Last month, the Financial Industry Regulatory Authority (FINRA), released a notice requesting firms and their broker-dealers provide details about the organizational cultures that exist in their workplaces.
The notice cited Ben McLannahan’s article in The Financial Times, which estimated that fines, penalties and litigation costs associated with cultural failures in the industry have totaled over $300 billion since 2010. That’s billion… with a B.
In his 2016 Regulatory and Examination Priorities Letter, Chairman and CEO of FINRA, Richard Ketchum, further clarifies that the review is intent on understanding supervision and, specifically, how firms operate in situations where conflicts of interest present themselves.
The letter states clearly that this effort is not a punitive action resulting from any specific wrongdoing. Rather, its a way for FINRA to understand how firms, “establish, communicate and implement cultural values” in their organizations and how those values may be guiding how these firms do business.
Why Should Financial Services Firms Take Note?
Matthew Reynolds’ recent article on WealthManagement.com likens the process to the regulatory authority playing “culture cop”. Reynolds suggests that FINRA’s study of firm culture is, at its core, really focused on how effectively firms are creating cultures of compliance. And for an industry that has been under the microscope in recent years, this makes sense.
As a compliance measure, the findings of the FINRA review may have distinct positive or negative ramifications for all financial services firms under their regulation. At its most restrictive, these findings could result in increased scrutiny, sanctions or disciplinary measures.
The converse may also hold true. Focusing attention on the importance of culture in driving behavior and performance may help the financial services industry as a whole to set a high bar for ethical business practices. While I am personally confident that FINRA has the best of intentions with this effort, the firms being asked to respond may not feel that same way.
Compliance Versus Truly Valuing Something.
I have mixed feelings after reading FINRA’s Regulatory and Examination Priorities Letter.
On a positive note, I commend FINRA and the industry as a whole for beginning to explore the notion that organizational culture does, in fact, serve as the fundamental underpinning for behavior and “how things get done” in organizations. Their efforts may help reestablish the public’s trust in the industry, but there are a few considerations that must be taken into account.
As a regulatory agency, FINRA is able to help ensure that financial services firms comply with regulations as they relate to culture. But can they persuade these firms to actually buy into the fact that culture is a critical component of their organizations? Compliance is one way to drive behavior, but forcing organizations to value a concept with a stick versus carrot approach may not have the sustainable impact FINRA is ultimately looking for.
Can The Firms Themselves Adequately Provide Valid Data?
FINRA is requesting eight pieces of information from firms, which I’ve summarized here:
- A summary of the key policies and processes by which the firm establishes cultural values.
- A description of the processes employed by executive management, business unit leaders and control functions in establishing, communicating and implementing the firm’s cultural values.
- A description of how the firm assesses and measures the impact of cultural values (to the extent assessments and measures exist) and whether they have made a difference at your firm in achieving desired behaviors.
- A summary of the processes the firm uses to identify policy breaches, including the types of reports or other documents the firm relies on, in determining whether a breach of its cultural values has occurred.
- A description of how the firm addresses cultural value policy or process breaches once discovered.
- A description of the firm’s policies and processes, if any, to identify and address subcultures within the firm that may depart from or undermine the cultural values articulated by your board and senior management.
- A description of the firm’s compensation practices and how they reinforce its cultural values.
- A description of the cultural value criteria used to determine promotions, compensation or other rewards.
While these eight questions do a nice job of capturing some of the core elements of organizational culture, I question whether respondents within the firms themselves have enough of a base understanding of organizational culture to effectively provide the quality of response that FINRA is hoping for.
This presents a challenge, even if the respondent firms do want to provide the highest quality data possible. Culture is a very complex topic. Because many of the unwritten norms that drive behaviors reside in the organization’s collective “unconscious”, asking firms to try to articulate their culture may be challenging.
Trying to objectively summarize the system in which you live day-to-day can be extremely difficult, if not entirely impossible.
What Will FINRA Do With The Information They Collect?
Furthermore, it’s not yet clear exactly what FINRA will be doing with the information they collect. This lack of specificity may have a significant impact on the information the authority receives from respondents, which in turn, could only serve to reinforce the idea that culture is a compliance concern, as opposed to a key differentiator that can help drive performance.
At this point it is too early to tell how FINRA will use the data and attempts to speak with a representative at the authority to get a better understanding have not been successful.
A Growing Concern
Is FINRA’s interest in organizational culture just the tip of the iceberg for the financial services industry?
Recently, the Australian Securities and Investments Commission (ASIC) has made it clear that they will focus on culture in financial institutions in 2016 and beyond. From a global perspective, this may be a sign that other regulatory authorities will follow suit. Now is certainly the time for financial services firms to proactively address their culture and values.
I appreciate these attempts to enforce compliance in an industry that has his turbulent waters in the past. I also understand the role of the authority is to establish and enforce compliance on the industry in order to drive certain behaviors. And their efforts to understand the culture of these firms may be a good first step.
Still, I can’t help but wonder how we might evolve the industry from viewing culture and values as a compliance issue, to one where these critical organizational dynamics are viewed and valued as generative elements of high performance.
This article originally appeared on Forbes.
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