As we embark on the third cohort of our Conduct Risk and Culture Academy in October, UK Finance asked Dr Roger Miles, Academy faculty lead, some questions about the current and future outlook for conduct regulation.

What has changed in the practice of conduct and culture regulation in the past year?

There have been some big shifts in the emphasis of where we?re going with conduct learning. The first one is that central banks have waded in. Though they?ve been in the space for a while, we?ve now had strong submissions from the Dutch Central Bank, the Bank of England, and American central banks, such as the New York Fed. Prudential capital supervisors are now very interested in the behavioural space and are adopting many of the same techniques that the FCA and other conduct regulators were discussing two or three years ago.

In the conduct space specifically, we?ve seen the extension of the Senior Managers behavioural rules (SMCR) beyond banks into insurance, fund management and so on.

The final big change that we?ve seen this year - a massive perception change - is the sharply increased use of RegTech, AI technology and high-powered analytical machine learning techniques.

All of these developments are changing and advancing the conduct and culture agenda quite rapidly.

What are central banks and prudential supervisors bringing to behavioural regulation?

Curiously, it's a return to some new derivations of older practices - most notably, let's call it ?observational behaviour supervision?: following the Dutch Central Bank model, and increasingly also the Bank of England and the PRA over here, supervisors are saying ?we want to get back to eyeballing practitioners, being in trading spaces with the people who are doing the banking work, seeing how they behave in real time as they strike their contracts and go about their business?.

What kind of roles are now responsible for the new conduct and culture reporting?

Originally we saw CROs, heads of conduct and the creation of reporting frameworks, but I?m very encouraged to see that the disciplines are now wider and involving a much more collegiate group of practitioners. We?re now seeing HR, Corporate General Counsels, other forms of risk specialists, and heads of commercial business coming in.

So as with the first 40 practitioners who came through our first two cohorts of the Conduct Risk and Culture Academy, there's now a real sense that you can get quite a diverse group around the table. And this is what SMCR is supposed to be about - in fact, what wider conduct and culture transformation is about. It's not just about having a narrow, risk-based or compliance regulatory based view, but about building real business value and approaching good conduct for the benefit of good customer relations, good client care, and good market-making.

What new types of regulatory thinking are you seeing coming through?

A lot of people come to us at the Conduct Risk and Culture Academy because they want to know ?What is the regulator thinking?? and ?Where are they getting this thinking from??

I?m very happy to say that's something of great interest to us, the faculty leading the Academy. More and more we?re seeing regulators, supervisors, and central bankers thinking in behavioural terms (a bit cynically, I sometimes say that every piece of regulatory research now published seems to have the words ?behavioural? or ?behavioural approach? in it.) Here on my desk today I?ve got papers from the International Monetary Foundation, the Financial Markets and Standards Board, the Central Bank of Ireland, and a couple of others, all headed ?behavioural?, ?behaviour analysis? or ?behavioural approach? - which is great, actually, because we?ve been saying for a couple of years that regulation in general is heading this way.

On the other hand, there are still relatively few people on the practitioner or advisor side who are across what ?behavioural? means in practical terms - the implication of day-to-day business practice, and more importantly, the positive value for business of all of this. It's not just compliance, it's building business value, translating these often very fine pieces of regulatory philosophy into valuable business practice. This is what we?re all about.

Where do you think conduct regulation is heading in the future?

I can't remember a time when there have been so many influences converging on the understanding of what it means to be regulated and to regulate effectively. As an observer, I?m really excited by this.

Let's take three examples.

First, management indicators for culture - new indicators that report things like reflexivity and cognitive diversity. Until recently these were notional, but, excitingly, we?re now getting a bit of flesh on the bones and seeing the creation of some really robust reporting indicators.

Secondly, a big change in the last year is the arrival of AI in the market. There were AI tools around before, but what we?re seeing now is a move into generation three of AI where we?re not simply able to harvest raw data from things like ordinary conversations rather than structured data, but we can take that data to jump ahead and identify intentionality, and look at whether there is the beginnings of misconduct taking root on a particular trading floor, for example.

Finally, from that, we can use things like a Culture Analysis to predict if a firm's engagement with conduct is going to get worse, and nip any problems in the bud.

Those three examples are all so important.

More routinely, just to ground it in the practitioner level, what the Conduct Risk and Culture Academy attendees want to know is, how do we put this stuff into practice? How does it create value in the business? After a year running the Academy and after a couple of years looking at this in UK Finance workshops, we are at the stage where we?re much more focused on reporting formats for both business value and good compliance - i.e. good conduct and good culture as tools of business building, resilience, and good market making.

We?re now beyond SMCR being the ?next thing?: it's actually in action, it's being put to work, and it's building value.

Learn more from Dr Roger Miles and colleagues at the upcoming Conduct Risk and Culture Academy.