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…
Most people were shocked at the behaviour exhibited by some of those world’s largest and most prestigious banks, both in the run-up to the global financial crisis and subsequent to it. Instances of manipulation of markets and mis-selling of products have come all too frequently. They have prompted a slew of industry initiatives and regulatory reforms and hefty fines have been levied on those found responsible. The aim of these initiatives has been, simultaneously, to encourage better behaviour in future and punish past misdeeds at source.
But how did these unethical behaviours arise in the first place, particularly on so systemic a scale? These behaviours were deeply puzzling, as they were apparently out of keeping with the character of many of the individuals involved. Assuming the individuals themselves knew these acts were wrong, what drove so many of them to act in this way? This is more than an academic question. Answering it may hold the key to preventing it being repeated.
In 1971, sociologist Henry Tajfel conducted a set of experiments with groups of individuals. These unearthed evidence of strong ‘in-group’ behaviour among the individuals in these groups. That is to say, their decisions were often shaped by what was collectively acceptable to the group rather than what was sensible for them as individuals. In group situations, people often quickly adopted a social, as well as an individual, identity which dominated their decision-making. So-called ‘social identity theory’ was born.
This theory has since been found in a wide variety of real-world settings and has been used to account for a wide range of behaviours which, when looked at from an individual perspective, are otherwise difficult to explain. For example, a now-famous US study looked at the poor academic performance of Afro-Caribbean boys in US schools, relative to their ability. The explanation was found to lie in social identities. In particular, a desire not to be seen to be ‘acting white’ by succeeding academically was found to be driving these boys to under-perform relative to their potential. This was despite the adverse personal consequences of these actions for the boys themselves, in terms of worsened income and job prospects.
The theory has also been applied to banking. An experimental study in 2014 looked at the incidence of cheating in different groups. It found not only that bankers were more likely to cheat than other professions, but that this cheating was more prevalent when bankers were reminded of their social identity. That prompted them to ‘act banker’. Unlike the Afro-Caribbean boy students, however, the bankers could often act in this way without risk of seriously adverse personal consequences for their future income and job prospects.
If this is the explanation, or part of it, for systemically unethical behaviour in financial services, the question then becomes what could be done to change the social identity of banking? Measures which encourage individual, as well as collective, decision-making and responsibility are one means of breaking down social identities. The Senior Managers and Certification Regime, introduced in the UK around a year ago, aims to do just that. It requires bankers in senior decision-making roles to act responsibly or face individual sanction.
Not so long ago, it was socially acceptable to drink and drive or to smoke in public places. But personal sanctions on both activities have, with time, acted to change fundamentally social perceptions of these two activities to the point where today both are effectively self-policing and self-sustaining. This is the journey banking needs to be on. Individual sanctions are a means of generating a different social identity for banking, one which is self-policing and self-sustaining. It is too early to tell how the measures that have been so far taken will shift the social identity of banking. But it is clear what success looks like. This is about changing what ‘acting banker’ connotes.
Andy Haldane, Chief Economist, Bank of England