Tone from within | Why personal responsibility in compliance is so important.

11th May 2021 by Brielle Hewitt

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Personal responsibility - compliance financial services

We’ve written in the past about the need for company leadership to take an active role in embedding a culture of regulatory compliance within their firm, but this is only a starting point. While company leadership should play a central role in promoting a culture of compliance, clearly they cannot afford to spend all their time focused on it.  

Such efforts by leadership are a means, not an end. Company culture usually trickles down from above, and the ultimate aim should be to inculcate a culture within employees at all levels of the organisation.  

This was reflected in a recent speech by Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, to the NYU Law School. In it, Steward outlined the FCA’s move toward focusing on ‘tone from within’. 

Tone from within 

To explain, it is helpful to refer to the regulator’s ‘Five Conduct Questions’, a set of five questions to help firms examine how they manage risks of misconduct. The five questions are as follows: 

  1. What proactive steps do you take as a firm to identify the conduct risks inherent within your business?
  2. How do you encourage the individuals who work in front, middle, back office, control and support functions to feel and be responsible for managing the conduct of their business?
  3. What support (broadly defined) does the firm put in place to enable those who work for it to improve the conduct of their business or function?
  4. How does the Board and ExCo (or appropriate senior management) gain oversight of the conduct of business within their organisation and, equally importantly, how does the Board or ExCo consider the conduct implications of the strategic decisions that they make?
  5. Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct?

As Steward explained, initial five questions assessments focussed heavily on senior management – known as ‘tone from the top’. Then, it evolved to focus on ‘tone from above’, that is, the conduct of mid-level leadership and line managers, with whom employees spend the bulk of their time. Now, the latest evolution of the approach is to focus on so-called ‘tone from within’, which is where individuals throughout an organisation really acknowledge the role they play in preventing misconduct. 

“‘Tone from the top’ is necessary for setting the parameters, the expectations and the examples,” said Steward. “‘Tone from above’ reinforces the ‘tone from the top’ at local levels and ‘tone from within’ requires every person in the organisation to be personally accountable and engaged.” 

We have spoken in the past about the importance of future proofing your firm from a compliance perspective, and see tone from within as a human complement to the need to constantly evolve your firm’s technology. If the entire firms feels engaged with and responsible for  regulatory compliance and general conduct, your firm and the people within will adapt continually as markets change, and new risks appear, just as your technology will. 

Focus on points of failure 

Steward pointed out the reason the five questions – and indeed the Senior Managers Regime – is effective is because both encourage firms to think about where behaviour might fail.  

“The focus on points of failure not only encourages greater awareness, it also promotes better calculations of judgement: about consequences, foresight of potential harm or damage and, in highly mature systems, the increasing risk of detection or being caught, which, in the case of bad actors, is the one risk that is often miscalculated,” he said. 

Too often, the real point of failure for firms is human nature, and the poor judgement of a few can end up having severe wider consequences on firm reputation, financial impact, but also impact on those that are doing the right thing in their firm – as we saw with the recent fines of Bank of America Merrill Lynch, Credit Agricole and Credit Suisse.  we4w244

However, human problems can have technological solutions, and our supervision platform allows you and your governance team to easily identify the points of failure in your firm, while supporting and empowering those functions and people striving to lead with a culture of strong governance, good conduct and a compliant operation.

If you would like to know more about how we can help, please contact Sean Morgan – sean@fingerprint-supervision.com

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