Regulatory Implications of the Royal Commission
While the obvious response to the Royal Commission could be to strengthen regulation and tighten compliance, this may not be in the best interests of the industry, of shareholders or of customers. In our article “Royal Commission on Financial Institutions – Lessons on Corporate Culture” we explored some of the cultural implications of the Royal Commission for organisations. In this article, we explore the regulatory implications.
How regulators respond to the findings from the Royal Commission can have significant flow-on impacts to organisational culture. In the light of the findings, it may be tempting to further tighten regulations across the financial industry.
If this happens, it could impact the whole industry and put added costs and burden back to shareholders and ultimately customers. At the same time, it may mask the deeper cultural problems that have been at the root cause of the crisis itself.
Since our last article, the APRA Prudential Review into CBA (“the APRA report”) was released, highlighting the need to build more adaptive organisations in order to address issues uncovered.
Amongst some of the cultural aspects highlighted were:
- The need to ‘walk the talk’ regarding risk
- The impact of lack of introspection and reflection
- Insufficient levels of challenge leading to “over collaboration”
- A historic difference in stature between the risk function and business units
- Over-focus on process rather than outcomes
The opportunity is for regulatory bodies, organisations and the wider community to consider what would be needed to enable an approach to compliance which helps to evolve these aspects of culture.
A prescriptive, rules-based approach is unlikely to do so. As the APRA Report identified, an over-focus on process rather than outcomes leads to undesirable consequences. With evolving consumer and societal expectations, the role of regulators, organisations and the people in them also needs to evolve.
We wonder what a regulatory framework might look like that:
- creates expectations for organisations to evolve their cultures in healthy, sustainable adaptive ways
- deepens the responsibility of organisations to evolve to meet current and emerging customer and community expectations AND
- embeds enforcement mechanisms that transform the way organisations act in relation to ensuring the intention of regulations is honoured
Some of the evolutions to support maturing culture and responsibility may include:
- True customer centricity embodied through the organisation
- Reflection and learning embedded throughout the organisation
- Development of self-awareness, personal agency and personal responsibility
- Purpose guiding decision making that prioritises long-term shareholder and customer value rather than short-term shareholder returns
- Act according to long-term strategic objectives aligned to the organisational purpose
- Open dialogue and idea meritocracy where dissenting opinions are welcomed
- Greater diversity that more closely represents the communities the organisation serves
- Development of shared responsibility for managing risk through ways of working
- Transforming the way people are rewarded and success is celebrated, to unleash the power of intrinsic motivation
While a vast number of organisations have an intent to implement the above initiatives, many organisations put them in place without investing in the individual, social and structural evolution to take them from intention to actualisation. They also fail to take an ecological approach or address unintended consequences.
The result is often tokenism, “seagull” initiatives and increased cynicism. To evolve organisations to greater responsibility is a worthwhile, necessary, yet substantial challenge and needs the support of all stakeholders including shareholders, boards, regulators and the community.
What might the role of the regulator be?
The tension between prescriptive and prudential regulation is really significant when considering culture. Organisations reasonably need to have a level of autonomy to run their businesses as they see fit, AND at the same time, do so in a way that is aligned with the intention of the regulations and in service of the community.
As we look to the potential of redefining the roles of regulators and boards we wonder where the line should be drawn? In order to redefine roles in a way that serve community and customers, we imagine that the greatest leverage point could be in the relationship between regulators and organisations. To enable greater partnership and external focus could allow these relationships to model the type of cultural evolution required of our organisations more broadly.
Some questions that might help regulatory bodies to consider their role are:
- What relationship could the regulator have with organisations that enable greater objectivity AND collaboration?
- How could transparency between all parties be increased?
- What regulatory practices may have contributed to the issues surfaced by the Royal Commission and how can these be adapted?
- How could regulatory culture become more adaptive and representative of the kind of culture that regulators and communities would like to see in organisations?
- How could the culture between regulatory bodies be enhanced to enable better outcomes?
We imagine that at its best, the regulators influence in enabling organisations to evolve more ecologically could support the entire industry to evolve to be more in line with its stated intent – to enable financial health and wellbeing by protecting and growing wealth. We are optimistic that this can have a range of positive benefits for all.