Regulatory Risk Culture in the Financial Sector

Abstract

Research Question/Issue: It is mandatory for financial sector organisations to adhere to applicable regulatory requirements. Regulators identified poor financial industry risk culture practices as a key reason for the 2008 financial crisis. This has led to increased regulatory scrutiny of financial sector risk culture. However, few academic studies on regulatory risk culture have thus far been published. In addition, there is sparse guidance to corporations to better understand and implement the sector’s regulatory requirements; assess regulatory risk cultures; and build and maintain a risk culture that actively incorporates regulatory risk requirements. The aim of this study was to investigate and propose criteria that could be used to assess regulatory risk culture in organisations.

Research Findings/Insights: Twenty interviews were conducted with stakeholders in a financial organisation in the banking sector. Half of the participants were business stakeholders affected by regulatory risk; the other half were regulatory risk practitioners. An initial code set was created using the risk culture indicators of the Financial Stability Board (FSB). The interviews were transcribed and coded to identify criteria that may be useful to assess regulatory risk culture. Based on the interview data, additional criteria were added during coding. In addition, the responses of the two groups were compared to understand their experiences of regulatory risk culture. The meaning derived from the results of this study is that organisations can identify factors to assess and improve their regulatory risk cultures. Theoretical / Academic Implications: This study provides a starting point for further academic work in the field of regulatory risk culture. In addition to identifying possible risk culture assessment criteria, participants’ views also provided insights into possible inadequacies related to regulatory risk practice in the organisation. Respondents provided suggestions for responding to these deficiencies. The findings indicate that banking organisations could introduce practical interventions to improve and influence their regulatory risk culture.

Practitioner/Policy Implications: These results are expected to be useful to regulators and financial sector organisations to inform regulatory risk culture improvement initiatives.