REGULATION STIFLES COMPLIANCE CULTURE
13 May 2020 at 14:00:00
If we are to be honest, we are heading in the wrong direction. More 'rules', more regulation, leading to poorer outcomes of compliance and a diminishing opportunity to develop a compliance culture.
Regulators have a problem. And it's now our problem.
Compliance with ‘rules’ gets in the way of a compliance culture. It's a dichotomy that all good regulators are aware of, but they are placed between a rock and a hard place.
This view isn’t ‘popular’, in fact it’s probably a bit ‘radical’. Not ‘unthinkable’, but it is outside Overton’s Window.
In his Reith Lecture in 2012, Professor Niall Ferguson suggested that,
“Regulation is the disease of which it purports to be the cure!”
He said this on the foundation that by prescribing yet more and more regulation, this leads to,
Complexity over simplicity,
Rules over discretion, and
Codes of compliance over individual and corporate responsibility.
Our world and the regulated industries within it are,
Highly complex and asymmetrically organised systems,
Over complicated regulatory frameworks, within which it is almost impossible to be compliant.
No one wants to be here, but it's where we are.
Not only this, these frameworks often favour 'rules' and not 'principles' or 'outcomes'. This leads to a 'tick box' approach to compliance, risk management and governance.
Recent regulatory action across different sectors and jurisdictions indicates that the focus still remains on complying with 'rules' and organisations will be held to account if breaches occur.
There is often little if any assessment of organisational culture, on how the values of the organisation are being lived, or not, and this drives organisations to pay patronage to the thing that will probably support better compliance outcomes...culture.
Now, let's be clear, I'm not saying that 'rules' are not part of the solution, but we have to acknowledge that they get in the way of encouraging organisations from implementing what regulators really want, which is a compliance culture.
Walter Bagehot, the famous journalist and economic historian, in his book "Lombard Street: A Description of the Money Market in1873, suggested that to create a robust financial and economic system, regulation should be focused on individuals and organisations being afforded discretion, as opposed to more rules, but, that with this discretion should come personal accountability and responsibility.
Certainly the Senior Managers' Regime recently introduced by the Financial Conduct Authority moves in this direction.
This inspires those accountable and responsible to ensure compliance, and if we promote this route, which is in favour of 'principles' or 'outcomes' over 'rules', we then open the door to encouraging a compliance culture.
Look at this another way,
If according to Joe Lehman, regulation is actually the consequence of culture within organisations and society,
If more regulation encourages organisations to follow a ‘tick box’ approach to compliance, and
If regulators continue to regulate and sanction organisations due to breaches in 'rules', rather than assessing the developing culture,
Then we find ourselves in an ever increasing regulatory spiral, but with decreasing regulatory and compliance outcomes.
The solution is a brave one, and
It requires organisations and regulators to work together more collaboratively.
Regulators need, want and should engender the cultural narrative with much more vigour.
We, as organisations in partnership with regulators need to support each other in the outcomes we all seek, and
Work hard to move away from yet more regulation,
And move towards better compliance culture through 'principles' and 'outcomes'.