MAS is equipping itself with advanced tools that will allow for culture and conduct to be evaluated in a more systematic way, say Jeff Kupfer and Stephen Scott at Starling.
On 30 March, Starling released its annual Compendium, a report on global regulatory activities aimed at promoting improved culture and conduct in the banking sector. In a series of articles written in collaboration with Regulation Asia, Starling has outlined its principal findings.
In the first three articles, we discussed (1) the UK’s leadership role in driving the global supervisory agenda around conduct and culture, (2) developments in Australia that have shaped the global dialogue around governance and supervision in this area, and (3) Hong Kong’s ecosystem approach to addressing culture and conduct issues.
This article focuses on Singapore, where senior officials have been emphasising the importance of culture in promoting ethical business practices at financial institutions. In particular, the Monetary Authority of Singapore (MAS) has been taking steps to solidify its own leadership role regarding the global culture and conduct risk agenda.
MAS Managing Director Ravi Menon offered the following illustrative remark for inclusion in Starling’s Compendium:
“The global financial community has made good progress in raising prudential standards, enhancing risk management, and strengthening controls. But reform of the financial industry — to make it safer and more purposeful — will not be complete until the industry ‘gets the culture right.’ The fact that misconduct continues to occur all too frequently across financial institutions shows that more needs to be done.”
“Culture and conduct has become an important area of focus in MAS’ supervisory agenda. The use of Suptech and predictive analytics, complemented by behavioural science, will equip supervisors with the necessary tools to examine and evaluate in a more systematic way what is commonly viewed as a nebulous area.”
As a means of driving desired change in culture and conduct risk management at firms, regulators in many jurisdictions have begun looking to increased accountability at the individual level.
In April last year, MAS proposed new guidance for financial institutions on individual accountability, joining similar accountability regimes in the UK, Australia and Hong Kong that are aimed at fostering a culture of ethical behaviour and risk management.
More recently, MAS proposed to extend the scope of the guidelines to include all financial institutions under its jurisdiction, including card issuers, fund managers and trustees, recognised market operators and clearing houses, and payment services licensees, among others.
The guidelines are not meant to be prescriptive but, rather, they seek to establish regulatory expectations of boards and senior management with respect to individual conduct: “It is ultimately the responsibility of each FI to hold its senior managers accountable for their actions and ensure proper conduct amongst their employees,” MAS had said.
The guidelines set the responsibilities of financial institutions in three key areas: (1) promoting individual accountability of senior managers through clear specification of accountabilities and by ensuring they are fit for their roles; (2) strengthening oversight of employees in material risk functions; and (3) embedding standards of proper conduct among all employees.
Announcing the guidelines last year, MAS Deputy Managing Director for Financial Supervision Ong Chong Tee acknowledged that clear accountability and good conduct are essential to good governance and sound business practices, and he indicated that MAS would be stepping up its supervisory reviews on various aspects of risk governance and culture at financial institutions.
“Persistent misconduct and a lack of individual accountability by persons in charge will erode public confidence in our FIs. We expect the boards and senior management of FIs to instil a strong culture of responsibility and ethical conduct,” Ong said.
Echoing Ong’s emphasis on culture in determining ethical behaviour, earlier this year MAS Executive Director Lim Cheng Khai described how problematic conduct is rarely the consequence of one “bad apple” but, rather, is often because of a “bad barrel.”
“MAS will not permit a few bad apples to tar the entire barrel, and will continue to respond firmly against misconduct,” he stated. According to Lim, directors, senior executives and compliance personnel have a key part to play in establishing and influencing desirable behaviour and conduct.
“Such ethical failures are rarely the result of one action or one person. Often, it is the culmination of a series of ill-disciplined, unchecked actions, over a period of time. A slip here, a compromise there. Without strong principles undergirding business decisions or the right tone from the top, it can be easy to veer into a chase after profits, at the expense of conscience and ethics.”
Addressing declining trust in the banking sector, Lim added, “This trust can and must be restored. Just as the decline in trust was due to misconduct of firms, the trust will be restored when FIs conduct their businesses in an ethical manner and commit to doing right by their customers.”
It is notable that MAS head Ravi Menon echoed this view earlier this month at a Symposium on Asian Banking and Finance. “Only with trust can the financial industry earn the ‘social licence’ it needs to thrive and grow,” he stated.
“Finance needs to be a positive force for good,” Menon added, noting three things that are required of the financial sector for this to be so: “it must be trusted; it must be inclusive; and it must be sustainable.”
Menon emphasised global surveys which show the financial sector to be suffering from a “trust deficit.” And in an effort to say why this was so, he remarked:
“The reckless risk-taking and blatant disregard for ethical conduct that we saw in the lead-up to the global financial crisis are a big part of the explanation. And it has not helped that the financial industry continues to be dogged by disappointing revelations of financial misconduct and malfeasance.”
Menon stated that MAS, and the firms it oversees, must jointly work to “foster a culture of good conduct underpinned by strong standards of ethics.” Observing that regulation and controls can only go so far in seeking to shape behaviour, he said, it is essential that firms focus on the “shared values, attitudes and norms in their organisations – in short, the culture.”
Menon also noted that MAS has conducted a stock-take of culture and conduct practices across selected financial institutions in an effort to determine “whether the tone-from-the-top echoed from the bottom” and “whether the organisational values plastered on the walls of the board room were practised on the ground.”
Earlier this year, MAS Assistant Managing Director for Banking and Insurance Ho Hern Shin described the stock-take as part of a “three-pronged approach” adopted by MAS to promote good culture and conduct. The three prongs relate to industry engagement to promote good practice, monitoring of financial institutions, and enforcing against lapses or offences that might occur.
According to Ho, MAS spent two years on its stock-take of culture and conduct practices and carried out thematic inspections on selected banks’ incentive structures to assess how ethical behaviour, prudent risk-taking and responsible sales practices are incentivised.
MAS also released an information paper on incentive structures so that banks might benchmark themselves against good practices for staff performance evaluations, remuneration frameworks, and processes for deterring unethical behaviour.
While the stock-take found that banks in Singapore are increasingly paying attention to culture and conduct issues, and have taken positive steps to instil good values and conduct, Ho observed that progress is not even across banks and more needs to be done.
A stand out in this regard is Australian bank ANZ. At a recent conference, senior operational risk leader Venkatesh Subbaraman remarked on recent events in Australia and pointed to lessons relevant to the bank’s Singapore operations. “It takes an incident to change the regulator,” he said. “We were quite surprised by what happened in Australia, and it took the regulator some time to act on that in the Australian landscape. But let’s not wait for an incident,” he urged, “let’s start driving that message of good conduct, because it makes your life as a risk manager easier.”
As discussed in earlier articles, the events in Australia surrounding the Royal Commission inquiry into misconduct in the financial sector have had broad impact among regulators, and firms, across the region. It is perhaps unsurprising to see ANZ in Singapore emphasising lessons hard-learned. Other firms in Singapore have had a more muted response and question the necessity of a culture and conduct risk regulatory agenda.
Menon highlighted this in his remarks earlier this month:
“Culture and conduct practices are uneven in the industry. Many financial institutions still struggle to articulate the conduct risks they face. Many are only starting to develop tools and indicators to obtain a holistic, cross-functional view of the culture within their organisation.”
According to Ho, banks must increase efforts to promote a “holistic, cross-functional view of the culture within the organisation.” This will require more robust monitoring tools and metrics to measure culture and conduct risk.
In this direction, MAS recently set up a ‘Culture and Conduct Steering Group’ – with the participation of 13 banks and the Association of Banks in Singapore (ABS) – which will work to identify best practices in the areas of conduct and culture and share them with banks to facilitate wider adoption.
Notably, Menon has highlighted the need for a more comprehensive view of organisational culture since June 2018 in a speech at the San Francisco Federal Reserve Bank. He described the development of supervisory methods that focused on better understanding the risk culture of financial institutions.
“Ultimately, it is people that take risks. And the incentive structure, governance practices, and value systems in financial institutions are what determine their attitude towards risk.”
Looking into the future, Menon spoke of the “enhanced supervision” that he expects to characterise the next decade, and his talk envisioned a landscape where regulators collaborate to establish common frameworks for culture and conduct supervision, drawing specifically on the tools of behavioural psychology.
Since then, MAS has established a behavioural sciences unit to run “culture and research empirical studies”, with a view to enhancing its policy design work and the efficacy of its supervisory interventions through applied behavioural science techniques.
As we will discuss in more depth in a future article, the emerging field of ‘computational social science’ offers much in this connection.
It is well established that interpersonal trust and perceived ‘psychological safety’ among employees and managers is key to behaviour in the workplace. Computational social science techniques allow us to measure and map these interpersonal trust dynamics, sifting signals from company data sets to produce heretofore unavailable insights into the drivers of employee conduct.
Such insights permit proactive management of culture, conduct risk, and company performance more broadly. It is encouraging, therefore, that firms, and regulators, have begun to explore the application of computational social science to regulatory and risk management challenges.
We will continue our series of articles further discussing some of key themes and findings from the Compendium, a full copy of which is available here.
This piece first appeared in Regulation Asia on June 13, 2019.
JEFF KUPFER is Co-Founder of US-based RegTech firm Starling Trust Sciences.
STEPHEN SCOTT is a risk management expert and CEO of Starling, a globally recognized leader in the RegTech space. Operating at the nexus of data science, network science, and behavioral science, Starling's Predictive Behavioral Analytics tools are used by leading financial services firms to assess and mitigate culture and conduct related risks.