Inarticulate ramblings of a management consultant

the day to day experiences of a consultant operating in weird and wonderful client situations

Passive adoption of regulatory change – the dangers of outsourcing your ‘conscience’ to the compliance function

Many of you will have read Daniel Kahneman’s excellent book, ‘Thinking Fast and Slow’ (attached link for a TED summary), or perhaps some of the other behavioural economics books such as ‘Nudge’ by Cass Sunstein and Richard Thaler. Some of you will also have read ‘The Social Animal’ by David Brooks. Perhaps you will also be aware of Rory Sutherland and his superb TED talks (see attached for my favourite) on the same subject…if not, I urge you to read / watch and absorb.

One of the most important messages from this interesting fusion of economics and psychology is that we humans are often at our best, when we’re at our most intuitive. Malcolm Gladwell talks about ‘thin slicing’, our ability to absorb and process incredible amounts of data and reach a rich, authentic, and accurate conclusion.


The regulatory changes that have taken place in financial services over the past 5 years, in response to the obvious and potential devastating systemic failures of the global financial crisis, have been far-reaching and all encompassing. Whilst in the past, there were two distinct approaches to regulation…the British and perhaps European approach which expected conformity with the ‘spirit’ of the law, and the American which was more focused on the ‘letter’ of the law, it seems a degree of homogeneity has emerged amongst regulators around the world, which is a lot more in the latter direction.

The impact of this approach is subtle and concerning.

  • Whereas in the past, intuition based on length of experience and knowledge, led to individuals investigating further and to a robust debate amongst peers as the ‘risk’ of a transaction (commercial, reputational, and perhaps personal), the current approach appears to be to create an ‘audit’ trail that exonerates the person from any blame.
  • Whereas in the past, the advisory nature of compliance enabled conversations to take place on the basis of ‘guidance’ and ‘clarification’ which led to a different decision, these days the decision is increasingly outsourced to compliance whose only reference point is the letter of the law.
  • Whereas in the past, there was a positive tension in most banks between the functions that had the mandate to ‘protect’ and those that had the mandate to generate a return, the tension still exists but is no longer positive. One investment banker who I spoke to a couple of months ago was offered a role in compliance but had turned it down. When I asked him why, he said ‘my friends would no longer speak to me if I took it up’.

Let me be very clear…much of the reason why we’ve got to where we are, is a result of too little, and poorly enforced regulation. The banks have indeed made their own bed and will no doubt need to live in those sheets for a while yet.

However, from some early investigations in surveying risk and compliance professionals in investment banks around the region (I’m conducting a survey and will publish outcomes later in the year), the real challenge lies in the type of adoption achieved. There are two potential outcomes:

  • Passive adoption is about following processes and procedures to the letter with no responsibility for the quality of the outcome.
  • Active adoption is about understanding the intent / purpose of the legislation and considering each case in that context.

Passive adoption will, in my opinion, lead to further financial crises (as no process or procedure will ever be comprehensive enough to cover the myriad of possibilities). Active adoption may finally lead to real, sustainable change along the path to re-establishing a healthy, respected financial services sector.

I’ve obsessed throughout this blog about the challenges of implementation (see link) and in particular the ‘last’ mile. The need for financial services to reinvent itself, and in particular find an approach to the increasingly onerous but reputationally critical regulatory environment rests with the principles of active adoption.


Categories: Active Adoption, Behavioural Economics, Compliance, Financial Services, Passive Adoption, Regulations

Tags: , , , , , , , , , ,

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