We have, over the past few months, seen numerous articles in City AM from various prominent voices all echoing a similar sentiment – that it is the culture of the organisation and following the spirit of a regulation which are key factors in doing the right thing. Below are summaries of three which caught my attention not only because they resonate, but I think they all capture the essence of something more fundamental which needs to change.
City AM
Tuesday August 29, 2017
Abigail Gammie
Abigail Gammie wrote about the opportunity that Brexit brings with the potential to focus on a more principles based regime. She argues that a light touch regulation based around broad principles rather than hard and fast rules both fuelled growth and innovation and was highlighted as a culprit in the financial crisis. Since then a number of rules have been introduced to avoid another crash which prominent voices, including Janet Yellen seem to derive comfort from. Abigail then goes on to highlight a deeper cause for the crisis “one that lies in the culture of the financial sector” which for me grabs the essence of what I am writing about. Introduce all the rules in whichever regime (rules versus principles). If the culture is one of maximising profit regardless of detriment to others along the way, then we’re already starting from a dubious place.
Abigail continues to support the argument for a return to the principles based regime and I agree that the rigid hard rules based environment, when applied to subjective matters, lends itself to ‘work arounds’ where the rule is met but spirit not observed.
This also leads me to wonder that if a regulator is boxing up bad behaviours or clear breaches into defined rules, then the industry is already and only being steered to only look for a, b and c. Bad behaviour d may continue under the radar for years until a big enough loss or market tremor occurs.
I found myself at odds with the last section of the article “Reward the guardians”. Not that I am against properly compensating people, but this would suggest applying the very means which creates a toxic culture on one side of the fence onto the other. Could this bring about overzealous interpretation of principles? There is perhaps an even deeper point for discussion here that if people are only in it for the green back then we may be steaming ahead for another crisis – a mid-life one.
City AM
Monday 18 September 2017
Chris Wiscarson
“In my experience, I have never seen a company change its culture”
Was a pretty damning quote in bold in this article by Chris Wiscarson.
Chris starts by pointing out that while a crisis may present itself in a different wrapping, at its core it is borne out of the same issues – organisational culture and deep resistance to change (2001 Equitable Life compared to 2008 Northern Rock).
Another damning quote from Chris:
“In my 40-year career, in whatever business, in whatever part of the world, whether the Americas, India, Europe or the UK, my experience has always been the same – I have never seen a company change its culture”.
And Chris, who previously on the executive committee at Lloyds Banking Group, has probably seen a fair few things in his 40 year career.
Chris continues in his article by suggesting change being brought about by CEOs which often can only be short term and superficial change supported by colleagues chasing their financial rewards and that feel good success factor.
This is interesting and also suggests the if the end game is solely a financial one, then it is perhaps not the best carrot to lead colleagues with (as mentioned above).
Let the grand new vision slip and it doesn’t take too long to go back to old crooked ways. Chris is clear in describing this as a change in climate as opposed to change in culture. Rather subordinates exhibiting behaviours and following processes to please the Chief Executive.
Chris continues to discuss public perceptions when things go badly wrong and how he was supportive of senior board level colleagues being personally responsible to responding to client complaints.
To me, this is the epitome of principles based regulation. If a client, and not just your mega bucks client, feels genuinely hard done by through the way a firm operates, then something must have gone wrong at a principles based level.
Chris hits a key point when he suggests that NEDS should insist on seeing analysis of all complaints – which I shall go into more detail on below,
Another, perhaps not surprising point, “The chase for profit appears destined to trump sensible business development with good customer outcomes”.
Chris’s closes his article with comments on firms with trailblazing bottom lines which have in the past been seen at benchmarks in the industry with a somewhat worrying desire by others to emulate those stellar profit figures. Equitable Life and Northern Rock have highlighted just what happens when it all falls apart. This permeated a toxic culture throughout the industry, Chris in closing suggests and the price still being paid today.
City AM
Friday 15 September 2017
Lee Stonehouse
Less to comment on here, but nonetheless an interesting article where Lee discusses the challenges faced by the industry with incoming Mifid requirements around recording all calls that possibly relate to financial transactions. I was particularly drawn to Lee’s point about draconian demands of new rules in an environment where colleagues are wedded to their latest mobile phones. Lee pitches his wares in promoting enterprise apps, but it was an interesting take especially since I recall a few years back there was a flurry to implement something similar in London. Some firms simply stopped allowed their employees to discuss business on mobile hand sets. That’s one way to get around a tick box.
Lee’s article echoes of the chat room banter that was evident in the FX scandal and how more communication channels are now being monitored for the purpose of surveillance. Current surveillance techniques allow for sentiment analysis and speech to text methods for analysis. An evolution of lexicon based queries.
In this ueber surveillance culture it seems regulators have leapt over the need to approach regulation from a principles based regime and decided to assume there’s no shifting this toxic culture so let’s lets monitor everything.
As you may have gathered, I’m a bit of a fan of principles based regulation and conducting business while observing the spirit of doing the right thing. So all of this got me thinking, particularly within my niche, is there a way firms can (better) utilise data in a way to observe the spirit of regulation which could help change this toxic culture?
(I think there is.)
But, to start with, in some cases there may be a need to undo some thinking of looking for wrongdoing and replace with a front foot principles based decision making.
A couple of points, I think, it pays to keep in mind:
Culture is a bit of a behavioural game and as is often the case, it pays to look at a situation from a holistic stand point.
A long held view which has become core to my writing and system design: that until a person (including legal entities) own a problem it will always, on some level, remain a problem.
With these in mind it would also help to start thinking about what a good ’healthy’ environment looks like using data points we can measure.
As an example, we could look at call length and frequency between a corporate broker and a salesperson. A historical view might show how it is normal they talk, but not always drawn out and not high frequency. Thus a pattern might be observed to reflect this. Any material deviation from this pattern (e.g. high volume, high frequency or both) should naturally draw attention.
Data which might be useful for analysis:
Your watch list will tell you who is on which deal (and should be) linked to an insider list.
You will know corporate clients
You will know if you are marker maker
You will know (from the watch list) if a non-client is subject to M&A
You will know from WIP sheets if corporate broking teams are looking to pitch for nomad, broker roles
etc...
Note, this is behaviour observation using existing data points.
We don’t need to wait for three months worth of trading to come in. Carry out historical analytics to show that it is quite likely that this increased communication could suggest a toxic and routine breach of the Chinese wall.
Thus you have enough data points to start to gauge when increase in call volume is normal and even then what is abnormal.
If data is being fed real time, then you can start to look for interesting correlations as they happen, for example an increase in call or messaging volume and trading desk P&L.
This steps away from the binary of ‘what’ to the subjective of ‘how’ and the ‘why’.
I guess what I am proposing is a bit like a parent watching a child and looking out before they trip up in their behaviour. Are there enough indicators (e.g. eating too many sweets) that a visit to the dentist might be inevitable.
Chris Wiscarson’s point above about seeing analysis of all complaints is the kind of data that would be very useful in shaping what to look for through other data points and progressing from there to a more front foot approach to surveillance and analysis. This would also serve as great ‘live’ client feedback which can help create an evolving benchmark of a good business model.
Binary indicators of good or bad must be retired in favour of shades of grey. Rather measure behaviour and process (i.e. look beyond the what and understand the how).
Thus to really exercise and implement good practise is to own the requirement to do so. Simply asking vendors to solve a problem is akin to head in the sand.
Further think of a pyramid of questions with the one ‘master’ question at the top asking:
“Is anyone getting screwed over here?” could be the litmus test for observing the spirit.
There is much to learn from the way the (Takeover) panel has operated with its approach using principles based regulation. In the opening sections from the blue book, we see the panel make it clear that it is interested in compliance with the letter and the spirit of the regulation.
“The Code is based upon a number of General Principles, which are essentially statements of standards of commercial behaviour. These General Principles are the same as the general principles set out in Article 3 of the Directive. They apply to takeovers and other matters to which the Code applies. They are expressed in broad general terms and the Code does not define the precise extent of, or the limitations on, their application. They are applied in accordance with their spirit in order to achieve their underlying purpose. In addition to the General Principles, the Code contains a series of rules. Although most of the rules are expressed in less general terms than the General Principles, they are not framed in technical language and, like the General Principles, are to be interpreted to achieve their underlying purpose. Therefore, their spirit must be observed as well as their letter.”
If we approach regulatory challenges from this standpoint and design systems with a proactive rather than reactive influence, we may start to encourage a shift in culture.