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Trust Matters: Better Communication Between Regulators and Regulated Entities Fosters Confidence in Financial Sectors

FINANCETrust Matters: Better Communication Between Regulators and Regulated Entities Fosters Confidence in Financial Sectors

– We have been complaining about a lack of trust for years, and it turns out it is present. Maybe not very high, but it exists – confirms Prof. Dominika Latusek-Jurczak from the Leon Koźmiński Academy. As it turns out, trust within the financial sector in Poland, in comparison with other Western European countries, looks quite good.

The study is part of a broader project TiGRE (Trust in Governance and Regulation in Europe), conducted from 2020 to 2023 on behalf of the European Commission, due to fears of a trust crisis in the financial sector. The researchers set out to determine what shapes trust between regulated entities and supervision.

What did the analysis involve?

The researchers checked data from Poland, Belgium, Denmark, Germany, the Netherlands, Norway, Spain, Israel, and Switzerland. An international team, which included Prof. Latusek-Jurczak, compared information on a cross-section of different regulatory systems, their maturity, and declared trust. Entities in Poland were asked, among other things, about the level of trust in supervision, the frequency of sending information and the course of communication in the regulated environment.

“We noticed that, for example, banks report quite a lot because it is conditioned by law, but they receive relatively little feedback,” says Prof. Dominika Latusek-Jurczak, the author of the comparative perspective on trust within the financial sector in Poland.

“It’s not about entities receiving a flood of information they can’t understand and can’t assimilate. It’s about communication being high quality and transparent. The key word is transparency, which is the mantra of public management. Everything is supposed to be transparent, which is a bit pointless because you need the competence to understand transparency. Therefore, the exchange of messages should be understandable and in an amount the recipient can assimilate,” comments Prof. Latusek-Jurczak.

According to the professor, transparency is built when parties do not rely solely on quantitative reporting. Such a form dominates in strictly regulated sectors, such as banks, from which the Financial Supervision Commission receives numerical reports, including information on risk management indicators.

“If one of the limits is exceeded, a ‘red light’ pops up and often only then contact is established because you have to explain what happened. That’s how it works in most of the environments we studied,” explains Prof. Dominika Latusek-Jurczak.

Communication Should Not Be a Punishment

As the economist explains, in more mature ecosystems with a higher level of trust, the regulatory institution communicates with both those who have exceeded the alert level and the rest.

Therefore, communication is not punishment, but a daily routine that fosters transparency. The Professor from the Leon Koźmiński Academy points out that in high-trust environments, the exchange of qualitative information runs parallel to the sending of numerical data.

The Better the Communication, the More Trust

Scientists emphasize that it’s not only about the frequency of contact, but also about its quality. The study showed that the entire system works best when both parties, i.e. the regulator and the regulated entities, scrutinize each other carefully, exchanging comprehensible messages in a friendly and trustworthy manner. When stakeholders exchange information with many entities, they usually agree more with the introduced regulations – emphasizes Prof. Latusek-Jurczak.

Experts underline that feedback and dialogue seem to play a crucial role here.

“Not disclosing enough information can negatively impact trust and even generate mistrust,” says Prof. Latusek-Jurczak. The research results illustrate the significance of contacts and information exchange in building trust, which is the foundation of a healthy financial sector.

“Regulated environments, such as the financial sector – heavily supervised – work best when this trust is active, meaning it is accompanied by vigilance. Vigilance means that we are constantly monitoring what is happening,” interprets Prof. Latusek-Jurczak.

How Did We Fare Compared to Other Countries?

“We have been complaining about a lack of trust for years,” recalls Prof. Latusek-Jurczak. “That was also the starting point of our project. The European Commission announced it because there was widespread talk of a trust crisis in many areas, including the financial sector. And it turns out that trust is there, perhaps not very high, but it’s there. We have a better result than one might expect.”

The research showed that Poland is not far behind the other countries analyzed. It was noticed that it has similar problems to Western Europe.

“Against international data, we really are in the strong average range. This is a very good result for Poland because if we compare it to the declared trust of citizens in the state, which is low, it turns out that at the level between the regulator and the regulated entities, trust has been built. This was a surprising conclusion for our partners,” says Prof. Latusek-Jurczak.

According to the professor, the political discourse, more polarized and emotional, causes quicker conclusions about trust, whereas business moves at its own pace, is less charged with extreme emotions, and relies on competence. “What surprised me is the fact that the trust that works in regulated markets is more mature. This is the result of our findings,” summarizes Prof. Latusek-Jurczak.

Regulators Should Not React: “No Comment”

As part of TiGRE, scientists have developed recommendations for the financial market, which aim to build trust. Institutions responsible for regulating the sector should maintain frequent contact with stakeholders, as their frequency promotes trust growth. Researchers also encourage the creation of working groups and advisory forums involving market participants. In this way, the regulator can obtain valuable information that will serve for more accurate decisions. TiGRE’s authors strongly advise against ignoring difficult issues and resorting to the “no comment” formula. Such a reaction usually primarily results in a decrease in trust.

About the Study

The study titled “Trust within the Financial Sector in Poland,” as part of the Trust in Governance and Regulation in Europe project, was conducted over the past three years. Alongside Prof. Latusek-Jurczak, Dr. Anna Pikos also participated in them. The work was financed thanks to the EU Horizon program. You can get acquainted with the details of the scientists’ findings here:

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