Regulatory summit panel examines how conduct is impacted by culture, and how culture manifests itself in conduct

It is “naive and potentially very damaging” to assume that there is a single risk culture that should prevail across all areas of a company’s activities, according to chief risk officer for international financial services at the Commonwealth Bank, Guy Harding.

The emerging market specialist with a particular interest in China and Indonesia believes that such an approach can be problematic because it ignores the local culture. Speaking this week at the Thomson Reuters 2nd Australian Regulatory Summit, Harding said that a risk culture could only exist with the permission of the environment in which it is operating.

“For me that means that it would be extremely arrogant to export an Australian risk culture to an off-shore jurisdiction,” he said.

“Ownership of a risk culture and the way that you bring that about is how you move away from potential lip service and tokenism.”

Harding was one of the panellists looking at ‘Why risk culture matters’ at the full-day event held in Sydney. And he was adamant that risk culture did indeed matter.

“If I had the choice between a slick system and a reporting capability versus a really strong risk culture, I’d take the risk culture every single time,” he said.

However, he was not so enthusiastic about risk-appetite statements. While conceding they were often valid tools, he said that “very florid and detailed ones” concerned him.

“They might suggest, among other things, that we will be intolerant of participating in or supporting any industry that may be polluting,” he said.

“But I look at some of my operations in China and I look at my total available industry mix and arguably many of them will have some element of pollution associate with them, whether they are directly involved in polluting the environment or whether suppliers they source from pollute.

“Or take similarly high level comments such as we are intolerant of the destruction of old-growth forests. That’s great to put in a risk-appetite statement but what does that mean for you when you have a deal in front of you? Does that mean, well I won’t lend to you if I know you’re destroying old-growth forests? Does it mean actually I won’t lend to you if I know that some of your supplies might have come from someone who is destroying old growth first? Does it mean you’re a retailer and you get manufactured product coming into you and they do not certify that all their product is definitely not from old-growth forest? Whereabouts do you draw the line?

“Those are the practical sorts of issue we need to get to grips with, and that is much harder at ground level that it is in the ivory tower to conclude that this what we are going to do.

“It is seldom the case that there is a black and white differential between what is good and what is bad; it’s invariably differing shades of grey.”

Harding added that it was dangerous to get “hung up” on the importance of risk appetite statements that have little relevance to people at “grassroots level”.

“The answer is the top teams going out on a regular basis to see what’s really happening,” he said.

“To the credit of my own board, they have been very keen to look in off-shore jurisdictions, and visit branches and outlets first hand.”

Regulatory challenges

The summit brought together leading regulators and industry experts to debate critical issues specific to financial services regulatory challenges and reform. These included the future of regulation, staying ahead of cybercrime and identifying market manipulation risks.

The ‘Why risk culture matters’ panel was charged with examining how conduct is impacted by culture, and how culture manifests itself in conduct.

Morningstar’s head of research strategy in Asia-Pacific Anthony Serhan said that it was impossible to underestimate the importance of culture.

“Not only in the context of preventing inappropriate risk, but also in the context of using the right culture to actually grow a business,” he said.

“Risk culture is also a case of reminding individuals about their responsibilities and creating a framework where individuals can also learn about the right approach to ethics and the importance of ethics in a well functioning firm and society and industry.”

‘Broken culture’

The regulators also had something to say. The chief executive of the Financial Markets Authority of New Zealand Rob Everett said that the big challenge for conduct regulator was working out how to define a ‘good’ culture.

“How does a good culture manifest itself? How does a broken culture manifest itself? What are the things you are looking for in an institution or an industry that might tell you that things have started to go awry?” he asked.

Everett said that boards needed to be much more actively involved in asking hard questions about behaviour and conduct.

“You can’t have a good culture in any organisation, financial services or otherwise, if management are not setting the example and showing people that good behaviours are rewarded and encouraged and that bad behaviours are discouraged,” he said.

“Boards have to go beyond impressive mission statements and start to look at the data.”

Effective regulators spent time at the top of organisations to understand how the missions being articulated and, more importantly how it’s being demonstrated, Everett added

Executive general manager of the Australian Prudential Regulation Authority’s diversified institutions division Keith Chapman said that it was imperative that organisations focussed on setting their risk appetite.

“The boards have the opportunity to set the culture of the organisation the way they want to run the organisation, and the board reflects that culture in the recruitment of the CEO, who reflects the same sort of behaviours in he recruitment of the next suite of management,” he said.

 “Risk culture is not something that is easy to define. You can’t produce a template, there’s no silver bullet, it is organisation-specific.”