Published by the Australian Financial Markets Association in AFMA Member News, October 2016.

Many financial services firms are knee-deep in significant change programs. Some of these programs require implementation of new technologies or regulatory requirements, involving operational and systems adjustments. This creates a need for specialist technical skills and often involves investment in new or updated technologies.

A lot of time is spent mapping the technical effect of the changes, planning the re-working of systems and revising legal documentation. While bad technical decisions can be disastrous; so can the inability of a firm to adapt to the change. Successful implementation also relies on the human element.

What is culture?

What do we mean by firm ‘culture’? Culture is the underlying ‘mindset of an organisation’. It directs how an organisation and its staff think, make decisions and behave. ASIC cares about culture because we have observed that a poor culture can be a driver of misconduct.

On the other hand, a culture that facilitates good conduct, builds trust and confidence in the firm and its products. With this in mind, we would like to draw to your attention to observations from recent work ASIC has undertaken on conduct risk.

Culture and conduct risk

ASIC is reviewing the results of a conduct risk survey we undertook with a group of market participants and investment banks. The survey looked at how firms are incorporating their values in policies, business practices and governance structures. We will provide individual feedback to the surveyed firms. Some of our general observations from the survey include the following:

• Firms are implementing frameworks to address conduct risk. However, some firms haven’t distinguished conduct risk from other risk areas, such as operational risk.
• A number of firms have scope to strengthen their arrangements to identify and monitor material conduct risk takers – these are the people whose remuneration is performance-based and whose actions can affect an entity’s compliance with its Australian financial services licence.
• Some firms have policies for detecting misconduct and have communicated the consequences of misconduct clearly, while others have showed gaps in these areas.

ASIC recently published Report 486 Sell-side research and corporate advisory: Confidential information and conflicts, which focused on capital market businesses. We found a number of inconsistent practices in how conflicts are managed, including a lack of research independence and inadequate separation of research and corporate advisory activities. These are discussed in further detail in Report 486 and the August edition of AFMA Member News.

Change and culture

Change not only transforms specific process and operations but can also be a catalyst for further change. For example, it may change the nature of people's roles, requiring them to adapt their skills in ways they are ill-equipped or unwilling to deal with. It can also change the way that staff not directly affected by the change perceive their roles. And, if there are changes in responsibility for key controls in a team, it can cause a diffusion of responsibility.

Does the culture of your firm encourage broad consideration of change on your operations? If change is implemented without considering these cultural impacts, there may be inadvertent consequences, such as incentives for undesirable behaviour.

Not all functions can be automated. People still need to make decisions about risk management and how the firm treats its clients and complies with regulation on a day-to-day basis. The broad context, including the governance and compliance requirements of the business, needs to be considered as part of the change process.

Questions we think may help when navigating your way through changes posed by innovation and reforms include the following:

• Has the firm reviewed its monitoring, governance and conduct controls as part of the change process?
• Has introducing a new system or process affected your governance and reporting arrangements, or the effectiveness of your supervisory arrangements?
• Have the new systems or processes created new or different conduct incentives and, if so, what kind of incentives?

Conclusion

During this period of change, ASIC’s focus remains on investor trust and confidence in our financial markets. When making changes to technology and operations, please remember there are likely to be impacts on the way people in your firm do their job. These impacts need to be considered as part of the change process to ensure that inadvertent implications do not occur.

A strong focus on governance, conduct and culture while an organisation is undergoing change will help ensure successful implementation. ASIC believes this success is not only good for your business, but will also facilitate strong financial markets and fair products that support economic growth.