Derek Bishop


The spirit or the letter of regulation?

Date added: 25th Jul 2017
Category: Culture of conduct/ethics

Surely organisations can be better served in building positivity rather than circumventing regulation?

Do we ever learn?

Six years ago we wrote an article entitled The Heart Rot Syndrome.  In it we looked at the dangers of culture creep, about how one discontented individual or bad practice could eventually spread until the organisation is rotten at the core.  At the time we commented that organisations which operate a healthy company culture and constantly strive for improvement will more easily be able to prevent poor culture creeping in.

In 2014 another article entitled Bad apple, take a look at the barrel, examined Mark Carney’s thoughts on banking system reform and the need for further work if the financial system was to be founded on diversity, trust and openness. Here again we highlighted the importance of leaders and senior managers taking responsibility for setting a strong culture and values.

Fast forward to 2017 and a press release by Sam Woods, the Deputy Governor for Prudential Regulation and CEO of the PRA. Calling financial institutions to account, Sam Woods highlights a number of areas in which the PRA has identified behavior that “might meet the letter of the regulation”, but is “designed to circumvent the spirit.”

How has this happened? How have businesses, and the financial sector in particular, not learnt the value of operating within a healthy organisational culture? With a great culture comes customer trust and loyalty, positive investor relationships, a strong reputation and engaged and loyal employees. All these add up to the potential for the ongoing strength and profitability of the organisation. Surely organisations can be better served in building positivity rather than circumventing regulation?

Is it simply that people are trying to get away with things because they can? In his comments Mr Woods acknowledges that “financial institutions will always be able to innovate faster than we are able to modify the prudential rulebook.” Now innovation can be a tremendously positive force for change within an organisation and it is something which is actively promoted by the government and regulatory bodies.

However, in our book Building a Culture of Innovation we highlight the importance of aiming innovation efforts at solving genuine problems which add real value to the customer and thereby drive growth for the creator. Sam Woods’ observation that some innovation is pure regulatory arbitrage, designed to reduce regulatory requirements without reducing risk, would indicate that there is still some work to be done in building strong and ethical cultures which seek to do what is right rather than putting short-term profitability first.

Do we ever learn? Perhaps it’s about time that we did; or are we doomed in 2020 to be writing about yet another scandal caused by basic failures in organisational culture.


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