The evolution of monitoring conduct in the financial sector: Challenges and solutions


In a recent post by RegTech firm Theta Lake, the company quizzed readers on how they are monitoring prudential risk.

Regulators and policymakers are intensifying their focus on the culture and conduct risk within the financial sector.

Ian Johnston, chief executive of the Dubai Financial Services Authority, even suggests that conduct risk could emerge as the “new” prudential risk. Commenting on the topic, Johnston said, “Until events of the past couple of months, I would have said ‘no’. But perhaps the Credit Suisse matter shows that a string of misconduct episodes might sufficiently affect the reputation of an institution that confidence could be eroded. And we know where that can lead.”

The Federal Reserve Bank of New York maintains its emphasis on governance and culture reform as part of a broader strategy to shape industry standards. This is aimed at fostering a safer and more trustworthy banking sector. At its 2023 Governance and Culture Reform Conference, the New York Fed emphasised five key points. One striking takeaway is the need for organizations to publicly acknowledge and reward staff to motivate desired behaviours. It may seem trivial, but even a thumbs-up emoji can have a meaningful impact. Neuroscientist Mauricio Delgado confirmed that such small gestures can sometimes be more motivating than monetary rewards.

However, overlooking staff efforts can have negative repercussions. It can create a toxic environment, thus leading to poor decision-making and, ultimately, a culture of misconduct. Keeping tabs on culture and conduct risk in a firm presents a complicated challenge. While financial firms excel at monitoring quantitative data, the processes for collecting and assessing qualitative data are far less mature.

In July 2023, the Financial Markets and Standards Board (FMSB) published a review titled ‘Conduct & Culture MI: Boundaries of Current Practice’. This report indicates a growing investment from financial services companies in risk management frameworks and data analytics aimed at understanding conduct and culture. The review also emphasises the importance of collecting end-to-end data on these aspects for a more comprehensive understanding.

The FMSB review accentuates that capturing all forms of communication, including digital elements like emojis and GIFs, is crucial for effective monitoring. Firms can only comply with regulations if they can capture all elements of communication in their native format, allowing for a more nuanced understanding of the organisational culture.

As the review concludes, firms are increasingly improving their analytical capabilities to better understand their own culture and conduct risk. This analytical advancement is supported by the capability to capture all forms of communication comprehensively.

Read the full post here.

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