Tue, Mar 5, 2013

Cultural Revolution

With cross-border regulation for banks looking more and more inevitable, the debate that continues is how suitable would it be for the rest of the financial services industry.

Insiders believe that national regulators have a better understanding and insight into the culture of their own jurisdictions, with many accepting the legitimacy of this argument. Because of this ongoing argument, it looks increasingly unlikely that there will ever be any form of centralized regulation for the financial services industry as a whole.

The financial crisis moved national financial stability to the very top of the regulatory agenda, and has therefore caused a shift away from the global integration of financial services and towards more localized regulation instead. As a result, we can already see diversity between regulators, leading to significant differences in interpretation of rules and regulations across several countries or regions.

While there are many areas of concern, the one overriding issue that worried industry leaders and participants in our report was culture. In fact, more than 83% of financial services’ CEOs believe that a company’s culture is the most important factor when looking to solve regulatory challenges.

Culture and compliance go hand in hand and it is encouraging that CEOs place such great importance on culture, and also that they appreciate the power it has in ensuring that regulatory change is embraced and also, in an ideal world, seamlessly integrated into any organization. CEOs recognize that getting the mindset of an organization right, particularly for financial services firms, defines the way the firm does business and how it interacts with clients and prospects.

The importance of culture is not something lost on senior management either with more than two thirds stating that a company’s approach was the most important part of the governance function to get right to avoid regulatory problems.

From a UK point of view, culture is not only judged and measured internally, but also externally. The FCA recently announced that it will visit every firm at least every four years, with a key area of focus for any visit based around assessing if senior management is creating the right model.

If regulation and compliance is not considered a high priority from a board level, it is unlikely that it will be considered a high priority from the rest of the business. This is where developing key practices from the top down can have a big impact, especially where reputation can determine whether a firm gets the next piece of business.