How can psychology help create cultures of compliance?

Jan 17th '17

The Financial Conduct Authority (FCA) recently published an interesting occasional paper exploring how psychological and social influences impact companies’ cultures.


The paper suggests that regulatory compliance can be improved by understanding the way people make decisions – and the factors that may influence them.


It’s useful reading for any organisation wanting to improve governance.


How is ethical wrongdoing currently punished?

The paper’s author, FCA economist Peter Lukacs, claims that people’s perception of the ‘appropriate’ penalty for misconduct has been affected by the scale of individual and corporate wrongdoing we have seen in financial services in recent years.


Irresponsible behaviour is widely seen as a key cause of the financial crisis. This and other news stories covering the extent of misconduct in the banking sector – estimated to have cost the industry £53bn in the last 15 years – have led to public support for harsh penalties for governance failings.


Personal liability for breaches has been ramped up too – and the article claims that ‘scrutiny of the culture in financial service firms has also increased markedly’.


Is this the right approach?

However, this paper says that penalties are not enough alone to deter wrongdoing. To truly change approaches to ethics, we need to look at the social and psychological influences behind behaviour.


These influences will differ from organisation to organisation, but there are some common factors, including:


  • Behavioural bias – something that is as prevalent in a corporate environment as in people’s personal lives. The paper says that ‘employees may use rules of thumb, discount future losses excessively and under or overestimate the risks of their actions, all with the consequence of moulding their approach to compliance’.
  • Groupthink – the tendency for people to ‘go along with the herd’ – particularly if they think that expressing an alternative view might be detrimental to their position. Recent history has shown that ‘groupthink in firms, where cohesive groups take poor decisions with limited scrutiny, can lead to poor governance and insufficient challenge’.


Matching deterrents with insights into decision-making culture

So alongside deterrents, we need to use insights from psychology and other disciplines to see why these behaviours occur in the first place.


There may be incentives – often unconscious ones – to break the rules that are stronger than the disincentive of a penalty.


How should firms and the regulator tackle this?

The FCA has already acted to increase the expected costs of breaches and to highlight personal accountability for wrongdoing. The Senior Manager’s Regime is an example of the regulator’s push towards individual responsibility. Shifting this responsibility, and focusing communications on the very personal nature of penalties, can focus decision-makers’ minds on the ramifications of poor ethical choices.


Other influences of behaviour

The paper goes on to look at:


  • The internal vs external influences of behaviour
  • The way perceived or actual ‘distance’ from wrongdoing can affect people’s tolerance of it, and
  • The way people’s behaviour is influenced by the corporate environment and the acceptance of wrongdoing.


How can this help Compliance teams?

It shows that there is a lot firms and regulators can learn from the social, psychological and other influences on decision-making.


Putting this into practice will be the challenge, particularly if you are pushing against an environment where groupthink is the norm and poor ethical behaviour is allowed.


So what should you do if you suspect your firm is falling victim to some of the influences that cause poor governance?


We have looked before at the red flags that indicate a poor corporate culture – take a look at these and see if any ring a bell. If so, Perivan Technology’s 5 ways to embed a compliance culture into your business will be a good read. They include tips on:


  • How you can make good governance in-built to your processes, rather than an afterthought
  • How to marry compliance and creativity for compliant financial promotions
  • How you can make everyone in the business accountable
  • How a culture of openness and honesty can be fostered
  • How to ensure stakeholders don’t overly influence your ethical decisions


For a more in-depth look at how to build good governance into your organisation, you can download Perivan Technology’ whitepaper, How to embed a compliance culture within your business. You can read a free copy here.


Source: Perivan Technology


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