Reputation risk and integrity: Conduct regulators now look to punish 'ethical misfires'

Fresh from a roundtable private briefing today with the Financial Conduct Authority (FCA)’s leaders in the Conduct and Culture space, I’m bound to reflect on what practical steps we all need to take; how best to translate the regulator’s latest initiatives on Consumer Duty, Diversity, and Vulnerability into new reporting practices.

I note that there’s also a wave of industry concern about whether, and how, to attach these new reporting requirements to potentially related reporting activities in the ESG space.

ESG indicators may be an inherently useful idea, but let’s be wary of relying on, for example, Transformation Plans as statements of robust truths. As financial firms ramp up their reporting on environmental, social and governance responsibilities, there's a danger that these reports are aspirational rather than an auditable account of What’s Actually Happening (WAH). Those of us working in the Culture Reporting (aka behaviour analysis) field of Conduct advisory are already careful to check that our MIs are rooted in observed behaviour (WAH) and so will withstand a supervisor’s scrutiny. By all means pull together a firm’s ‘ethical reporting’ from different streams, but be careful to maintain clear sight of both ESG and Conduct initiatives. Wishful ESG claims to environmental probity increasingly look like “games of compliance”, which are of course a Conduct no-no – not that they were ever OK. Indeed, conduct regulators have started to prosecute and fine firms that indulge in one particular form of this misconduct: greenwashing.

For any firm that’s now serious in committing to proper reporting on ESG or Consumer Duty – and for most UK regulated financial firms, this should mean both of those – it’s time to reflect on the new forms of reputation risk which flow from these activities. Careless, wishful or outright false reporting on either of the new ‘ethical scorecards’ now carries the threat of a Conduct investigation and, in extreme cases, a supervisor’s charge on Pillar 2 regulatory capital.

Please don’t, though, take this as a cue to worry that your firm’s first priority must be to “get the MI exactly right”. In any case, there’s already a sea of conflicting notes from various advisory firms on what’s “the right MI” for ESG, and conversely, as yet, no regulator-approved guidance on MI for Consumer Duty. So, based on my chat with the regulators (in the UK and around the world) who actually design these initiatives, may I suggest a different approach?

Firms will best thrive in the new reporting environment when they first pause, step back from the detail of the metrics, and reflect on the principles that guide the regulators’ thinking. I’m often asked “What does a Conduct regulator really want from us?” and can assure you that, more than granular MI, what they most want to see is practical evidence that your firm is thoughtfully engaging all its employees, customers/clients, and the wider markets/publics in routine conversations about “good outcomes” and “purposeful working”. To align your firm with the broader aim of providing “socially useful” financial services, the first task is simply to start this conversation. True ethical engagement thrives on all-staff conversations at ground level; where middle and senior managers gather anecdotes and nurture agreement on what drives people to do “good work” in finance.

I could go on to join the dots between Consumer Duty – which the regulator just summarised to me as “a radical new, outcomes-based approach to accountability” – and other ESG, Conduct and Culture strands. Actually, yes, I will be going on to unpack exactly these topics with UK Finance members who attend this session on 10 November: Reporting on integrity in business. Earlier in this session series we’ve already had lively, informative discussions where member firms have shared their own work in progress and interactions with regulators – wholesale and retail, PLC and mutual. Do join us to learn more. Spaces are limited, so do book now to avoid missing out.

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