After a series of systemic misconduct scandals in other markets, the Monetary Authority of Singapore (MAS) is encouraging Singapore’s financial institutions (FIs) to take another look at the norms of desirable behavior and ethical business standards. What lessons can FIs boards and senior management take from the experience of their peers in other jurisdictions?
Since the 2008 Global Financial Crisis, recurring incidences of systemic misconduct have affected the financial services (FS) industry, eroding the confidence of the community, governments and regulators. Despite regulators increasing their conduct and culture requirements globally, conduct scandals have continued to impact the sector. In the 2019 Edelman Trust Barometer, FS was once again the least-trusted sector.
For many in Singapore, Australia’s recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has brought this issue to a head. Australia’s previously exemplary reputation as a safe and model FS sector is now in tatters. CEOs and board members have been sacked and may face prosecution for presiding over cultures that precipitated misconduct.
Even before the Australian Royal Commission, MAS was highly attentive to this issue, wanting to protect Singapore’s reputation as Asia’s premier FS hub. Now, culture and conduct is at the top of not only the MAS agenda – but of every FI board. The unspoken fear is clear:
If it happened in Australia, could it be happening in Singapore as well?
Boards and senior managers seeking comfort that their FIs will not be rocked by scandal need to understand the key drivers of misconduct.
- Misconduct is set with the tone at the top – As MAS has already made it clear in many of its papers, the way in which an FI conducts its business and deals with customers is primarily shaped by the attitude and behavior of its board and senior management. This was also the opinion of the Australian Royal Commissioner, whose scathing assessment of the behavior of several prominent executives and directors led to their abrupt departure. Regulators know more stringent regulations won’t work. There needs to be a shift in culture – and it must be led from the top.
- The biggest scandals are not caused by bad apples, but by systemic drivers – FIs have long had employee surveillance and communication monitoring in place to identify individuals doing the wrong thing. But the root causes of the most prominent misconduct scandals are not the result of criminal or unethical intentions of “rogue traders” or unscrupulous employees, but rather the result of unintended or poorly considered or monitored business strategy: aggressive revenue targets, inappropriate incentives, poorly identified and managed conflicts of interest, poor product design or skewed distribution models. It’s time to stop looking for the mythical one “bad apple” and revisit misconduct from a business model perspective. What are business strategies, remuneration and performance models teaching employees about what the institution values and how to behave?
- Accepted industry practices may not be acceptable to the regulator or the community – Global Forex benchmarks manipulation, LIBOR/SIBOR market abuse scandals, “fees for no service”, trailing commissions and systemic mis-selling cases were caused by actions that, for years, the industry accepted as standard practice. The idea that “everyone’s doing it, so it can’t be wrong” is highly seductive – but wrong. When the UK’s banks hard-bundled mortgages and other credit products with payment protection insurance, the fact that the whole industry was participating in misconduct didn’t save them. The entire sector has paid dearly for conducting what used to be considered “business as usual” in billions of pounds worth of fines and remediation costs – not to mention the unquantifiable losses caused by brand damage. In these cases, so-called “non-financial risks" have proved to be the most expensive in an FI’s risk universe. The challenge for all boards and senior managers is to find the next misconduct scandal hiding in plain sight under the guise of “acceptable industry practice”.
Ethical conduct is just as much about competition as compliance
As Singapore’s FIs start the laborious process of determining whether their current policies and processes meet MAS’s proposed new Individual Accountability and Conduct Guidelines – as well as growing regulatory expectations around assessing culture as a potential driver of misconduct – it’s worth remembering the bigger picture around conduct.
This is not just a compliance issue. Yes, the consequences of failing to meet MAS’s expectations include the potential for MAS to direct an FI to remove its director or executive officer or to revoke its license.
However, long-term, these are not the worst things that will happen in a misconduct scandal. With challenger banks and FinTechs eating away at the addressable FS market, traditional banks, asset managers and insurers are increasingly relying on their brand and reputational value to retain their customers and defend their traditional markets.
The more conduct scandals erode customer faith in traditional FIs, the easier it is for non-traditional competitors to enter the market. And, for those new challenger FIs, inevitably regulators will also expect the same standards of customer fair dealing and good market practice. This will be much more difficult for new market entrants to achieve retrospectively. It will be critical to design in appropriate behavioral signals upfront and build a strong risk and compliance culture.
Improving conduct and culture is fundamental to an FI’s brand and critical to maintaining its competitive edge. That’s the most important reason to set the appropriate tone-at-the-top and shine an ethical light on every systemic driver of institutional behavior.