How to Avoid a Scandal: Purposeful Cultures
The financial services (FS) industry has faced scandal after scandal, particularly since the global financial crisis. These have had costly consequences in more ways than one. Many FS firms have paid multimillion-pound fines or reached significant settlements with regulators over the shortcomings in their financial crime risk management1. Between January 2011 and December 2019, £38.3bn was paid to customers who complained about the way in which they were mis-sold PPI.2 Some individuals have even faced criminal charges for their part in the manipulation of interest rate benchmarks.3 Such events all result in reputational damage for the institutions involved.
In recent years, the industry has made significant efforts to reform and improve conduct in line with both specific regulations (e.g. the Senior Managers and Certification Regime) and principles from regulators (e.g. for conduct risk management). However, we have still seen scandals occur ‒ and compliance costs continue to increase. Indeed, by early 2020, two thirds of FS firms in the UK still expected the time and resources devoted to improving their conduct to increase over the coming year.5
Why does this challenge persist?
The approach that many organisations take in trying to avoid a scandal is flawed from the outset. Harms to others are often seen as an unfortunate by-product of the pursuit of profit. This shapes a response which seeks to contain, manage, mitigate, and, where possible, prevent negative impacts on the organisation. Instead, firms need to start with a broader purpose and use this to inform their wider culture and controls.
Mindsets and ideas shape how individuals and organisations influence, prepare for, and respond to events. Firms that seek to avoid events where risks crystallise are likely to consider conduct management as a mechanism for defending themselves from damage (i.e. they seek to avoid a scandal), and they thereby underappreciate the importance of serving customer needs and upholding the integrity of markets. Such a mindset focuses efforts on handling the immediate crisis and external perceptions relating to the scandal, rather than fixing its underlying cause(s).
Furthermore, when firms do begin to consider the causes, they risk only looking at the causes of a particular event, rather than identifying broader themes that could result in other harms occurring. It can take time for the cracks in a company’s controls or culture to show; by waiting for events to occur in order to identify problems, firms leave themselves open to other issues developing from the same underlying root cause in the meantime. Moreover, organisations are more likely to downplay the need for change if they see a particular event as being the result of ‘legacy’ conduct or culture issues. This risks firms seeing events as being the result of the same few ‘bad’ actors rather than wider cultural or control issues.
How can clear purpose support good conduct?
Joe Garner outlined a pyramid of business purpose in his contribution to the FCA’s 2020 discussion paper on purposeful cultures.8 This pyramid asserts that, while it is necessary for organisations to make sufficient profit, they must also seek higher purposes such as serving customers and improving society.
FS firms should start by defining a clear purpose. This requires them to understand the needs of their customers, employees and communities, and invest in business areas in order to best meet these needs. Once firms have structured their activities in this way, culture and controls should be developed to support them in managing distractions from this purpose.
To give a few examples:
- Organisations should have effective processes through which they are able to understand the problems that their actual and potential customers face, as well as any barriers to accessing their products and services. Outcomes should inform product and service development so that the firm can best meet the needs of its broadening customer base.
- Company culture should be led and nurtured to be inclusive in order to foster an environment in which all employees feel comfortable informing product design and service with insights derived from their own experiences and perspectives.
- Incentives should be designed to direct efforts in line with the firm’s purpose, and to discourage short-term tactics which improve profitability but harm customers and society in the long run. This does not mean that efficiency does not matter; improvements can offer opportunities to invest in innovation or better pricing. However, financial objectives should be set in service to customers, and not the other way around.
- Senior Managers should receive information which helps them to assess and challenge whether business activities are contributing towards the firm’s purpose. Management Information should support them in answering questions about whether the design and operation of the organisation could be amended to better serve customer needs and support the functioning of financial markets.
If and when a scandal does occur, it should be seen as an opportunity to ask questions and understand how the organisation can improve its culture and controls to better manage distractions from its purpose. In this way, firms can focus on having a healthy impact, rather than managing the impacts of an unhealthy focus.
1https://www.fca.org.uk/news/news-stories/2020-fines
2https://www.fca.org.uk/data/monthly-ppi-refunds-and-compensation
3https://www.cfr.org/backgrounder/understanding-libor-scandal
4http://financial-risk-solutions.thomsonreuters.info/Cost-of-Compliance-2020
5https://www.fca.org.uk/publication/discussion/dp20-1.pdf
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