There could be a case for targeting individuals with fines rather than firms, the Financial Conduct Authority’s chief economist said.
Peter Andrews said there was a “very striking” difference between the level of tolerance of non-compliance in the financial services sector compared with other industries.
In a speech delivered yesterday (18 October), Mr Andrews said: “In aviation, trains, nuclear, oil exploration and so on, there is near zero tolerance of non-compliance. On the other hand, in financial services we have sometimes seen systematic non-compliance.
“I became more intrigued by this difference when some non-executive directors of financial firms told me the link between a staff member being disciplined by the FCA and breach of firms’ internal disciplinary codes. Specifically, in some cases there was absolutely no link.”
He said the FCA will be publishing a paper on behaviour and compliance in organisations, which focuses on what regulators can learn about improving compliance by combining insights from behavioural economics, sociology and psychology with traditional economic thinking on credible deterrence.
Mr Andrews said: “It is not just the size of the probability of detection and the penalty for non-compliance that matter. It is also their salience and vividness to the decision-makers considering engaging in misconduct.
“So, for instance, there might be a case for targeting more penalties at individuals directly responsible for the wrongdoing rather than at the firm.
“This makes the risks more ‘personal’ to other people who might be tempted by non-compliance.”
Firms could also increase the salience of the risks of non-compliance by alerting their staff whenever the regulator takes action.
He also said companies should have consistently positive values, which staff are reminded of regularly.
Mr Andrews said: “Anthropologists tell us that people are very influenced by social norms in the group around them and often change their beliefs and possibly even preferences to conform.
“In fact, the ease with which any individual employee can mentally justify misconduct can also be shaped by things as simple as the company’s beliefs and internal language around business objectives and consumers.”
damian.fantato@ft.com
