Views on improving the integrity of global capital markets
07 April 2020

Regaining Trust

The tone is set at the top and has to permeate through the firm

Trust in the financial industry remains low more than a decade after the global financial crisis. A survey in 2018 found that only about 44% of global retail investors completely trust the financial services industry, the CFA Institute said in a report last year.

As the crisis showed, major financial institutions have grown so large and complex that they have become not only too big to fail but also too big to manage, where senior leadership with oversight responsibility failed to monitor, detect and manage excessive risk-taking and misconduct within their organizations. Global regulators have imposed over US$320 billion of financial penalties on banks. A slew of high-profile misconduct scandals has eroded consumer trust in the financial industry. These include the Lehman Brothers minibond crisis, LIBOR manipulation, foreign exchange rigging, money laundering, the opening of fraudulent accounts, and tax evasion, among many others.

Conduct risk is difficult to eliminate completely because human behavior cannot be fully predicted or controlled. However, conduct and behavior are closely correlated to an organization’s culture, where employees see what is valued and rewarded and act accordingly in order to be successful.

In view of increasing regulatory investigations, huge punitive fines on misconduct, growing cost of compliance and the resulting reputational damage, financial firms have a vested interest to go beyond a ‘tick the box’ approach to compliance and develop more effective ways to manage and minimize conduct risk and promote good corporate culture. The tone from the top is not enough, particularly in large, complex organizations.

Top leadership

The tone from the top starts with the chief executive officer and senior leadership. Board and senior executive management are responsible for setting the tone and leading the direction of the firm. While tone from the top is important to champion messages of good culture across the organization, it also needs to be authentic and consistent. Senior leaders must walk the talk in aligning business practices and decision-making with accountable and ethical behavior. However, the tone from the top does not work if it’s inconsistent with what actually happens at the middle management level and below.

Sub-culture and silos

Company culture communicated by senior leadership is expected to permeate through different levels of the organization. However, large, complex organizations often have silos that exist across different business lines, departments, and teams with their own sub-culture, which can deviate from the overall direction of culture communicated by senior leadership, and have a greater influence on the actions of staff.

The middle

Cultural change must involve managers at all different levels of the company. The senior leadership may think it has successfully delivered its message. But if that message is not understood or accepted in the same way by middle management, that means it has failed to fully permeate down the organization.

Middle managers are the immediate supervisors and role models for the majority of employees in day-to-day operations. Staff, particularly at the junior level, see what is valued and rewarded by their immediate supervisors and emulate similar actions in order to be successful. So, for good culture to percolate through the organization, it must be exemplified from the middle as well as top management.

Individual accountability

A number of regulators have implemented rules enhancing individual accountability at financial firms. These rules require firms to clearly identify key individuals and their ownership of responsibilities within business functions and other core units so that there is the transparency of individual accountability across core divisions. Regulators that have implemented individual accountability regimes include the UK, Australia and Hong Kong. Singapore will soon join their ranks.

Individual accountability rules have a profound influence on the way people behave. Since the names of key individuals are clearly identified, it instills in them greater awareness of regulatory obligations, as well as responsibility for any misconduct under their watch or failure to implement controls to prevent misconduct.

These rules make executives and senior managers more accountable, which in turn helps to strengthen the tone from the middle and the top. These rules have also created greater transparency in large global financial institutions with complex reporting lines.

Remuneration and incentives

Compensation is the most effective way to foster a good culture. Financial firms can implement effective systems to record staff behavior and link it to performance reviews, promotions, and remuneration and incentives.

Some financial firms are using a balanced scorecard approach for staff who are responsible for revenue generation. This approach measures both financial and non-financial metrics in the assessment of staff performance and remuneration. Non-financial metrics may include customer satisfaction, complaints, and compliance with rules.

In 2016, the Monetary Authority of Singapore mandated financial advisers to implement a balanced scorecard approach in their remuneration framework for representatives who provide financial advisory services and their supervisors. The framework aims to strengthen professionalism, address conflicted remuneration, and improve customer outcomes.

Repairing a broken culture

Issues and views on culture were hardly heard of before the global financial crisis. But the numerous misconduct scandals around the world since then have made the connection between company culture, employee behavior, and customer and investor outcomes all too clear.

Financial institutions must look deep within themselves to repair a broken corporate culture that wreaked havoc on public trust and the integrity of the financial system. The international Group of Thirty body has also weighed in and recently issued recommendations for financial institutions to improve culture.

Regulators are also increasing their focus on how regulations can improve culture across firms. They are exploring behavioral science tools to gain better insight into consumer and business biases with the aim of enhancing the supervision and regulation of the financial industry.

The implementation of financial regulation to increase the individual accountability of senior managers is only the beginning. Culture reform will continue to grow until trust is rebuilt again in the financial services industry.           

Image Credit: © Getty Images/AndreyPopov

About the Author(s)
Sara Cheng, JD

Sara Cheng, JD, is Senior Director of Capital Markets Policy and Strategy, Asia Pacific. She is responsible for advocating policy development in Asia Pacific, writing research centered on capital markets and financial regulation, and engaging with financial regulators and standard-setting bodies on policy advocacy. Cheng's work experience spans close to 20 years in the finance industry. She's worked in investment banking, legal, compliance, and securities regulation. Before CFA Institute, she worked in the CEO office of the Hong Kong Securities and Futures Commission from 2012 to 2017. She also previously worked at Goldman Sachs in New York, Mumbai, and Hong Kong where she held a range of diverse compliance roles in asset management, investment banking, and research. Cheng also previously worked as a US corporate lawyer and holds licenses in the states of New York and New Jersey. She is a strong supporter of diversity and mentoring. While at the Securities and Futures Commission, she founded and chaired the Women’s Network for which she received the 2015 Employee Award for outstanding contribution to the SFC.

1 thought on “Regaining Trust”

  1. Tanguy van de WERVE says:

    An excellent piece!
    I would add that investors’ confidence is low also because many retail investors:
    – have simply lost confidence in capital markets (not only in financial institutions) following 2008 (and soon 2020)
    – fail to understand how come some in the financial services industry can get so high salaries and bonuses
    – have low level of financial literacy
    – do not understand the precontractual information provided to them

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