“Those working in the financial sector must be as serious about values as they are about valuation, and just as passionate about culture as they are about capital” – Christine Lagarde, Managing Director, IMF (Dublin, June 2018)
Bank misconduct globally has cost $320bn and €580m has been paid to-date in redress by Irish retail banks to customers denied the correct tracker mortgage interest rates. The Edelman Barometer 2018 ranked Ireland as the least trusting of the financial sector out of 28 jurisdictions surveyed.
A lot of attention has focused on banking culture and multiple reports have been published since the financial crisis pointed to ‘group think’, ‘governance and control issues’, ‘strategy failures’ and ‘regulatory failures’ as causes of the financial crisis.
There is a recognition that banking culture was a critical factor on the crisis and other scandals such as, product misselling, LIBOR rigging, forex manipulation, tax evasion and money laundering, including the tracker mortgage scandal here in Ireland. “Culture” represents an institutions’ norms, attitudes and behaviours related to risk awareness, risk taking and risk management or the institutions risk culture (Financial Stability Board). Culture has been defined as “a system of shared values and norms that shape behaviours and mindsets within an institution”. Derville Rowland, Direct General Financial Conduct Central Bank of Ireland, described it as “the unwritten rules and/or way things are done around here”, “it is from the top down, it is a matter for the boards and senior management, in the first instance, to set an effective culture that places the best interests of their customers first. Banks still have a distance to go to live up to their slogans of putting customers first”.
Ireland’s leading five banks recently announced the establishment of an Irish Banking Culture Board (IBCB), modelled on the Banking Standards Board in the UK, to focus on bank behaviour, ethics and culture in tandem with existing bodies such as the Institute of Bankers. The IBCB will be a private sector body funded by member subscriptions with the objective of raising standards of behaviour and competence in organisations.
The announcement follows a report (Behaviour and Culture of the Irish Retail Banks July 2018) commissioned by the Minister for Finance pursuant to the Minister’s powers in the Central Bank Act 1942, carried out by the Central Bank of Ireland in collaboration with De Nederlandsche Bank (the Dutch Central Bank), arising from the failures in behaviour and governance identified in the Tracker Mortgage Examination. The Report looked at behaviour and culture, senior leadership teams, how things are done and the attitudes to consumers in AIB, Bank of Ireland, Permanent TSB, Ulster Bank Ireland and KBC Bank Ireland. The Report acknowledged that the banks were at different stages of embedding the consumer in decision making but all had significant work to do, in particular in respect of diversity and inclusion.
Following the report the Central Bank has issued a risk mitigation programme to each of the banks requiring each bank to prepare an action plan addressing issues identified. The objective of the Central Bank is to shift a perceived mind set in banks from “Is it legal?” to “Is this right?” to “Is this sustainable in the long term interests of our customers?”
Embedding Culture – Can Banks do well while doing good?
The Financial Stability Board in April 2018 identified lack of accountability for misconduct as a key driver of misconduct and noted without strengthened individual accountability profound cultural change in the financial services sector is unlikely.
“Better rules can support a better culture but there must be credible sanctioning and rigorous checking by supervisers to ensure banks are meeting these expectations. Each bank needs to define a set of values and guidelines for desired behaviour from the top. Desired behaviour [must be what] earns respect from colleagues and managers and what gets [employees] a bonus or promotion” – Danielle Nouy, Chair of the Supervisory Board ECB 15 October 2018.
Banks are already embracing the sustainability agenda but sometimes struggle to see how this translates beyond CSR (Corporate Social Responsibility) initiatives. To drive cultural change an institutions values need to be embedded in all policies, systems from front office to back office, including customer service, marketing, product development, risk management, treasury, compliance, finance, human resources and I.T. Ironically institutions in so called “niche” areas of ethical finance, and in particular Islamic finance being a value based system itself, have advocated and implemented this methodology for many years and a lot can be learned by conventional banking institutions as to how values permeate through all aspects of such institutions in terms of how risk, management, and governance structures and policies are internalised throughout all decision making, conduct and all activities of such institutions. For example, Islamic financial institutions operate a dual layer of oversight with a Shari’ah board and Shari’ah internal audit function which monitor compliance specifically to ensure that matters such as sources of funds, governance, product design, and avoidance of particular activities comply with the institutions values, most importantly the overarching principle to avoid causing harm in society.
Regulators – Carrot and Stick?
Directors of financial services providers and persons performing key prescribed control functions (PCF) are already subject to ‘fit and proper’ requirements and a competence examination on appointment and on an ongoing basis but the rules are quite old. The Report’s risk mitigation recommendations and diversity findings have led the CBI to propose fresh requirements in the form of an Individual Accountability Framework, Senior Executive Accountability Regime and a review of the existing fitness and priority requirements (the “Framework”) and this approach is in line with the views of Danielle Nouy, Chair of the Supervisory Board, ECB expressed recently.
The Framework will set out codified common standards for all staff of regulated financial services providers, additional standards for senior management and standards for businesses and consequences for deviating from such standards.
Revisions to the current enforcement process would mean the CBI would be able to pursue individuals directly for their misconduct rather than only where they were proven to have participated in a firm’s wrongdoing (as is presently the case) on the basis of failing to adhere to their individual “Statement of Responsibilities”.
The implementation of these changes are subject to legislative amendment and the CBI has formally recommended that the Minister for Finance consider the adoption of such an individual accountability framework. In the meantime the CBI is committed to “more intrusive, targeted conduct supervision of those firms that pose the greatest potential harm to consumers including robust challenge of board and executive management” (Derville Rowland DG Financial Conduct, Central Bank of Ireland 19 October 2018)