What if the culture criticising regulator has a bad culture?
30/10/2015
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This year has seen ASIC go on the offensive against poor board cultures that have been attributed to unethical business practices (for example see HERE). While ASIC had conflicted financial advisers and brokers in mind, the criticism was not confined to these industries. It also echoed APRA concerns that boards had to be vigilant to step in and correct poor cultural practices in prudentially regulated industries (see HERE). Both ASIC’s and APRA’s focus were consistent with international regulatory bodies’ concerns, such as those expressed in new guidelines released by the Financial Stability Board (see HERE and HERE and HERE).

This is well, and good, but what happens when the government appointed market supervisors’ culture is found wanting, and in need of a good bash as well?

Those interested need only look at the UK counterpart to ASIC to observe the implications. The UK’s Financial Conduct Authority (FCA) is in hot water after a mis-step attributed to board culture.

An FCA media briefing led to incorrect reports that the FCA would investigate closed-book life and pension policies and the trailing commissions associated with these dating back to the 1970s, leading to significant share market losses for insurers and associated companies.

A UK Treasury Committee investigation published its review in March, saying recently that ‘The Treasury Committee’s report in March 2015 identified a number of concerns in the light of the FCA’s mishandling of this episode. The committee recommended – among other things – that the FCA should carry out investigations into its standards and culture, its communication methods and the board’s effectiveness.’

Notably, FCA’s chief executive Martin Wheatley resigned from his role in July. The FCA is still looking for his replacement, and it was reported in the Financial Times that the CEO of ASIC, and harsh critic of certain company cultures, Greg Medcraft, has been approached as a potential candidate.

In response to a UK Treasury Committee enquiry into the so-called ‘closed-book blunder’ (see HERE), the regulator confirmed that either an internal or an external board review would take place every year to ensure accountability.

‘The board agrees that as a matter of good corporate governance it is important that its effectiveness is regularly reviewed, and has agreed it will do so on an annual basis,’ the FCA said. ‘Before the publication of the committee’s report, the board had agreed to commission another externally facilitated effectiveness report and we have since commissioned Tracy Long of Boardroom Review to produce a review this year. We agree to publish the results. The board has further decided to commission an external review every other year, with an internal review taking place in alternate years.’

The FCA response, although only recently published, was completed in June. The FCA scheduled a delivery target of ‘within six months or shortly thereafter’ to the goals it set out, suggesting the results of the board review could be released either later this year or early 2016.

While transparency is in many respects laudable, the publication of an annual board review may end up subverting the effectiveness of such a review. How frank would board directors be if they knew that their views could be made public? In addition, management input, which is a useful tool in board reviews, may be rendered useless if such input could be used in the political hot house of a UK or Australian parliament.

Nevertheless, independently conducted board evaluations for our market regulators that includes an assessment of their “cultural” oversight would not only be seen as welcome by many, but essential. After all, what is good for the goose…

© Guerdon Associates 2021
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