Should regulators focus more on incentives than fines?

Jun 8th '18

Mark Carney, Bank of England governor, has suggested that financial compliance should focus more on incentives than fines.


Speaking at the Bank’s Markets Forum, Carney talked of London’s position as a role model of good corporate conduct and addressed some of the challenges facing the industry.


The City as role model

Carney said that since the financial crisis of 2008, ‘the UK has played a leading role in addressing misconduct in domestic and global markets’ and that the City of London has a ‘particular responsibility’ for tackling misconduct given its position as a leading financial centre.


Good progress has been made, he said, in building ‘fair and effective markets’. But he also touched on the need to ‘maintain focus as memories fade and the temptation to turn inwards returns’.


Creating the right focus

Carney spoke of the need to create what he termed ‘real markets’ – which he defined as professional, open, resilient, fair and effective – designed to serve their end users rather than being ends in themselves.


One of the key aspects of this, he said, will be a ‘move from an excessive reliance on punitive ex post fines of firms to greater emphasis on more compelling ex ante incentives for individuals’


Ultimately, the industry needs ‘a more solid grounding in improved firm culture’.


In other words, while the financial crisis spawned numerous laws and regulations aimed at improve the ethics and robustness of the sector, there needs now to be more incentive for individuals to follow the rules, rather than ways of punishing them after the event.


How to incentivise good practice

If you are trying to implement this approach in your own organisation, where do you start? Our 5 questions offer advice:


  1. Reduce opportunities for bad behaviour

This is cited by Carney as the start point. This means putting in place a culture where good behaviour is expected and poor ethics aren’t tolerated. This approach needs to start at the top.


  1. Make sure your reward structure incentivises ethical conduct

Carney said that good practice ‘requires compensation rules that align risk and reward’. Do your compensation practices support treating customers fairly and promoting the FCA’s desired consumer outcomes?


  1. Ensure firms and individuals take responsibility for their conduct

Carney cited the Senior Managers & Certification Regime as an example of regulation that increases individual accountability, saying that it ‘re-establishes the link between seniority and accountability, strengthens individual accountability, and reinforces collective responsibility.’


With the regime due to apply to almost all regulated firms in future, our blog on the subject looks at whether this will increase your risk of an FCA fine.


The notion of individual accountability is one that extends beyond the SMCR to all areas of business. In a culture of good conduct, regulatory compliance shouldn’t just be down to your team – read about why compliance is everyone’s responsibility.


  1. Make regulatory compliance built-in, not bolt-on

Cultivating an approach that embeds good governance is an ongoing theme for the regulator, and underlies its ethos. Earlier this year, the FCA announced an updated approach to supervision of firms which, in its words, moves towards a ‘more forward-looking and pre-emptive’ attitude to supervision.


  1. Explore automation as a way of mandating Compliance team approval

Even though your team is there as a backstop against poor conduct, humans are fallible and inevitably, regulatory breaches can slip through.


This can be particularly true in the case of marketing and communication materials, where it can be easy to let your financial promotions get out of control. Find out how you can build in Compliance team approval to your promotions and how technology can help Compliance teams to minimise the risk of regulatory breaches.


Building a culture that incentivises good conduct, rather than penalising poor behaviour, isn’t always straightforward. But with the backing of the Regulator and the Bank of England, it seems clear that this is the way conduct regulation in the UK is heading.


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