Compliance, Risk, Conduct and Culture in Financial Services

“We simply do not know if we have the tools to change the banking culture.”  Lord Turner, UK FSA Chairman

This blog is part of  a larger keynote address to the Conduct and Culture in Financial Services Conference, to be delivered on October 11-12, 2016 in Sydney, Australia.

Why Focus on Culture and Conduct in Financial Services?

Between 2008 and 2015 the banking industry as a whole has been fined nearly $300 billion for unethical and fraudulent activities. As a result, trust in banking has been at an all-time low for the past 7 years, far lower than during the S&L crisis in the early 1990s. And with recent increases in regulation and compliance requirements putting additional pressure on banks and their employees, conduct and risk culture is becoming a significant issue.
As a result of external pressure by regulators, governments and the public, most banks have responded with numerous interventions and changes designed to improve conduct and risk culture, hoping that this will have a positive impact on excessive risk taking and unethical behaviour among their employees.

One global institution, Citibank, states on its website and in its ethics document that “conducting business responsibly and ethically is critical to protecting our reputation for integrity and maintaining our competitive advantage” and is therefore augmenting its existing 60-page Citi Code of Conduct with an additional company-wide top-down communications, staffing and education campaign of “Zero Tolerance”. Other banks are following suit with new policies and internal procedures in an attempt to reshape culture and eliminate unethical behaviours.

While such approaches are well-intentioned, the real question is: “will they bring about positive and sustainable behaviour change?” And equally important, will the government and regulatory bodies see this as sufficient and back off on the growing amount of regulation and compliance?

“In terms of regulation, I would say that we are clearly better off, but in terms of ethics, I would say we are nowhere,”                    ~Dean Baker, Centre for Economic and Policy Research

We believe the many internal policy changes, additional training and risk compliance processes being introduced are unlikely to make any substantial improvement in conduct and risk culture. since there are already numerous internal compliance and business safeguards in place, as well as training programs, yet still issues of unethical and overly risky behaviour continue to occur.

The multiple initiatives and changes being introduced by banks are not sufficient to effectively improve the overall risk culture because all these new changes take place INSIDE the corporate culture, which is the real driver of behaviour.

In many ways, corporate culture is analogous to the water in a fish tank. When the water is clean, fish and plants tend to thrive. But let the water go foul and it negatively impacts everything. And introducing new fish or plants into a dirty aquarium does little good. The real solution to ethical and appropriate conduct in financial services lies in attacking both risk culture and the overall corporate culture from the inside out.

Recently, the importance of corporate culture within financial services has been strengthened through stronger regulation of “risk culture”.  The Australian Prudential Regulatory Authority (APRA) has introduced a new standard, CPS220, effectively requiring that regulated Boards must:

• Specify the quality and character of the culture that they seek to obtain (typically done in terms of core Purpose, Values and Principles). Most importantly, Boards are responsible for shaping the organisation’s culture.
• Measure the extent to which the actual culture aligns with the ideal.
• Develop and implement measures to close any identified gaps between actual and ideal.

Risk and Conduct in Other Industries

Currently there are few, if any, successful reshaping risk culture activities in banking to use as direct examples.  However, an analogy can be made within industries where “safety behaviour” is critical to company performance and people’s lives.  In the offshore oil and gas industry, strong, macho subcultures exist among pipe fitters, welders, drill crews, and other operationally intensive functions.  Line managers often have strong personalities with years of experience and they oversee younger crews, all eager to make a name for themselves and “be the best”.  (The analogy to trading rooms is not too far off).

In a testimony before the US Senate Committee on Energy and Natural Resources, MIT Professor Nancy Leveson identified corporate culture as the most critical element of safety in the Oil and Gas industry.

Recently, I spoke at length with Dr. Scott Geller and Dr. Steve Roberts of Safety Performance Solutions and Virginia Tech University, the recognized experts in behaviour-based safety change in the oil and gas industry.  Both are adamant that the behaviour change principles so effectively used in oil and gas for decades are transferable into other industries where strong subcultures exist and behaviour can be linked to positive and negative outcomes.

The Opportunity for Banking and Financial Services:

Now is a timely opportunity for banking and financial services leadership to manage risk culture and conduct with an effective intervention where employees at all levels feel confident and empowered and take personal accountability for the behaviours and effectiveness of the business and their colleagues.

Such an intervention should result in positive peer pressures, more open dialogue within peer groups and management concerning risk, behaviours and values, plus greater compliance and professionalism. Such shifts will lead to a significant reduction in excessively risky and unethical activities.  Employees at all levels will begin to accept greater personal responsibility for the culture and the overall spirit and pride in the organization will substantially increase.

“High fines on their own don’t result in changes in behaviour, they result in shareholders getting less dividends. So we need an additional set of levers to effectively reshape culture.”                   ~ Greg Medcraft, Head of Australian Securities & Investments Commission

My keynote address will be focusing on 4 important levers for culture change in Financial Services.  In my next blog I will describe these 4 levers and how to apply them.

John R. Childress

Senior Executive Advisor on Leadership, Culture and Strategy Execution Issues,
Business Author and Advisor to CEOs
Visiting Professor, IE Business School, Madrid

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