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Banking needs a new social identity

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

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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