The global financial crisis exposed widespread misconduct in the financial services industry, with poor risk culture being identified as a key contributing factor to the endless scandals that beset almost every major financial institution over the last decade. In the banking industry alone, we estimate USD 1.06 trillion in industry profits have been wiped out as a result of this bad behaviour.
In response to heightened regulatory scrutiny, and to defend themselves against an onslaught of fines and penalties, financial institutions across the world worked around the clock to bolster their risk and compliance efforts across their three lines of defence. In more recent years, most of these efforts have focused on enhancing their first line of defence (i.e. the business units) to drive greater individual ownership and accountability in an effort to encourage a movement from rule- based to value-based behaviour. In particular, employee education has been a key focus for most institutions, with the industry spending USD 10 billion on compliance training alone in 2018 (with approximately three quarters directed at online delivery). However, ongoing scandals provide a clear indication that a decade’s worth of compliance training has failed to shape industry risk culture in a meaningful way.
We see three fundamental issues associated with online compliance training that render it ineffective in driving cultural change: (1) employees loathe compliance training, and view training obligations as a tedious, box- ticking exercise that detracts from their daily responsibilities; (2) eLearning is not taken seriously, with no repercussions for ignoring or failing training modules; and (3) a lack of employee alignment and support, resulting in low information retention. As a result, the endless list of eLearning modules that employees are forced to complete every year has failed to shape their behaviour.
Financial institutions need to take a more strategic approach across the entire training value chain – including employee identification, material selection, employee incentivisation, and performance supervision – in order to properly augment employee mindsets. In particular, greater attention should be paid to employee engagement levels through improved monitoring of their eLearning activities, incorporating these insights into reviews and compensation / promotion decisions. We see the appropriate use of such solutions as critical in driving behavioural outcomes.
While most employees in the financial services industry maintain high ethical standards, there will always be a handful of bad eggs that can set the wrong tone for their organisations. And the battle against this unethical behaviour should always start with effective training. The fact is, a fundamental overhaul of employee mindsets is crucial in tackling the root cause of misconduct. With the financial services industry racking up an average of USD 30 billion p.a. in fines since the financial crisis, we believe this new breed of “CultureTech” has the potential to save the industry USD 10-15 billion p.a. in misconduct-related penalties.
While more effective compliance training serves as the fundamental catalyst to shaping employee attitudes to risk, it cannot operate in isolation. For organisational risk culture to evolve in a more meaningful way, a holistic strategy focused on driving employee ownership and accountability to encourage value-based behaviour is needed.
However, we see RegTech solutions as a critical next step in fixing the train(ing) wreck that has failed to shape the financial services industry’s attitudes towards risk and compliance training, exacerbated by the widespread “box-ticking” culture of front-line employees.