The 2016 FINRA Annual Conference stood out in many ways, including the roster of speakers and the attendees. Even the quality of the program was very high.
As usual, FINRA conferences are about discussing and debating top regulatory concerns, as well as current issues affecting the industry. The 2016 conference wasn’t any different. With the goal of continuously supporting and refining compliance within the industry, it dwelt on how firms needed to react in the face of an evolving fiduciary landscape.
Here are key takeaways from the conference:
1. Firms MUST place ethical considerations and client interests at the heart of business decisions
Having client interests at the heart of business decisions helps to protect investors and the integrity of markets, which would in turn help to boost investor confidence. How would it look if investors found that the professionals with whom they work are putting their own interests ahead of their customers’? It creates a conflict of interest that may drive away these investors.
So, how can firms ensure that investors’ interests are prioritized? The first step is to adopt a rules-based approach. Aside from that, firms need to reassess the investor-facing behaviors and conducts of employees. How do these employees behave when engaging an investor?
2. There is greater need for institutional culture and not just a “culture of compliance”
Firms need to appreciate the fact that rules alone cannot address the challenge of ensuring that “good people” aren’t ruined by a few bad ones within the industry. In the past, there have been incidences where employees colluded to do unthinkable things at the disadvantage of investors. An excellent example is the July 7, 2012 case published in the Economist where it was alleged that Barclay’s employees colluded to fix trading rates, with one employee said to have even posted notes in his diary as a reminder to alter the trading rates for the following week.
As an industry regulator, FINRA is running a firm-level culture review project that started back in February to help kick out such behavior. However, although industry-wide rules can attempt to address such issues, institutional-level culture is really needed.
3. If you want positive firm culture, hire positively cultured staff
Research reports from behavioral scientists indicate that an individual’s standards of right and wrong are influenced by the opinions of people he or she works with. This means that there is a real risk of hiring a “negative culture carrier” who would become the seed of a negative sub-culture at the firm. Firms are therefore encouraged to perform even more thorough ethical, financial, and regulatory history analyses of potential employees before hiring.
4. The C-Level needs to lead by example
For firms to be successful there is also greater need for boards, CEOs, business leaders, and CCOs to play an active role in setting the tone at their respective firms. These leaders need to “own their firms’ cultures” and be the role models of the values and practices they expect to see in their staff.
5. Is your compensation system promoting unethical behavior?
Lastly, incentives and bonuses can reinforce or discourage unethical behavior within the firm. Whenever you reward unethical behavior, you are only promoting it. It is therefore important for firms to be mindful of the conflicts their compensation systems might create. You can address this problem by always aligning your compensation systems with customers’ interests.
FINRA hopes that ethical culture will remain a top priority in the industry and that, going forward, the customer’s interests will always come first. Also, the regulatory body expects increased application of data analytics to help address poor culture.