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Blog series – Michael Held

In advance of our event at the Bank of England on 21 March 2017, we asked interested parties to write on the theme: Worthy of trust? Law, ethics and culture in banking…

Note: What follows are my own views and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.

‘Where were the lawyers!?!’

If you’re not asking that question when you read about a corporate scandal, you should be. Public companies – banks included – are well-staffed with lawyers. But are they well-served?

Why do companies – again, banks included – get into trouble when lawyers are there explicitly to keep them out of trouble?

Maybe what lawyers actually do is not what I think they’re supposed to do. Let’s stay with banks, since that’s what I spend my days thinking about. I worry that lawyers in banks are too often asked by clients, in effect, ‘How close to the legal line can I get?’ Or maybe they’re instructed, ‘Just tell me if this is legal or illegal, not what I should do’.

Worse, I worry that lawyers, intentionally or not, enable this kind of thinking.

How’s that?

In a word, culture. Culture comprises the shared norms that any group of people will develop over time. These are the unwritten—and perhaps unspoken—rules that are communicated largely through behavior. To some extent, each of us takes our cues from our peers and supervisors. By observing others, we discover what is important to the group. We gauge the difference between what is right and what is wrong, between what is successful and unsuccessful.

Sometimes this very basic, human tendency to ‘fit in’ goes too far. It leads to a dangerous level of adherence and lack of questioning. Lawyers in any organisation can get caught up in the same dynamics that can ensnare their clients. We’re not immune from our surroundings.

But that doesn’t have to be the case.

Lawyers can – and should – occupy a role that is both insider and outsider, to borrow a term from Gillian Tett. We should offer our clients both insight and independence.

Insight comes from access to many divisions of large organizations and opportunities to build trusted relationships with a client over time.

Independence comes, in part, from a lawyer’s training, independent code of ethics, and reporting responsibilities that ultimately go up to the board of directors.

In short, lawyers have to understand what happens within a firm and question whether decisions are both legal and ethical. We have to tell clients not only if they may do something. We should also counsel them about whether they should do it.

I do not mean to imply that a lawyer must serve as a priest, a rabbi, or a psychologist. (Although if you are, so much the better!) A lawyer’s advice on culture should always be grounded in law. We must be cautious in venturing too far afield. But in light of recent history, I’d say that lawyers could benefit from some wanderlust.

It is terrific that the Bank of England’s panel on bank culture includes a lawyer—and not just any lawyer. The Lord Chief Justice probably has some things to say on the role of law and lawyers in improving conduct and culture in financial services. I’ll be there, paying close attention.

Michael Held, Federal Reserve Bank of New York

Senior Managers and Certification Regime

Exploring how the SMCR - and especially Certification - can be implemented in the most effective way across the sector.

The Senior Managers and Certification Regime is a major regulatory change that will affect all banks and building societies. Responding to recommendations by the Parliamentary Commission on Banking Standards, the government and regulators have together developed a comprehensive framework to ensure better accountability and responsibility for behaviour, competence and culture in banks and building societies. The new framework provides an opportunity for the industry to focus on and demonstrate a culture of professionalism. We are working with firms and regulators to facilitate this, including areas where a common approach across firms could support both the objectives of the regime and the skills and development of the people covered by it.

Professionalism

Evaluating whether a more 'professional' approach to banking would improve behaviour and competence across the industry.

The Parliamentary Commission on Banking Standards found that 'banking culture has all too often been characterised by an absence of any sense of collective responsibility to uphold the reputation of the industry', and argued that a greater focus on professionalism could be an answer to this. Working with a leading team at the University of Leeds, we are researching the issues around professionalism in banking. In particular, we are reviewing how professional qualifications are currently used across the sector, and at whether a stronger role for professional bodies, along the lines seen in some other sectors, like medicine or law, would help raise standards. To inform this work and develop a rounded picture of 'professionalism' and what it means in banking, we are surveying banks and building societies, professional bodies and a wide range of other interested groups, including consumer bodies and investors.

Assessments

Providing an honest and impartial assessment to Boards of progress against objectives on behaviour, competence and culture.

The BSB assessment exercise presents Boards with an objective and impartial view of their firm's culture, identifying where things are working well and recommending areas for improvement. It draws on information not only from Boards and senior teams, but also from employees, investors (or members), trade unions, customer groups and other relevant bodies. In doing so, it will provide constructive challenge to each firm individually, while building a collective understanding of common issues across the industry, or sectors within it. We undertook our first annual assessment exercise in 2015 with ten firms (Barclays, Citi, HSBC Bank, Lloyds Banking Group, Metro Bank, Morgan Stanley International, Nationwide, RBS, Santander UK and Standard Chartered). The BSB itself will not publish individual assessment reports - each firm owns its own report - but key themes and messages will be set out in the BSB's annual report, the first of which will be published in Spring 2016. Given that Board engagement is central to the assessment work, only firms that have their headquarters in the UK are eligible for the full assessment exercise. All firms, including branches of firms headquartered overseas, will however be included in a focused membership-wide survey, which will allow each participating firm to benchmark itself against its peer group.

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