2023 Year End Special Edition Magazine

Harry Toukalas
Co-Founder & CEO

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Systemic Misconduct in Financial Services

Harry Toukalas MBA, MsRiskMgt, PhD

Through his PhD, Harry Toukalas has investigated the likelihood of systemic misconduct in the financial services industry. Despite the significant implications of systemic misconduct, there is relatively little known about its causes and how it can spread. Harry’s research has uncovered the behavioural drivers of systemic misconduct, the precise ways it spreads throughout the financial industry, and what regulators and banks can do to reduce its likelihood. Harry commenced his senior career with the NAB as the Australian Head of Operational Risk before joining Bankers Trust as the Regional Vice President Risk Management for Asia/Pacific. He then returned to the NAB as the Global General Manager of Operational Risk and Compliance for the Group. Harry subsequently became the founding Managing Director of the Bank of Cyprus Australia, building it into a full-service retail bank before its divestment to a major bank. He is the Co-Founder & CEO of Swarm Dynamics, which uses a combination of behavioural science, social network analysis and AI to measure, predict and shape risk behaviour.

The focus on misconduct from financial services entities, regulators and public inquiries tends to be on the responsibility of individual organisations and those who manage them. This emphasis on individual accountability is consistent with an episodic view of misconduct that is perpetrated by rationalistic bad actors.

In contrast, this research examines the lesser explored dynamics of systemic misconduct in the financial services industry. This reflects a situation where separate entities (e.g. banks) share similar behaviour without collaborative intent and interorganisational networks facilitate the spread of unwanted behaviour to the whole system. In this context, the cause of misconduct is considered a social construct reflective of the “bad barrels” metaphor rather than an individualistic driver represented by “bad apples”.

The examination of systemic misconduct is based on data from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (2019). This comprises case studies and testimony from 71 Australian entities across the banking, superannuation and insurance sectors and is one of the largest collections of misconduct data. The analysis involved the novel application of statistical social network analysis to predict the likelihood of systemic misconduct.

The findings reveal a statistically significant likelihood of systemic misconduct in the Australian banking industry, based on routine interorganisational interactions rather than conscious collusion. Also, the fact these interactions occur through interorganisational networks means the likelihood and severity of misconduct is amplified due to the “network effect”. Given the Australian banking system is considered one of the strongest in the world, these findings have global implications on legislation, supervision and entity approaches towards the treatment of behavioural risk and misconduct.