Different jurisdictions have been tackling the issue of culture and compliance differently.
The UK regulator, the Financial Conduct Authority (FCA), has been investigating the best regulatory approaches that regulators can take to promote the right culture and conduct of their regulated entities.
This is something that they consider in their high-level essays collection Transforming Culture in Financial Services where they look at the regulators in managing culture.
What about the regulator taking the hands-off approach?
This is the position of the Hong Kong regulator the Securities and Futures Commission (SFC).
Dr. Angus Young Senior Lecturer and Programme Director for the Department of Accountancy and Law at the Hong Kong Baptist University spoke at a GRC Institute networking event earlier this week looking at the development of the regulation corporate governance and the low bar of compliance in the HK environment.
He touched on the development of Manager in Charge (MIC) Regime, the regulatory developments with the Hong Kong Stock Exchange (HKEX) and the consultation around the weighted voting right (WVR) and their new direction to improve governance, the move to create the more independence for Independent Non-Executive Directors (INEDS).
Regulator Holding Culture at Arm’s Length
Dr. Young said that the regulators want to stay far away so that if something does happen then the SFC can enforce because if they get too involved then the regulator will find that they have just become a part of the liability.
He said that to date the securities regulator has not addressed culture and what discussions have happened around culture form the HK bank regulators has happened.
He added, however, that the securities regulator will be ‘caving in’ an including culture as part of their conversation and their own regulatory framework and their governance requirements.
However, this would only be the companies operating in the wealth management sector and for the listed companies.
This arm’s length approach extends to the MIC regime.
The MIC regime which has been compared to the BEAR in Australia is on paper a step in holding leaders accountable for compliance failures, but Young explained that the recently implemented framework is at this point untested.
For him, there is a question mark of how it will be enforced considering the regulator's traditional mode of keeping the industry at arms-length.
There was no consultation for this regime and the justification for the regulation if that they just wanted the businesses to understand what their responsibilities are.
He pointed into overlaps in the framework and what he referred to as ‘relaxed language’.
“Hong Kong has a renowned genre of business that the government should be hands-off, they call it positive non-intervention.”
This then is an environment not used for government intervention and Young said that if there is a problem then the government will not bail the business out they must figure it out for themselves.
“It has no substance, it’s just a closet that got coat hangers. They expect companies to fill it in themselves, but by pointing these things out we are saying these are the basics, and then you will work out the rest,” he said but added that if there is still a problem then they will come in and hold the company accountable.
Compliance more than Paper
Compliance is quite low in this environment and Dr. Young said that there is no risk for organisations. Young believes more needs to be done and the bar of compliance needs to be raised.
Young calls for a holistic approach to compliance, because without this then the governance objectives cannot be met.
To achieve the right compliance is study the different regulatory requirements from regulators and then ensure that the ‘right corporate culture cascading down to frontline staff’.