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Regulatory compliance view

Individual and corporate wrongdoing as seen in financial services in recent years has profoundly affected public perception of the types of penalty deemed ‘suitable’ for severe misconduct, writes Financial Conduct Authority (FCA) economist Peter Lukacs. Understanding the social and psychological influences on decision making is important to improving regulatory compliance, he argues in a paper, titled ‘Creating and sustaining cultures of compliance: insights from psychology and beyond’. He writes:

In addition to calls for stricter penalties for offenders, we have seen notably higher fines imposed since the pre-crisis period, while scrutiny of the culture in financial service firms has also increased markedly.

Penalties can go a long way to deter wrongdoing. But to rely on them alone is to overlook one of the fundamental drivers of all our behaviour: social and psychological influences.

Obvious as it may seem, it is worth emphasising that for regulatory measures to be effective regulated firms must comply with them.

But as today’s occasional paper on ‘behaviour and compliance in organisations’ spells out, without an understanding of the social, psychological and other influences on decision making in any given organisation, regulators could be missing a trick when it comes to improving effective compliance.

As seen in the LIBOR scandal, the extent of rule-breaking among peers has a strong influence on the likelihood that an individual decides to break rules. In such examples, the culture of the organisation, what people see, hear and experience every single day, normalises misconduct. In some notable cases, like that of PPI mis-selling, misconduct is even incentivised.

In a nutshell, combatting ideologies that trivialise poor behaviour – from ensuring that staff remuneration does not promote poor behaviour to ensuring that moral considerations are part of individual decision-making – is a logical and necessary enterprise in the pursuit of good conduct.

Visit https://www.fca.org.uk/publications/occasional-papers/no-24-behaviour-compliance-organisations.


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