This is my first visit to Australia (I’m here for this year’s #RefinitivSummit). And I have landed right in the middle of the best place and time to explore ethical business practice and regulation. Why? A Royal Commission on misconduct in banking and financial services recently delivered its final report. And banking touches all sections of society.
If at first…
There is a flurry of activity by both financial regulators and financial institutions around this. Yet much of it seems to be occurring without an appreciation of how to bring about real change.
Front page headlines in the Sydney Morning Herald on Saturday took up the topic, quoting Helen Coonan, the Chair of the new Australian Financial Complaints Authority (AFCA). She says:
“Poor culture in financial institutions has been identified as the main culprit that permitted a slew of bad practices, appalling treatment of consumers and small businesses, and in many cases arrogant indifference to regulatory and compliance risk…”
Ms Coonan also asserted that the:
“AFCA is playing an important part in restoring shattered community trust and confidence in the financial services sector.”
How exactly they are going to do that while slamming financial institutions in speeches is not obvious.
Treating them like children…
No doubt there has been some appalling behaviour in these institutions. And everyone agrees that culture is at the root of it. So, while the Royal Commission covered many subjects, and I will focus only on: Section 2 – Culture.
There is a lot to agree with in the Report, including the statement that:
“Culture can-and must-be assessed by financial services entities themselves”.
It goes on to say that entities must form a view of their own culture, identify problematic aspects and change them, followed by reassessment.
I agree wholeheartedly with this statement, however I am not sure that they actually mean it. As the Report goes on to say that in organisations that have the most problematic cultures:
“There is…an important role for regulators to supervise culture – that is to:
- Assess the entity’s culture
- Identify what is wrong with the culture
- ‘hold up a mirror’ to the entity. … and educate the entity about its own culture;
- Agree what the entity will do to change its culture; and
- Supervise the implementation of those steps.
This would appear to contradict the categorical assertion that “Each financial services entity has primary responsibility for its own culture.”
Cultural transformation clues – to try try again
I would like to make two points, although there is so much more to say.
First, as we say in our book (Ethical Business Practice and Regulation) culture cannot be changed from the outside. Efforts to do so are bound to fail, and the one mentioned above is no exception – being based upon a PARENT-CHILD relationship (if you’ll forgive me for drawing on the field of psychology).
The essence of Ethical Business Regulation (EBR) is that regulators should encourage organisations to assess – and deeply understand their own cultures. And to bring credible evidence that they have done so as the basis for developing a relationship based on trust.
Those who know me will know that I am passionate about the use of the values based Cultural Transformation Tools of the Barrett Values Centre for this purpose.
The other point I would like to make is that unless and until regulators, the media and politicians stop blaming blaming every financial institution and person in them we will not achieve change. Why? Blame is the opposite of an environment of psychological safety. And psychological safety is so important for an open, just culture where the true root causes of misconduct will emerge.
Stepping up enforcement where intentional criminal behaviour is found is fine; but taking the same attitude towards all misconduct will accomplish the exact opposite. Behaviour will remain hidden and defensiveness will prevail.
Regulators and financial institutions must recognised the nuanced reasons for misconduct. There is a need for (some counterintuitive) steps to be taken in order to eliminate blame culture – and encourage accountability.
There are many factors that created the misconduct in the first place, and the solutions are not simple, nor will they be immediate.