In the decade since the financial crisis, global banks’ misconduct costs have reached over $320bn (€273.7bn), with the result that public trust in financial institutions remains very low.
This lack of trust is particularly evident in Ireland. Of 28 markets surveyed, Ireland is the least trusting of the financial services sector, according to the 2018 Edelman Trust Barometer.
This is hardly surprising, given that, in the years since the financial crisis, the banks’ unacceptable failings had a devastating impact on 37,800 customers, who were denied a tracker mortgage or put on the wrong rate.
It was only following intervention by the Central Bank of Ireland that the banks paid €557m in redress and compensation to those customers, with the total costs to the banks amounting to €1bn, when internaladd-ons are included.
Given that misconduct can cause consumer detriment and, indeed, threaten the safety of financial institutions, there is an emerging global trend towards more intensive regulatory focus on conduct risk that arises from inappropriate, unethical, or unlawful behaviour. There is also an increasing focus on culture, which drives behaviours and, ultimately, customer outcomes.
Like other regulators worldwide, the Central Bank is increasingly insisting that firms comply not only with our regulations and codes, but also that the people who lead the firms we regulate and supervise set about building a culture that better serves their customers, their shareholders, and the wider economy in which we license them to operate.
Indeed, when Christine Lagarde, managing director of the IMF, was in Dublin in June, she spoke about how “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.”
I could not agree more.
The ‘Behaviour and Culture’ reviews the Central Bank of Ireland has published provide a snapshot of the current behaviour of the executive leadership teams at AIB, Bank of Ireland, Permanent TSB, Ulster Bank, and KBC. These are the decision-makers who set the tone from the top at the firms they lead.
The reviews, which the Central Bank carried out in collaboration with our Dutch counterparts in De Nederlandsche Bank, leaders in the supervision of behavior and culture, found that all banks have recently taken steps to reinforce the consideration of the consumer interest. However, the reviews concluded that consumer-focused cultures at these banks remain under-developed and that all five banks still have a considerable distance to travel.
The reviews found that banks struggle to move on from a crisis-era mindset, when the focus is on urgent and short-term issues. They also found that the banks’ executive committees need to overcome obstructive patterns, such as fire-fighting behaviour, occasional reversal to directive leadership styles, and failure to empower senior staff, in order to transition to maturity.
The Central Bank also conducted “diversity and inclusion” assessments, which found that banks have much more work to do to ensure their organisations are sufficiently diverse and inclusive, particularly at senior level, to prevent group-think, guard against over-confidence, and promote internal challenge.
It is generally recognised that the banks need to rebuild trust with their customers, shareholders, and the societies where they operate. But what the banks sometimes fail to see is that they must first become trustworthy. And that is where culture comes in.
Culture is important, from both a prudential and conduct perspective. Culture should be driven by institutional standards, such as fairness, respect, integrity,, and honesty, which are promoted from the top down, echoed from the bottom up, and visible throughout the organisation.
Management and staff should be asking themselves questions derived from their institutional principles, such as: Is the tone from the top signaling the right values to staff?
Are there clear lines of accountability within the firm? Are consumers’ interests being taken into account, when decisions are made in the boardroom? Are the right products being sold to the right people?
Are staff appropriately incentivised? Have ambitious, diversity and inclusion targets been set, especially for board and executive committee level, and is performance against those targets being measured?
While culture is, in the first instance, a matter for the firms, regulators also have a role to play and we intend to play it.
We will require the five banks to develop action plans to address the findings and mitigate the risks identified in our reviews.
Supervisors will assess the actions planned by the banks and engage on progress. Building on our earlier work on culture, banks can also expect further changes in how we supervise them. We will conduct more intrusive, targeted conduct supervision of those firms that pose the greatest potential harm to consumers, including robust challenge of board and executive management.
Last and certainly not least, we are recommending individual accountability measures to drive better behaviour. These include proposed conduct standards for all staff in regulated firms, such as acting honestly, ethically, and with integrity; additional conduct standards for senior management; and standards for businesses.
We are also recommending to government that a senior executive accountability regime (SEAR) be implemented through legislation, which would place obligations on firms and senior individuals to set out clearly where responsibility and decision-making lie for their business.
These requirements would assist in assigning responsibility to individuals in a regulatory context and decrease the ability of individuals to claim that the culpability for wrongdoing lay outside their sphere of responsibility.
In short, our message to bank leadership teams is that the Central Bank expects high standards in high places and those standards to be embedded in all aspects of the business. This is key to developing the consumer-focused culture to which all firms should aspire.