Regulating business culture. A “solution in search of a problem?”

In what lawyers are calling a “solution in search of a problem,” Canada’s solvency regulator is seeking input from the Canadian property and casualty insurance industry on how to regulate business culture.

“I feel like this culture conversation in Canada is a bit of a solution in search of a problem,” Stuart Carruthers, a partner at Stikeman Elliott LLP, observed at a recent NIC Conference panel discussion on emerging issues and regulatory hot topics facing Canada’s P&C insurance industry.

“I think, generally Canadian FIs [financial institutions] get it right compared to institutions in other countries,” he explained. “In other countries, usually Canadian FIs are viewed as having the best culture and governance in the world. So, I don’t [see culture] as a as a pressing problem, but we’ll see what the Australian guideline looks like.”

In Canada, the Office of the Superintendent of Financial Institutions (OSFI) is proposing to establish guidance for the industry on six prudential outcomes they want businesses to achieve around leadership, compensation, accountability, risk mindsets, group dynamics and resilience, Carruthers observed Sept. 20 at the NICC Conference held in Halifax.

OSFI’s move is in step with regulatory activity in Australia, where a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services sectors issued recommendations in February 2019 to improve oversight of the business culture at FIs.

That commission “directed that financial services entities are to take proper steps to assess the entities’ culture and governance, identify any problems, deal with those problems and thereafter determine whether the changes made have been effective.”

The key difference from past regulation around culture in Australia was the commission’s guidance to “determine whether the changes made have been effective,” as noted by KPMG in a blog post about the recommendations.

OSFI is currently in a consultation phase on the topic, before formulating its guidance. Insurance Bureau of Canada has made submissions to OSFI on the matter, said Carruthers, “and are quite opposed to more culture regulation; see it as redundant, unnecessary, and hard to measure. A lot of the OSFI guidance is very vague.

“The thing is, how do you measure culture? What’s good in a culture? What’s bad in a culture? Is risk-taking better? Or is being more risk-averse better? It’s very, very hard to measure.

“I jokingly say I think it’s like trying to ask if classical music is better than jazz music, or is it better than folk music?”

Jill McCutcheon, partner at Torys, didn’t think OSFI’s desire to provide guidance on business culture was completely “off the mark,” although she agreed it seemed like a solution looking for a problem. She saw its utility in ensuring organizations are taking diversity seriously.

OSFI’s concern is about growth and change at federally regulated financial institutions, as McCutcheon said.

“If you only have the same people, the network of people is the same – everybody stays the same if you don’t shake up your board, you don’t shake up your management,” she commented. “We know that if boards and senior management are more diverse, probably the risk of groupthink gets lower. So, I don’t think the whole thing is off the mark.

“But I certainly agree with the submissions that…this is just something that we are aware of in the industry, and work on on a daily basis. I’m not sure that we need this guidance.”

Koker Christensen, a partner at Fasken, said OSFI’s regulatory initiative around culture is part of a broader effort by global financial regulators to recognize more intangible influences on an organization’s financial results.

“This is a train that’s going down the tracks, right?” Christensen said. “The focus on non-financial risks is kind of a mega-trend in insurance regulation. I mean, it’s in Canada…but it’s starting at the global level. The Financial Stability Board [which monitors the global financial system] and other organizations write about this, and it trickles down.”

That said, Christensen agreed, culture is a large, diffuse entity, and may not be a perfect candidate for prescriptive regulations.

“I don’t think it’s easy to sort of design a set of principles or processes that are going to lead to a good culture. I think it’s really challenging how to implement this correctly,” he said.

Photo courtesy of iStock.com/FatCamera