Starling advisors Gary Cohn, Mark Cooke, and CEO Stephen Scott feature in Fortune

Starling Team

Over the last decade, the financial industry was subject to increased regulatory scrutiny and public scorn triggered by misconduct scandals. During the coronavirus shutdown, however, banks have been critical partners to policymakers struggling to prevent a full-blown depression. Amidst such efforts, regulatory supervision has been partly suspended, to allow the industry to focus on the provision of economic relief.

However, lighter supervision might result in a heightened conduct risk. It is highly likely that increases in opportunistic crime will be spurred by economic anxiety. With many working remotely, outside the scope of standard internal risk controls and systems, things could turn sour quickly. Banks must therefore exercise added vigilance if they are to avoid future scandal and regulator wrath.

A rules-based approach to risk and compliance governance has failed to prevent misconduct in the past, and such an approach is to be avoided now. Firms have not done well in anticipating misbehavior, in part because their leaders overweighted the impact of setting the right “tone at the top,” when it is actually the “echo from the bottom” that matters more. Now, what is called for are principles-based policies aimed at encouraging responsible corporate cultures.

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Starling: the BIS Innovation Hub Can Draw Lessons from the GFIN

Stephen Scott

The Bank for International Settlements (BIS) has announced plans to extend its Innovation Hub program over the next two years, in collaboration with central banks in markets across Europe and North America. The first three BIS Hubs were established in Basel, Singapore and Hong Kong. Additionally, a new Hub in Switzerland was announced earlier this year.

Next, a Toronto centre will be opened in collaboration with the Bank of Canada; a London centre in collaboration with the Bank of England; a Frankfurt and Paris centre in collaboration with the European Central Bank/Eurosystem; and a Stockholm centre in collaboration with the central banks of Denmark, Iceland, Norway and Sweden.The BIS will also form a strategic partnership with the New York Federal Reserve Bank.

“With this expansion, the Innovation Hub will be well placed to advance work on a broad range of issues of importance to the central banking community, including digital currency and digital payments, cyber security, distributed ledger technology and artificial intelligence,” said Benoît Cœuré, Head of the BIS Innovation Hub.

The BIS is following in the footsteps of the GFIN (Global Financial Innovation Network). Today, some 50 banking sector regulators, international standard setting bodies, and other interested industry parties are part of the network.

While the GFIN regulators achieved something important and difficult in linking up with one another, experience suggests that less than sufficient attention was dedicated to cultivating a supportive ecosystem to involve financial institutions trialing regtech tools, and the tech innovators who are bringing such tools to market.

This may be instructive for the BIS Hub programme. The success of these multi-party initiatives requires a structured collaborative network to be established. By promoting and facilitating knowledge sharing among such firms, regulators and central bankers, these programmes may amplify their impact and speed on desired outcomes.

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Second Revision to Japan’s Stewardship Code

Starling Team

On March 24th 2020, the Financial Services Agency of Japan (FSA), through the Council of Experts on the Stewardship Code it had established, offered a revision to the Stewardship Code that had been published in 2014.  The revision prompts a focus on environmental, social, and corporate governance (ESG) factors surrounding sustainability and investor stewardship. 

Previously, the Code had featured seven principles.  With this revision, an eighth principle is added, applicable to many financial service providers, including investment consultants for pension funds, and proxy advisors.  These professionals  should endeavor to contribute to the enhancement of the investment chain’s function and provide appropriate services for institutional investors.

The revised Code also asserts that asset owners should encourage asset managers to secure beneficial owners’ interests by engaging in effective stewardship activities.  Under the revised Code, stewardship responsibilities are defined as:

“The responsibilities of institutional investors to enhance the medium – to long-term investment return for their clients and beneficiaries by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement, or purposeful dialogue, based on in-depth knowledge of the companies and their business environment and consideration of sustainability consistent with their investment management strategies”.

In April this year, nearly 300 institutional investors accepted the suggested changes to the Code and adopted a “comply or explain” approach when the Code is not applied.  We have not, to date, heard much from the FSA regarding its views on how culture and conduct related risks feature in connection with this new emphasis on stewardship.

However, as in many other markets, Japan has suffered prominent misconduct scandals in the last year and these revisions to the Stewardship Code may be driven in part by concern for improved management of non-financial risks among Japanese firms.

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The New Normal: Conduct Risk & Personal Accountability

Starling Team

On 30 April, Starling released its 3rd annual Compendium, a report on global regulatory activities aimed at promoting improved culture and conduct in the banking sector.  The series of reports has traced the evolution in thought regarding the supervision and governance of conduct risk among bank regulators and industry leaders, worldwide. As in previous years, clear trends have emerged, as reflected in the Key Takeaways found in this year’s report:

  • CEO turnover – Misconduct was a principal driver of CEO turnover in the last year, which saw far higher than usual CEO churn. 
  • Personal liability – The last year has seen a continued emphasis on individual accountability and personal liability schemes in several jurisdictions.
  • Anticipating outcomes – Regulatory efforts around culture and conduct risk have become grounded in an overt concern for customer outcomes.

Culture and conduct management challenges were prominent in many industries over the last year, including the banking sector.  As a result, RegTech firms have begun to bring governance tools to market, and some bank regulators now actively promote the trialing of such tools among the firms they oversee.  Heightened regulatory sensitivity to culture and conduct risk implies a need to explore new tools and approaches to risk identification, assessment, and mitigation. 

To access a  full copy of Starling’s Compendium, click here.  Last year, Starling and Regulation Asia shared findings from earlier issues of Starling’s report – covering the UK’s leadership role in driving the global supervisory agenda around conduct and culture and post-Royal Commission developments in Australia, to Hong Kong’s ecosystem approach and Singapore’s push to addressing culture and conduct issues.

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Leveraging Technology and Hong Kong’s Unique Position to Manage Risk

Starling Team
Hong Kong markets show continued resilience, in part due to the focus on risk management at the local exchange. (HKEX)  The role it plays in global capital markets and the city’s position as connector between the East and the West, require a rigorous approach to risk. And good governance and risk management has played a key role in shaping and supporting trust in Hong Kong as an international financial centre. 

The symbiotic relationship between such trust and effective risk governance continues to shape Hong Kong’s future, and has prompted an ecosystemic approach with some focus on the promise of data technologies.  “At HKEX, we believe that collaboration with regulators, market participants, and all of our stakeholders is one of the keys to managing operational risks,”said John Killian Group Risk Officer at HKEX.  “We are also increasingly bringing innovation and technology to bear in helping us assess, calculate, control, and mitigate financial, operational, and market risk.” 

Today, HKEX is finding ways to make risk management a competitive advantage.  Technology solutions that originate from the HKEX Innovation Lab help to ensure that they are able to maintain robustness and resiliency, even amidst current volatility.  In this, the relationship between risk and trust is paramount.  “The better we are at managing risk, the more comfortable investors and market participants are trading on our platforms, and the lower their costs of trading become,” said Killian. 

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