What has the Deepwater Horizon oil spill to do with banks’ capital charges and bank culture?  Perhaps more than might appear at first sight.

The connection is a social licence to operate, where an organisation, a project or proposal or a sector of the market has broad social acceptance within the relevant community and amongst its stakeholders.  One of the best-known references to social licence was in connection with the Deepwater Horizon oil spill but Mark Carney, Governor of the Bank of England, urged financial markets in 2015 to regain and reinforce the social licence they need to operate, innovate and grow and, in late 2017, referred to repeated instances of misconduct cases that have called into question the social licence of finance.

And UK Finance is running a workshop next month on Reputation Risk and ‘Behavioural Regulation’ in the context of capital calculations and charges, including social licence and why it’s receiving regulatory attention.  In other words, regulators are making the connection between social licence and capital – and reputation and capital – when looking at the risks banks face.

I see this as upping the ante rather than a new regulatory topic or risk category.  Conduct risk is already a key component of ICAAPs and SREPs and any regulatory focus on reputation or a wider social licence is in line with the FCA’s increased focus on the culture of financial institutions.  However, the reputation of an organisation can be as hard to measure as its culture and a regulator’s risk appetite could be quite different from that of the institution or its parent or that of the other financial services regulator.

Putting aside these technical points, the message from both regulators is now clear:  culture, reputation, trust – and the social licence to operate – are firmly on the regulatory agenda.  If these topics start to feed into capital charges, that could be a way of applying a further cost of doing business, prompting banks to take action.  Although there’s significant scope for differences of opinion between banks and regulators about social licence and the perception of whether that’s achieved, it would be a brave bank that argued that these points don’t matter.


The blog and all entries on it are intended to provide general information about recent and expected items that might be of interest.  Neither the blog nor any entry provides or constitutes, or purports to provide or constitute, advice relevant to any particular circumstances.  Legal or other professional advice relevant to any particular circumstances should always be sought.

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