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.