Over the last decade, many scandals in the financial services industry have shined a light on the importance of employee conduct and exposed misconduct as a major factor in these scandals. Since then, many financial institutions have being working to boost their risk and compliance efforts.
Regulators across the world are also stepping up efforts to identify gaps and improve their conduct risk monitoring strategies. Regulators are focused on making firms understand that misconduct will have consequences, and simply relying on rules and processes will not prevent it.
LRN recently surveyed 500 ethics, compliance, and legal experts around the world, compiling their 2020 Ethics & Compliance Program Effectiveness Report. The report demonstrates the importance of corporate culture to enhance and maintain ethical behaviour.
The key findings show that when leaders balance compliance risks with effective mitigation measures and controls:
- Employees are 4.3x more likely to question decisions when they conflict with organizational values.
- Employees are 3.8x more likely to do the right thing, even if it’s not in their personal best interest.
- Employees are 3.2x more likely to speak up or speak out, even in front of managers.
The report states “An organization’s ethical culture determines whether its rules and procedures will be followed, ignored, or circumvented...”
Firms must implement best practices to build a culture that focuses on ethical behaviour and accountability and meets regulatory criteria. While firms will often find that most employees have a high ethical standard, there's always the potential for staff that can set the wrong tone for their organizations. That’s why monitoring conduct risk across all levels of the organization is so important.
Other results from the LRN report show that while organizations are on the right path in the battle against unethical behaviour, some gaps still need to be worked on:
- 75% of ethics, compliance, and legal professionals believe that ethical behaviour is taken into account at their organizations when it comes to selecting employees for promotion.
- Only 31% of ethics, compliance, and legal professionals say their organization recognizes or celebrates notable ethical conduct or leadership when it comes to bonus allocation, and only 57% when it comes to performance reviews.
- Only 53% say senior leaders at their organizations take action and responsibility when there are compliance failures.
- Only 46% say their organizations’ senior leaders support effective sanctions or penalties on senior executives, and high performers involved in misconduct.
- Only 39% say their organization makes ethics and compliance considerations a significant factor when they hire employees for managerial, executive, or control functions.
When looking at insights from the survey, the focus on accountability from regulators is clear. The UK regulator FCA has been encouraging senior individuals to take responsibility for their direct actions, as well as indirect behaviour that contributes to a laissez-faire culture.
High-Impact Program Insights
To meet regulatory obligations and mitigate the risks of misconduct, firms must foster a culture of ethics and compliance and effectively design a high-impact program that keeps the organization on a positive path.
According to LRN research, high-impact programs are more likely to have senior managers supporting sanctions or penalties on employees who commit misconduct. Compliance departments are in a constant battle against unethical behaviour and high-impact programs help teams audit, evaluate and mitigate risks. A high-impact program helps firms to mitigate the risks of misconduct, effectively identify problems and learn from mistakes.
Another point to look at is the relationship between aggressive business goals and the risk of misconduct among employees. As stated by LRN, most of the recent scandals of misconduct were driven by a lack of balance between business objectives and the monitoring of conduct risk.
While more effective actions are required from firms, regulators have been emphasising the importance of a holistic strategy focused on responsibility. Technology can assist compliance teams identify and mitigate risks and encourage value-based behaviour. With the correct use of automation and employee monitoring systems, technology can save the financial services industry from massive fines.
RegTech solutions are a critical partner in helping firms enhance their ethics and compliance program. When firms understand the importance of employee monitoring and management of conduct risk in the organization it will be easier for them to meet regulatory obligations.
In practice, manual processes have failed to help firms to monitor risk and compliance, leading firms of all sizes to fall in the trap of misconduct scandals. If you are looking for an automated solution to manage conduct risk and compliance, contact MCO today!