Whilst progress has been made tackling negative aspects of bank culture, there is still much work to do.
The ten‐year anniversary of the collapse of Lehman Brothers – arguably the peak of the financial crisis – is an opportunity to take stock and assess whether efforts to fix bank culture are working. The answer is a qualified ‘maybe’.
In a study by Risk.net and consultant Catalyst, 87% of banking risk managers said that ‘risk culture’ is key to understanding risk, yet only 57% said the concept was well defined in their organisations. Even fewer said it was well understood (45%) and measured (27%).
“We work with UK tier one banks and I’ve seen them all attempt genuine cultural change,” said Peter Beardshaw, partner and UK risk management practice lead at Accenture. “It is difficult to gauge how far that is fully embedded. These organisations are huge, which brings challenges. But we have been helping them implement models that take the ‘tone from the top’ down through the layers. The next step is that culture needs to be tested, to make sure it will not slip under stress.”
Regulators worldwide have used different tactics to try to change bank culture. In the UK, there is a clear focus on ensuring that the buck stops higher up in the hierarchy, which could be seen as a response to the public impression that senior bankers evaded justice (carrying their bonus cheques with them) after the crisis. However, it appears to have deeper philosophical roots than this.
In a little‐reported speech in March, Andrew Bailey, chief executive of the Financial Conduct Authority, said that one of the seeds of the 2008 collapse was planted 38 years earlier by economist Milton Friedman in a New York Times essay in which he said the job of businesses was “to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” Mr Bailey said that many managers in finance and elsewhere enthusiastically embraced the first half of that message – the bit about making as much money as possible – while ignoring the vital second half about conforming to society’s rules.
The Senior Managers Regime, introduced by the FCA in 2016, can be seen as a way of addressing this, as it boosts personal accountability for financial executives. Through fines, penalties, conduct initiatives and individual culture reviews, the regulator has also tried to tackle remuneration structures, conflicts of interest and other drivers of poor conduct.
One of the challenges, however, is that it is difficult to measure change in something as tough to define as ‘culture’.
“Banks have done much to address weak risk management processes. [But action on] culture is harder to highlight,” says Stuart Campbell, a director at consultant Protiviti. “There is [little consensus on the causes of misconduct such as] market rigging, though [many have blamed] personal interest and poor understanding and mixed messages from boards. Nevertheless, attitudes have changed and banks have been adjusting compensation schemes and clarifying responsibilities.”
But cultural change shouldn’t just stem from the regulator wielding a big stick – banks themselves must lead the charge. Indeed, they took the initiative in 2015 by launching the Banking Standards Board, whose members commit to being assessed against nine cultural indicators including honesty, competence, reliability and openness. The BSB had 25 member firms last year – including the five biggest UK banks – but faces a stiff challenge to enlist all of the 300‐plus banks in the country.
Critics also complain that it is a private and voluntary organisation with no statutory or rule‐making powers. A BSB spokesperson said: “The BSB can challenge and support firms to manage their culture effectively. It cannot raise standards itself – banks must do this. The commitment therefore has to be voluntary.”
Paul Butler is managing consultant at Catalyst and a former managing director of culture and conduct leadership positions at RBS. He gives the banks some credit for making staff understand that “it’s not just what you do, but how.”
“Banks have introduced culture role models. They have spent money on experiential training that uses real‐life scenarios. This genuinely influences behaviour and is more effective than compliance e‐learning, which has felt like a ‘tick box’ exercise,” he says. “Banks have also introduced these concepts in recruitment, objectives, appraisals – including 360‐degree reviews – and compensation. They have also married expectations with the SMR’s five conduct rules. This work is embedding values and has begun to make a difference.”
Mr Butler says improving risk culture is still difficult for those in the “first line of defence”, such as traders or salespeople, as they encounter so many potential risks. Meanwhile, “second and third line groups, such as managers and auditors, often act like police rather than internal consultants. That’s a missed opportunity.”