Eye on the Markets Summer 2016: Informal Business Culture in Financial Services: Does it Matter?
The State of Play
2015 was, again, a year of “first time cases” for enforcement actions with total fines amounting £6.2b across the FCA, CFTC, FINRA, SEC and SEC. Despite that enforcement actions further add to the cost pressures of financial services companies, they do not seem to be enough of a deterrent for avoiding non-compliant behaviours.
Meanwhile, to identify and prevent noncompliant behaviours, financial services companies continue to invest in data analytics-driven compliance and risk frameworks. In addition, firms continue to implement business culture change programmes, as the role they play in noncompliant behaviours has been widely acknowledged, especially following the Saltz Review in 2013. However, critics argue that business culture transformation programmes are mere window-dressing techniques.
Whilst these above-mentioned actions are necessary, they fail to act upon one of the industry’s invisible challenges, namely informal business culture. As a consequence, compliance and risk frameworks, alongside business culture transformation programmes, will continue to be sub-optimal if they are overshadowed by strong formal-informal business culture asymmetries.
Informal Business Culture: Why it Matters?
Informal business culture is the set of organisational characteristics and relationships that are hidden but powerful as they informally reinforce certain values and behaviours. When the asymmetry between the formal and informal business culture is strong, agents tend to revert to the informal business culture for informing their behaviours.
Informal business culture can contribute to nurturing behavioural biases. For example, if the informal business culture over-emphasises top performance, agents will face self-worth stresses that lead to rationalisation, self-serving behaviours, alongside other biases. Ultimately, these biases will be driving the agent away from cultivating one of the key factors for avoiding non-compliant behaviour, namely critical judgement.
Informal business culture and subsequent behavioural biases can also contribute to nurturing unintended behavioural consequences. Partly the reason why compliance and risk frameworks are not working is because they are distorting the decision-making process. Therefore, behaviours intended to outsmart the system are encouraged. In addition, compliance and risk frameworks can also create a perception of safe-harbour whereby agents tend to shift their responsibility, with regard to compliant behaviour, by thinking that “it is someone else’s job”.
Informal Business Culture: How to Fix It?
To achieve a sustainable change in business culture, the formal-informal business culture asymmetry must be tackled. For this purpose, in broad brush, a three stage plan is necessary:
1. Diagnostic Stage: (i) develop and update, through machine-learning algorithms, an informal business culture database and (ii) develop a formal-informal business culture asymmetry map.
2. Awareness Stage: (i) communicate the features of the informal business culture and (ii) raise awareness about the consequences of informal business culture.
3. Reconciliation Stage: (i) develop behavioural de-biasing techniques and tools to reduce the formal-informal business culture asymmetry and (ii) institutionalise the formal-informal business culture symmetry as part of the day-to-day work.
The question of non-compliant behaviour within the financial services industry is complex and reducing the formal-informal business culture asymmetry is one factor for preventing non-compliant behaviour to arise in the future. However, it is an important factor to act upon.
An expanded version of this question will be presented by Alexandra at the 6th International Disaster and Risk Conference IDRC Davos 2016, the world’s leading conference on Integrative Disaster and Risk Management, of which patronage includes international organisations, such as the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN), as well as private sector organisations.