A mechanistic compliance with rules cannot be an adequate substitute for an internalised sense of responsibility and basic morality that a finance professional owes to his client or counterparty. How can we build a culture of trust and strong values in the financial industry? We need an ecosystem to do so – with a role for regulators, the industry, and most important, the firm itself. What can regulators do? First, the role of regulators. The international regulatory community has been intensifying efforts to ensure that financial institutions foster a sound risk culture and conduct themselves in a prudent and socially responsible manner. But instituting a good risk culture is not merely about slapping on more rules or adopting a perfunctory, checkbox approach to compliance. MAS therefore takes an intensive supervisory approach to risk governance and culture in financial institutions. We prefer this to an overly prescriptive regulatory approach based on one-size-fits-all rules that may be less effective in addressing idiosyncratic risks. Financial firms differ widely in goals, activities, and culture. Instead, close supervision – consisting of both onsite inspections and offsite reviews – provides MAS with a good view of a firm’s risk governance and culture and practices on the ground. This allows us to assist the board and management in identifying emerging areas of vulnerabilities and to take pre-emptive corrective actions where necessary. Let me cite two areas we focus on: compensation and fair dealing. BIS central bankers’ speeches  3  Compensation is an important mechanism to shape incentives and behaviours.
•  We read of traders in banks circumventing internal rules to make outsized market bets that subsequently resulted in large losses for these banks. •  And in financial centres across the world, including Singapore, regulators have uncovered attempts by traders at several major global banks to manipulate key financial benchmarks used to set rates for loans and foreign exchange contracts. Little wonder that global surveys show that levels of trust in the financial industry are lower than ever. •  According to Edelman, a public relations firm, banking and financial services ranked last among 15 industries that the public trusted “to do what is right”. 1  •  In countries most affected by the financial crisis and its aftermath, levels of trust are lower still – barely 30% of the public in Europe trust their banks. 1  Edelman Trust Barometer, 2013 and 2014. BIS central bankers’ speeches  1  Why trust is critical to finance Financial products and transactions can be quite complex and information asymmetries often place financial institutions in a more advantageous position compared to their customers. •  Trust that the bank is sound is critical for savers to keep their monies in bank accounts and for borrowers to make long term investment decisions. •  Trust that financial advisers and insurance agents are dealing fairly is important for consumers committing large portions of their savings for a long period of time.