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Compound Growth

20th December 2016

Behaviour & Compliance

The FCA has this month published two occasional papers on behaviour and compliance within organisations as well as on ‘incentivising compliance’ with financial regulation.

In addition to the two occasional papers, the FCA has now launched a new section on its website as a place for ‘independent opinion.’ This new section of the FCA website is entitled ‘Insight’ and the first article published upon it relates to the same topic as the occasional papers entitled Creating and sustaining cultures of compliance: insights from psychology and beyond.

Whilst the views expressed in this Insight article are those of the independent author and not an official FCA stance, they are nonetheless interesting to those within the industry.

Occasional Paper 24: Suggestions for the industry

Occasional Paper 24 entitled Behaviour and compliance in organisations. This Occasional Paper considers the factors that can affect effective compliance and puts forth some suggestions on how both firms and the regulators can improve levels of compliance.

“No-one should underestimate the challenge aced by financial regulators in ensuring compliance with the extensive rules, principles and guidance that govern conduct of financial services”

Occasional Paper 24, 16Dec16

Occasional Paper 24 informs that the tendency for the regulators approach to compliance often combines the use of detection and punishment to try and alter firms’ incentives through an approach of what is considered ‘credible deterrence.’

However, perceptions from psychology (as laid out within the Insights article) put forward that this type of approach can be complemented by a strategy that seeks to alter the ‘choice architecture’ for decisions relating to compliance.

This Paper believes that regulators could be ‘missing a trick’ when it comes to improving effective compliance is they do not have an understanding of the social, psychological and other influences on decision making in any given organisation.

Occasional Paper 25: Incentives and Compliance

Occasional Paper 25 on the other hand, entitled Incentivising compliance with financial regulation addresses the basic economic theory that relates to incentives and how incentives can be utilised to improve and enhance compliance in financial regulation.

Written by two leading academics on the economics of tax systems, Gareth Myles and Chris Heady, this Occasional Paper discusses in particular what lessons may be learnt from tax authorities in promoting compliance and how this may assist financial regulation.

Considering that some may see the tax authorities as having a ‘harder job’ that their financial regulatory counterparts as there are no direct benefits for business making tax payments and that the tax authorities will likely know less about most taxpayers than the financial regulators do of regulated firms).

This paper believes that ‘at the heart of any regulatory process is providing incentives that encourage regulated firms to comply.’ Thus, taking a closer look at the basic economic theory of incentives should be beneficial in how they can be used to enhance compliance.

Insight Article:

This article for the FCA’s Insight section was written by FCA economist, Peter Lukacs. It begins with discussing the widespread individual and corporate wrongdoing that has been discovered in recent years and had a big impact on the public perception of the penalties considered ‘suitable’ for severe

To address the uncovered misconduct, we have seen in recent years:

stricter penalties imposed upon offenders
higher fines awarded
increased scrutiny of the culture in financial service firms

Whilst this opinion piece believes that penalties can go a long way to deter wrongdoing, to “rely on them alone is to overlook one of the fundamental drivers of all our behaviour: social and psychological influences”.

Thus, whilst it might seem obvious, Mr Lukacs believes that it is worth stressing that in order for regulatory measures to be effective, regulated firms must comply with them.

He continues on in his opinion piece to discuss social influence in action; how firms may see themselves as virtuous when others may think differently; that distance from the negative consequences of rule-breaking might make it easier to justify wrongdoing; the environment of misconduct and how both firms and regulators alike can learn from social psychology on making compliance decisions.

“In a nutshell, combating ideologies that trivialise poor behaviour – from ensuring that staff remuneration does not promote poor behaviour to ensuring that moral considerations are part of individual decision-making – is a logical and necessary enterprise in the pursuit of good conduct.”

P Lukacs, FCA economist, Insight Article 16Dec16