Kweku Adoboli is the former UBS trader convicted of fraud. He accepted responsibility for a $2.2 billion loss at UBS Bank, part of a shared $50 billion trading book. He was acquitted on four of the charges because it was accepted that his actions had nothing to do with trying to achieve personal financial gain. UBS was fined and censured for creating the culture that resulted in the losses. The regulator concluded that “the failure by senior management to adhere to the Bank’s own policies [was] indicative of a lack of focus on instilling a culture of compliance.”

Adoboli recently lost his appeal against being deported and repeated his observations during trial and investigation that “profits-first ask-questions later” banking culture is still alive and well. He says that recent discussions indicate that many are “still struggling with the same conflicts and pressures to achieve no matter what” that “where people fall into this grey zone. I think [fraud] could absolutely happen again” that “the only way to generate the same level of profits is to take more risk” and “I think it’s about culture. The culture is set at very senior levels of the industry. They [bosses] have as much responsibility for what the outcomes are as those pushing the buttons.”

This begs questions over how far banking culture has changed since the 2008 debacle; what has been done to address the wrong kind of risk taking and what still needs to be done? Adoboli is out of the loop somewhat as there has been an extensive programme of regulatory changes addressing exactly these issues by the regulators. He may be right, however, as to whether banking culture has changed despite these regulations.

There has been a lot of work amongst banks over culture that goes beyond compliance. It remains to be seen if this has been effective or if there will be a lapse back into bad practice. The history of banking regulation would indicate the latter. Many firms with good culture and less historical baggage are not finding it hard to adapt. Others are struggling.

There is certainly a history of innovation that is not incompatible with acceptable risk taking and those that are trying to channel the great entrepreneurial spirit of the City now that Brexit has added to the challenges. There is also an adjustment disorder. Even the phrase ‘business ethics’ in Financial Services is changing and being replaced as the balance between law, regulation and ethics is tipping.

Ethics begins where law ends but the handover point is not fixed; when trust in the banking sector’s ability to manage itself and maintain high ethical standards declines, as in the financial crisis, regulation will naturally move in to fill the gap that is seen to have been vacated by ethics, which was largely institutional self-discipline. It can only be a good thing that there is a redefinition.

Identifying banks with the wrong culture is not as simple as distinguishing those that are fully compliant from those that game the regulations to increase profit. There seems to be a broad consensus that good culture needs to address more than the codes, regulations, duties to customers, conduct rules and the administration of justice. Although not uniform, culture needs to engage with social responsibility, doing what is right in a way that aligns with strategic business objectives, practices and reward and with stakeholders.

Culture is a leadership issue. Values and good culture drivers should come from the top, and then become lived, part of the fundamental assumptions, beliefs and motivations of all. The tone from the top, the tune from the team. The FRC comments that “Codes put forward principles for best practice that make bad behaviour less likely to occur; and public reporting can make it harder to conceal such behaviour. But, by itself, a code does not prevent inappropriate behaviour, strategies or decisions. Only the people, particularly the leaders within a business, can do that.”

Only time will tell if banking culture has changed. The pessimism from Adoboli is shared by many. Other whistleblowers will come forward as part of the process of forced culture change through exposing wrongdoing and through engagement with reputation risk advice about how the flow of scandal and fines are toxic to brands far beyond a drop in profit.

Some say that the new whistleblowing regime will catalyse change, others that the protection for those who come forward is not enough. In the US, for example, bounties are offered to induce whistleblowers to come forward.

But like other change management levers, too much negative reinforcement around liability and punishment can overlook the need to focus on positive change. Really effective whistleblowing policy would dovetail with and promote a culture in which speaking up is the norm and endorsed by Senior Managers.

Until the public and politicians give banks a much cleaner bill of health the regulators will have to keep pressing. Early indications from the new government are for an increased focus on the need to improve governance and accountability. The BSB is starting a study of how standards of behaviour and competence are set and shaped by law, regulation, codes and other standards, and to ask whether this balance is working effectively, and what this might imply for the industry:

“This is not a study devised to conclude that less regulation would be beneficial. It is, rather, asking what needs to be in place alongside regulation to produce the highest standards of behaviour and competence in banking; what is needed to fill the space beyond the ‘boundaries of regulation’, for that regulation to be not only bounded, but to work effectively.”

Despite the resistance and irritation some feel, entrepreneurs will always see opportunities in challenges and will understand that regulatory constraints don’t need to be stifling.

This is an extract from an article first published in Governance and Compliance, October 2016.