiveness.  A culture that paid lip service to diversity, but did not embrace it, leading to group think.”

Nusseibeh points out that this isn’t an issue exclusive to the banking sector, and contends that organizations must continue to review the way they operate and hold themselves to higher standards in order to ensure good outcomes for their customers, shareholders and other stakeholders.  
Asset managers have a responsibility to those that trust them with capital, Nusseibeh argues (rightly, in our opinion), and he goes on to say that culture challenges cannot be relegated to the HR department.  Rather, culture should be seen as a key governance concern, one attended to by the board, CEO, and heads of risk management among firms.  And asset managers must themselves address the roots of culture challenges within their own organizations, both to increase their future value, and to lead by example.
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Bank of England Deputy Governor Warns of Crackdown on Financial Sector |Iternational Investments

Starling Team

The Bank of England (BoE) Deputy Governor Sam Woods recently warned that Britain’s financial sector that regulators may crackdown and enforce their rules to ensure the financial system is safe a decade after the financial crisis. Woods, the head of the BoE’s banking supervisory arm, told the Telegraph that he wants to avoid “a return to the buccaneering ‘heads I win, tails you lose’ culture that we had before the crisis”.

“I think it’s possible that as we come out of the reform phase, and enter a phase where we’re defending the reforms that have been put in place, that you may see more enforcement activity,” he explained. He also warned that bankers expecting less strict regulations after Brexit will be disappointed. He says it doesn’t make sense for a global trading centre to let its domestic banking system to get jumbled up with the risky side of finance.

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ASIC Widens Culture and Pay Crackdown | Financial Review

Starling Team

The ASIC plans to crackdown on boards, culture and pay from banks to other big listed companies. Chairman James Shipton recently spoke of continued “blindness to reality” among some boards. He also warned that ASIC’s corporate governance taskforce would reach beyond banks and examine listed company boards. “Financial risk is very mature here but that same revolution is required in non-financial risks,” Mr. Shipton told the Financial Review.

According to the ASIC, non-financial risks include operational risk and conduct risk. This also includes risks from not treating customers fairly. The aim is to detect cultural and organisational and management failings that may lead to conduct issues and breaches.

It is clear that boards among all large listed firms in Australia will need to give greater attention to non-financial risk matters. They should insist that management has developed a robust ability to report meaningfully with regard to such risks and to forecast where risk issues are most likely to appear and to demand focused mitigation efforts.

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FCA and Bank of England Announce Proposals for Data Reforms Across the UK Financial Sector | Bank of England

Starling Team

Starling has frequently noted how both the UK’s Financial Conduct Authority (FCA) and the Bank of England (BoE)’s Prudential Regulatory Authority have put increasing emphasis on the importance of non-financial risks, and especially those that flow from culture and misconduct. In an interesting development, on January 7th the FCA and BoE jointly released a plan to further develop their data and analytics capabilities. As we learn more about this new strategy, it will be very interesting to see how it may align with those regulatory priorities.

Both authorities already rely on high-quality data to fulfill missions of maintaining financial stability, competition and market integrity. This new strategy goes further to lay out a plan to invest in new technology and skills in order to make better and more efficient use of data. It outlines the organization’s focus on using advanced data analytics and automation techniques to gain an understanding of how firms function. Specifically, the conduct regulator aspires to “predict, monitor and respond” to market issues. The FCA will also invest in skills and new ways of working to understand data and technology.

“In keeping with our Mission, a data-driven approach to regulation allows us to anticipate harms before they crystallise, better understand the effect on consumers of changing business models and to regulate an increasing number of firms efficiently and effectively,” said Christopher Woolard, Executive Director of Strategy and Competition at the FCA.

We believe it is particularly interesting to note the regulators’ interest in using data and advanced analytics capabilities to “predict” where issues of regulatory interest may arise within firms and markets, and to “anticipate harms before they crystallise.” Innovation in data analytics has demonstrated that there are rich, untapped data sources within firms that can provide insight into non-financial risk with predictive reliability. Given the stated priorities of these regulators as noted above, we are looking forward to seeing what new capabilities this data initiative will make possible.

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UK Companies Are Only ‘Paying Lip Service’ to Governance Reform | Financial Times

Starling Team

The UK’s Financial Reporting Council, which sets the country’s corporate governance code, has criticized UK listed companies for merely “paying lip service” to changes in Britain’s corporate governance guidelines that recently came into effect. The UK boardroom regulator said that a review found that many companies prioritize “strict compliance” but give “insufficient consideration” to the importance of culture and strategy in the context of ensuring good corporate governance.”

The FRC revamped the UK’s 25-year-old corporate governance code in 2018, introducing guidelines for boards to scrutinize corporate culture, among other duties. The FRC also urged boards to pressure management to take action — to be detailed in annual reports — when it finds culture to be in tension with the company’s stated strategy.

“Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the code and does a disservice to the interests of shareholders and wider stakeholders, including the public,” said Jon Thompson, FRC chief executive. In the wake of several high profile corporate failures, the FRC urges companies to put greater focus on the outcomes of implementing its governance code in 2020.

It is important to note the clear distinction the FRC draws between compliance and governance. Too often, the two ideas are conflated. But compliance is about checking to assure that a firm is operating in accordance with mandates imposed upon it by regulators. That is, compliance is externally driven. By contrast, governance should be driven by internally established concerns for shareholder and stakeholder interests.

While governance and compliance priorities may often align neatly, it is governance that is the responsibility of boards, and the FRC has indicated that this responsibility cannot be effectively outsourced to a firm’s compliance function.

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