Opinion piece - Australian Financial Review, 17 June 2015

This month I spoke plainly before senators on culture in some parts of the financial services sector and offered thoughts on how we can nudge industry to lift its game where poor culture is an issue.

I've been talking about culture for a while now. That is because it matters and is a big driver of conduct. Sadly, poor culture often means poor outcomes for consumers.

We need to ensure we regulate for real people and their behaviour. That means looking at culture and incentives, and making sure there is credible deterrence: tough penalties and a high likelihood of getting caught.

Sometimes we need to use a carrot and stick to get the right conduct because right now, what we see here and abroad does not inspire much trust and confidence. In the wholesale markets we have seen the global scandals in FX and interest rate benchmarks that have led policymakers, for example in the UK, to examine what action is needed to repair this lost confidence.

In retail markets in Australia we have had scandals in finance advice sectors and responsible lending. Often it is not just an organisation's few bad apples driving bad outcomes for consumers but the culture itself, often starting at the top. It is no good always just pursuing the bad apples, if the fundamental problem is the tree.

Culture is defined in the Australian Crimes Act as an attitude, policy, rule, course of conduct or practice. Section 12.3 of the act makes it a criminal offence if a company's culture encourages or tolerates an employee's breach of the law.

At present this provision extends to parts of the Corporations Act but not the parts dealing with financial services and products.

The carrot

ASIC welcomes organisations wanting a culture that drives the right outcomes.

We want to work with those groups particularly large financial services firms to help them create the right culture, including sharing with boards and management when our surveillance identifies cultural problems. We are making sure the dots are connected from the top to all levels of an organisation.

We encourage boards and management to think about the three Cs of good conduct: communicating from the top on what is expected; challenging whether the culture is achieving the outcome desired; and complacency, that is, do not be complacent. Conduct should be continually reviewed, enforced and validated.   We also support the initiative by a number of firms working with groups such as the St James Ethic Centre to develop an ethical framework for how they will run their business.

My position is pretty simple: good culture should not mean mountains of red tape and armies of compliance staff. Good culture is simply about doing the right thing by your customers.

The stick

When we find organisations that do not care that their delinquent culture is hurting consumers, then we must be firm and credibly deter this behaviour.

To this end, we have suggested broadening the Crimes Act culture provisions to the financial services and products provisions of the Corporations Act, and extending these provisions not just to companies but also responsible management.

One of the recommendations of the UK's recent Fair and Effective Markets Review was that firms take greater responsibility for their employee's conduct. It also sought to reverse the tide of ethical drift which has led to recent scandals. Specifically, the final report recommends the most senior people in a firm should be held personally accountable for the behaviour of those on the frontline.

In addition, often a way to shape culture is through peer pressure. To this end, we should consider a co-regulatory solution such as a financial services industry disciplinary panel to issue infringement notices as an option to deal with civil breaches.

This might be a good idea because it would be an independent peer panel, that is, made up of respected industry experts judging the conduct of their peers. The significance of this cannot be underestimated – being judged by peers has major reputational consequences above and beyond any monetary impact. And it avoids the expensive and time-consuming process of going to court.

But culture is not about arcane concepts and academic arguments. It is about real people. And when I talk about poor outcomes, this is a polite way of saying people are often getting fleeced.

Sadly, those who get fleeced are not only the wealthy.

And this is the thing: markets can recover but often people do not. People are often left with a loss they cannot afford.

That is why cleaning up culture is crucial. That is why restoring trust and confidence is crucial in parts of the financial services sector.

Greg Medcraft is chairman of the Australian Securities and Investments Commission.

This piece was published by the Australian Financial Review on 17 June 2015.