Written by:
Simon Hills, Director, Prudential Policy, UK Finance

Earlier in the month I joined a meeting in Basel that brought together regulators and industry participants to examine challenges that may have been encountered in the introduction of the Basel Committee on Banking Supervision’s 2015 Corporate Governance Principles for Banks. And just last week I sat in on a UK Finance workshop organised as part of our culture and conduct network by UK Finance associate members Eversheds Sutherland and Worksmart.

The workshop considered a case study, based on poor selling practices in a rapidly growing bank. As the story unfolded we examined the impact on the bank and some of the senior managers accountable for the problems – the root cause of which was poor culture.

It struck me that both events emblemised the focus banks and their supervisors now have on improving culture in the banking industry. This is important for a couple of reasons. Firstly, poor culture results in bad things happening to banks’ customers and fines being imposed. It is estimated that in the decade leading up to 2020 banks will have paid $400 million in fines and redress, reducing lending capacity by about $3 trillion – an enormous number – about the same amount as the UK’s projected 2018 GDP. But more importantly, good culture and conduct supported by strong governance processes ensure that banks do the right thing by their customers and will regain the trust of society – trust that sadly slipped away in the wake of the global financial crisis.

The discussion around the table in Basel identified that good progress is being made in identifying and encouraging good culture in banks. But the point that one bad apple can spoil the whole crop was well made. If one bank is in the spotlight because it has treated customers poorly or tried to manipulate markets, the entire industry is quickly tarred with the same brush.

So what are some of the mechanisms that can improve culture? There are carrots and sticks. The UK regulators’ introduction of the senior managers and certification regime has made senior executives individually accountable both for what goes on in the businesses they manage and ensuring there is continuous cultural improvement. If they get it wrong, individuals can face very serious enforcement action. And there are indications that regulators in other parts of the world, for instance in Australia and Malaysia, are considering introducing similar individual accountability regimes.

But encouragement is important too. Banks can withhold approval clawback bonuses for poor behaviour, but many now positively reward those whose exemplary behaviour is strongly aligned with the cultural values of the institution. And targeted development programmes, which recognise that everybody contributes to a bank’s culture, can play their role too, by promoting diversity and challenge. And there must be strong institutional support of calling out bad behaviour and whistle-blowing.

A question remains in my mind, however, about how banks can objectively measure culture, so they can demonstrate to their regulators and society more widely that it is continuously improving.

As we set about answering this question it will be important that we measure what we value, not value what we can measure.

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Reputation Risk: How To Identify, Measure and Manage It for The New Regulatory Reporting – 5 December

The new era of ‘behavioural regulation’ demands that firms produce new indicators, report formats and management tools for reputation. This highly participative workshop is facilitated by our highly-rated subject expert. Attendees will be given the opportunity to grasp unfamiliar concepts, apply new approaches to problem-solving, and encounter fresh perspectives on the front-line practice for reputation risk.

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A question of conduct and culture
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