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The Gap between Compliance and Ethics

Monday 26 June 2017

A heavy focus on compliance with regulation can lead to unethical decision-making. 
This was the position of Professor Dimity Kingsford Smith from UNSW Law, panellist at the Banking and Finance Oath (BFO) Summit held recently at the Swissostel. 
"I don't think we can get rid of regulation,” Kingsford Smith said. “But we can certainly improve and fine-tune it. There are some examples, particularly in the consumer sector, where I think there is evidence that regulation has become self-defeating or redundant. Looking at what we now know about disclosure makes pretty clear in the retail sector—it bears far too much weight, and we urgently need other ways of protecting consumers.”
The BFO event was an opportunity for members of the financial services community to discuss the importance of acting ethically in an industry with a reputation for choosing business over consumer outcomes. 
This event comes at a time when the Australian Securities and Investment Commission (ASIC) is lobbying for more flexibility for its regulatory toolkit. The Australian Competition and Consumer Commission (ACCC) has been handed the responsibility to create a body to look more deeply at the practices of banks. 
“It is quite right that a financial institution would defend its license,” Kingsford Smith said. “It is a major asset from the shareholder to the business. But when the defence of the license gets to the stage where it loses sight of the longer-term purpose of having a license, it also gets in the way of compliance and internal rule-making and so on.” 
However, the aim is to encourage members of the financial services community to act ethically, whether there is an existing regulatory rubric or not. 
Regulation should be seen as baseline, as a basic level of conduct that society will tolerate. 
“Within all Australian and international financial regulations, there are plenty of really central propositions, rules and principles that have a huge amount of room for interpretation. So, if you take the central one, like the license requirement to be efficient, honest and fair, there is a lot emphasis and conversation in the past about efficiency and a lot of what institutions have done in the past have been driven by justifications of efficiency.”
 Removing regulation is not the answer

“If 99% of people outside of this room knew the first session of the Banking and Finance Oath Conference about raising ethics and financial standard could be interpreted as ‘it is all the fault of regulation’, then let’s wind it back, “ Peter Kell, Deputy Chair at ASIC, said. 
Kell spoke about the review of ASIC’s present regulatory powers in attempt to make regulation more fit for purpose, while tackling some of the existing trouble areas.
“If there is more flexibility in the regulatory toolkit, it will allow us to address some of the problems with the licensing,” Kell asserted. 
 Industry response and not regulation itself
 Helen Rowell, Deputy Chair at the Australian Prudential and Regulatory Authority (APRA) said that real problem was not regulation but rather industry’s response to regulation. 
“Regulation has an important role, if it is well-designed. The question is: how does industry embrace and respond to that regulation?”
Rowell said the key is for organisations to shift and adapt as the community’s expectations evolve. 
“The challenges arise where the regulation is grey, where regulation cannot adequately cover every instance. Regulation can just provide a platform.” 
Ethics lost in translation
 The perception of the discourse of ethics is that it should be something warm and fuzzy, and not professional. 
Claire Payne, Consulting Fellow of the Ethics Centre, looked at how language has an impact on an individual’s behaviour and how they relate to their job and to the business. 
However, business has consistently failed in talking the language of ethics, and the common usage of business acronyms and abstractions has the tendency to dehumanise.
“We don’t talk the language of ethics enough,” Payne said.

The failure to speak ‘ethics’ in favour of only speaking ‘business’ can have a significant impact on an individual’s moral compass.

For risk and compliance professionals 
If an organisation is truly paying attention to compliance, then they will be giving their compliance professionals the resources needed to get their job done.

On the other hand, if compliance is perceived as nothing more than a ‘tick box’ aid to complying with regulation, there is a lot more work to be done to establish those compliance professionals’ value proposition to the organisation.

  • Why can’t the compliance professional advocate for the language of ethics within the organisation?
  • Why can’t business cases include ethical implications and impacts, so that there is an understanding that transcends the numbers and efficiencies gained?
  • Why can’t the failure to be ethical be included in any report that looks at the cost of compliance?
The challenge of unethical decision-making may not lie so much with the amount of time and resources being put into compliance regulations, but it may certainly be due to how organisations talk about compliance.
  • How do you define compliance?
How organisations regard their compliance function will influence how organisations respond to domestic or international regulation. 

Panel form the Banking and Finance Oath Conference