The global economy has moved on from the crash of 2008 but the banking and broader financial services industries are still recovering from the shock. As recent events demonstrate there is a sense of fragility.

Regulators and governments are responding to the continuing concerns of politicians, economists and the public and regularly challenging practices and behaviour within the sector. Firms consequently are investing heavily in actions to drive cultural change, against a challenging economic background.

An example of the regulatory response is the UK’s Senior Managers and Certification Regime (‘SMCR’). One of the strictest personal accountability frameworks in regulated financial services around the world, it will radically change the way in which senior management operates. Business leaders will be watching with interest as its reforms are rolled out across banking, insurance and investment firms in 2016, and extended across all other parts of the UK financial services industry in 2018.

Much of the industry has realised that, in order to regain trust and, even more importantly, to future proof themselves against the next banking scandal or economic shock, they need to go beyond simply ensuring that they comply with the growing roster of regulations. To do this they need to look at changing their culture, the DNA of their firms by asking “what are we here for?”, “what are we made of?” and “how do we do things?”.

The risks have never been greater

As leaders understand, changing culture is not easy; there are many forces that favour the status quo even when the need to change is apparent. Whilst the UK’s Financial Conduct Authority has called off its thematic culture review, it remains very focussed, as are other regulators, on assessing firms’ culture and leadership’s role in driving change. They also remain strict about enforcing regulations and are ready to act when they’re breached. Banking leaders globally have found to their cost that authorities are showing no let up when it comes to identifying and taking action against firms that are not fully compliant with regulations, and that are not demonstrating the highest ethical standards.

Similarly, firms are conscious of the stigma attached to investigations. penalties today go beyond the financial, with an increasingly adverse impact on corporate brands and individual reputations that can take many years to overcome. They know that their share price, the opportunities to transact, and the ability to recruit and retain talent are all adversely affected by coverage of an infraction.

The challenges of scale are significant

Firms with an international footprint suffer unique challenges in this new, stricter environment because of national differences. What might be accepted practice in some regions such as the developing markets might not be acceptable in europe or the US. While universally consistent standards are still a long way  off, firms have to think about how they implement their own principles and guidelines while not putting themselves at a disadvantage to competitors and at the same time not alienating and disempowering their own workforce in these regions.

For those firms whose growth was by way of mergers and acquisitions, enacting cultural change and creating a consistent respect for regulations and procedures brings additional leadership challenges. Where there is no consistent DNA,  where individuals identify more with their previous employers  or market partners, tensions can develop. Similarly, as many firms now have presence around the globe, with different cultural norms in different countries, it is difficult to create one consistent set of values and behaviours. Often, the drive will be to conform to the norms of the most demanding country (e.g. the UK/US), which leads local managers to push back, worried about restrictions to their ability to generate revenue.

Money matters too much

One of the biggest challenges to cultural change is employee motivation and compensation schemes. historically employees, and leaders were rewarded for delivering financial results, meaning revenue growth. There is general agreement that there was insufficient regard for the duty of care to customers (both professionals and retail clients) and there was little control over excessive risk taking. In recent years clawback arrangements have been enacted. Senior management now needs to put arrangements in place that directly link messages about good culture, about obeying the letter and the spirit of regulations and about acting with the best interests of the customer in mind, with employee compensation.

Here leaders must ensure that their teams have more  “skin in the game,” financially and otherwise, and a greater understanding of and alignment with the organisation’s goals. Share vesting periods have been extended and compensation arrangements changed to increase the proportion paid in equity. At the same time the level of fixed compensation has increased over recent years with the view that this will reduce risk taking.

Clawbacks can be useful – but senior managers must insist that they be carried over longer timescales. This should include when employees move jobs in order to combat the situation in which irresponsible members of staff simply move, before they have to face the consequences of their actions, into a new job where their shares are bought out. The legal arrangements to put this in place will not be easy. In order to curb the overall quantum of incentives, management must ensure that behaviours are built into performance scorecards.

UK regulations lead the way

The SMCR requires that the responsibilities of senior managers are fully documented and that individuals are able to demonstrate how they fulfil those obligations within the context of a clear organisational framework. This does give designated managers more power in some ways, such as performing reviews when they are taking on a new role. At the same time some business leaders have expressed concerns that this stricter new regime will scare away talent as current and future senior leaders are put off by the increased personal responsibility and the severity of the sanctions that could be taken against them. This should drive firms to ensure clarity and quality in management processess.

Under the new regime, Board members and designated executives are responsible for defining and ensuring the right culture permeates the firm. By recognising and embracing a new world of higher ethical standards and the requirement for a profound change of culture, the leaders of firms can safeguard their relationships with regulators, but can also turn these higher standards into a competitive advantage if they can navigate the challenges of capital buffers, fines and remediation costs.

The SMCR requires senior managers to be able to demonstrate that they have taken all reasonable steps in making material decisions which will result in more extensive and detailed written records. In some firms this could slow decision making and even lead to decision paralysis. To combat this, senior managers need to be proportionate in their response to this requirement. When it comes to information, this issue is one of reliability and sufficiency – senior managers need to have timely access to the right quality of data which provides enough granularity to analyze issues at hand.

The ‘tone from the top’ is paramount

In all areas of activity, in order to instil better practices it is essential that the leadership of the firm creates a culture  in which everyone buys not just into the letter, or even the spirit, but into the philosophy of doing the right thing for its customers and the industry, and also protecting the reputation and resilience of the firm they work for.

The ‘tone from the top’ needs to be clear and consistently reinforced. The messages need to get through from the top of the firm, through middle management, and through to the most junior members of staff. What matters most to people is what their immediate manager instructs them to do and how they behave. The challenge is to ensure the behaviour at that level is consistent with expectations. good culture and integrity go beyond a checklist or procedures manual – they are created by the day to day actions of staff. Boards and executives need to identify ways to evaluate how their cultural messages play out throughout the organisation and how they incentivise the desired behaviours or reinforce consequences for poor conduct.

Driving cultural change is more likely to be successful if the approach is a commercial one, explained in business terms, rather than making it a compliance exercise. The board should not merely aim to cascade messages to the rest of the firm. It requires clear and consistent action from the board. The C-suite needs to actively model and demonstrate the kind of correct behaviour and approach that it wishes to see in action throughout the firm, rather than simply talking about it.

Training and education programmes have a role to play. It is essential that senior staff should ensure that it’s not just seen  as a bureaucratic exercise. The need is beyond just banners, wall posters, or computer based training and even face-to-face presentations. effective change requires ongoing reinforcement of messages and behaviours.

Communication is key

Initiatives to change culture involve a two way communication process – they require business leaders to listen as well as speak. If leaders want to effect change, they need to know what is not working within the organisation. Firms should engage with their millennials as this group is a good source of information about inconsistencies between stated values and actual behaviours. This age group does not stay long at firms where they perceive that what their seniors do is inconsistent with the stated values of the firm.

Here and in other areas, those boards and senior managers that ensure that they entrench ethical practices at the core of their business strategies, rather than treating change as a one off, time limited project, can put their firms ahead of the competition and ensure that they are able to mitigate the impact of future financial and conduct-related shocks.

But what about making a profit?

Many financial institutions, perhaps especially larger banks, currently face a series of serious challenges. For example, there is pressure on revenues caused by a flat yield curve set at historically low rates of interest; the reduction or disappearance of sources of fees and commissions; rising capital requirements coinciding with equity market disruption; uncertainty around AT1 capital; changes in accounting requirements; and the now considerable cost of responding to regulatory change. This is, for some, without exaggeration a ‘perfect storm’.

These issues will likely take time to play out and whilst they do, firms must continue to learn cultural lessons from the crisis at the end of the last decade - a tall order that will likely pay off well for those management teams that respond well.