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From Punitive to Supportive

Monday 26 March 2018


A supportive rather than punitive relationship between regulators and regulated entities will yield better results.
 
At the 2018 ASIC forum, Maintaining Trust, Christopher Hodges, Professor of Justice Systems at Oxford University, examined ways to build trust between the regulator and regulated entities, while highlighting the fact that there is no evidence to suggest the traditional ‘deterrence’ approach actually yields results.
 
“By and large, the best regulators want to work with businesses; therefore, the business needs to work with the regulators,” Hodges said.
 
For Hodges, the open culture borne out of a supportive relationship between regulator and regulated entity is one of trust between the two parties.
 
“There has been a shift in the regulatory framework from deterrence to support,” he continued, adding that there is little evidence to prove deterrence ever worked.
 
Instead, he believes the focus should be on coming together under agreed terms.
 
“That is, how we agree on what we ought to be doing, and how we then do it—as well as how we monitor the fact that we are doing it, and how we then move on.”
 
According to Hodges, in 2010, when UK regulators published their enforcement priorities, it became clear that few regulators actually used deterrents.
 
The new relationship between regulators and regulated entities is similar to the shifts about which the Australian Transaction Reports and Analysis Centre (AUSTRAC) has spoken, and the kind of collaborative relationship meant to be brought about through the Fintel Alliance.
 
This means having external regulatory framework but also having that ethical, self-regulatory approach.
 
“What most of those regulators think they are doing is actually supporting businesses to do the right thing,” Hodges explained. “They’re saying, ‘If things go wrong, then please tell us, and we will help you, and we will work together to fix it.’”
 
This breaks down into two regulatory paradigms from the same regulator: the supportive approach for those trying to do the right thing; and the more punitive approach for those wilfully doing the wrong thing.
 
The supportive approach means regulators need a wider toolbox, however, and this is not unlike what is happening now in Australia.
 

 
Moving away from blame

Hodges believes the ‘blame culture’ does not work; thus, it is better to have a supportive approach that encourages an open communication.
 
“People hide what went wrong, if they are afraid of an investigation,” he said. “Therefore, we don’t learn.”
 
This is what happened in the civil aviation industry in the United States. Initially, Hodges said, the regulator prosecuted airlines for failing to report. It then shifted to a ‘no prosecution for failing to report’ policy, and perhaps unsurprisingly, they received more reports.
 
“If you talk to most of the advanced civil aviation regulators and airlines, without collaboration there wouldn’t be this ‘no blame’ type of culture,” Hodges said.
 
The ‘no blame’ approach was also applied to challenges in the UK with regards to work, health and safety (WHS) incidences. When regulators began supporting companies, rather than levelling fines, they found incidents related to poor WHS fell.
 
 

Trust and openness to change culture
In his presentation, Hodges mentioned the publication put out by the Financial Conduct Authority (FCA).
 
The discussion paper, Transforming Culture in Financial services, features contributions from a wide range of people, including Andrew Fawcett, Senior Executive Leader of Strategic Policy at ASIC.
 
In his article, Once more onto the breach: The impact of firm culture on breach reporting in Australia, Fawcett addressed the regulator’s interest in matching the organisation’s culture with their ability to meet their regulatory obligations.
 
Fawcett writes:
 
How a regulated firm meets its breach reporting obligations is an indicator of how effectively firms are able to identify and respond to problems when they, inevitably, arise.
 
Furthermore, Fawcett writes that ASIC is seeking to influence firms by providing direct feedback and data about where that regulated firm sits in relation to its peers. According to Fawcett, providing firms with this benchmarking-style feedback gives them a greater understanding of their ‘relative strengths and weaknesses’.
 
For the whole ethical regulatory approach to work and to create this trust and openness between the regulator and the regulated entity, however, organisations need to be the prime movers. They must declare, up-front, that they want to do the right thing.
 
This means organisations need to go back to their staff, their customers, and other stakeholders with whom they engage and find their social purpose—an idea not unlike that which ASIC Chair James Shipton addressed when he suggested financial institutions needed to go back and question their purpose as it relates to wider society.
 
“Technically, this is moving, in corporate theory, from the famous maximising shareholder value to maximising stakeholder value,” Hodges said.