Part Two
(In this second installment, the writer discusses the four remaining drivers of misconduct that the Deloitte Center for Regulatory Strategy identified based on its study of the findings of various conduct-related enforcement actions, regulatory reviews, and firm remediation programs in the financial services sector.)
Complex, disconnected, or “growth at all costs” business models
In large, complex organizations, there is a risk that branches or offices will develop their own cultures and behaviors that may not necessarily align with the values that are espoused by headquarters.
One US-based financial services firm was recently subjected to a congressional grilling after it was revealed that thousands of its employees opened millions of accounts without the consent of customers. Now allegations have surfaced that in some branches, that practice took on a particulary sinister shape: in states where there is high incidence of illegal immigration, employees are claiming that management ordered them to round up highly vulnerable undocumented workers, drive them to the bank’s nearest branch, and then open accounts for them. Not surprisingly, the bank’s official spokesman denied the allegations on the basis that this kind of behavior is inconsistent with the institution’s values.
Disparate subcultures or a problematic prevailing culture
Naturally, an organization that already has various subcultures or a prevailing culture that gives more weight to short-term financial success than the sustainability and integrity of the business puts itself in a position where poor conduct may develop.
An investigation into the financial services firm I cited above revealed that employees opened the fake bank accounts because they were under immense pressure to meet sales quotas, at times even being threatened with termination if they failed to meet their targets. That bank has since gotten rid of its sales goals for select products and the scandal has prompted other banks to take a closer look at their own sales practices.
Manual and complicated processes and procedures
Compliance procedures that involve reading voluminous policy documents, accomplishing repetitive risk-approval processes, filing multiple forms on a single issue, and that constantly change can often drive people to cut corners. Unwieldy and tedious controls that are set in place to prevent misconduct may actually be the very things that cause people to evade such controls or else to comply with them but with a “tick-box”, rather than a scrupulous, attitude.
Worse, this lack of respect for systems of governance and controls may extend to those who are seen as reponsible for designing and administering such controls. When this kind of mind-set sets in, it will be difficult to reorient employees toward good governance principles, since any directives or guidance from compliance officers will likely be challenged or ignored.
Weak systems for monitoring and surveillance
In 2014 the Bank of England led an effort to establish the Fair and Effective Markets Review (FEMR) to conduct a comprehensive assessment of the way wholesale financial markets in the United Kingdom operate. The final report of that review body noted that firms “must ensure they have the means to detect wrongdoing [since they are closest to the actions of their own staff and counterparties] and act decisively when it is detected [since they stand to lose the most, financially and reputationally].”
If an organization does not have adequate internal monitoring and surveillance as part of its compliance process, then it follows that management does not have a comprehensive picture of employee conduct. It will then be unable to identify and manage important risks, and misconduct may go undetected.
Along with this monitoring system, an organization must also have in place a process for addressing problems once they surface and, of course, a management team that has the determination to take the right action, regardless of how difficult or unpopular it may be. To conclude this series, I will talk about the ways organizations can restore stakeholder trust—with a focus on embedding a principled culture and cultivating good conduct—in my next article.
To be continued
The author is the chairman of the Integrity Initiative Inc.
Image credits: Nuvolanevicata | Dreamstime.com