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Blog series – Peter Montagnon

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…

Are banks any different from other companies? Many bankers would probably answer ‘yes’ because of their role in financing the economy, the power and responsibility that it gives them, the special skills they need to do their job and what they would like to think of as the status this confers. Most regulators would answer “yes” because of the banks’ essential role in the payments system, the public dependency on their services and the high degree of leverage with which they operate.

So banks are seen as different because of the nature of their activity and because they are heavily regulated. Yet they also share with other companies a need for embedded purpose and values which sustain their business and secure its long term prospects.

Not long ago I was treated to some quite aggressive pushback when presenting this point of view to a group of bankers. The problems which gave rise to the crisis, I was told, were dealt with because bankers were now required by regulation to consider whether the product they were selling was suitable to the customer. So everything was now OK.

I replied that it was not OK because the public at large might reasonably expect banks to want to sell them a product that met their customers’ needs, not that they would do so purely because they were required to, by their regulator. As long as bankers are only constrained by rules from selling unsuitable products, the crisis could easily recur. Some people, after all, only regard rules as being made to be broken.

This is why banks need to move beyond obsession with compliance and take a look at what actually drives behaviour in their businesses. They will find the same principles, which apply to other businesses, apply to them as well. First, all businesses must have a sense of purpose which includes delivering something which society really wants and needs. Businesses which want to survive and thrive must deliver genuine value to their customers, not extract value from them.

Second the core ethical values which underpin durable businesses apply to banks as well. Such values include reliability, honesty, openness and respect for stakeholders, which means society from whom the social licence to operate is derived. Companies which can articulate a clear purpose and embed their values will tend to be worthy of trust. Those which do not may succeed for a while but will always be at risk.

Admittedly the task of building a good culture is harder for banks because it has to be carried out in parallel with a focus on compliance that consumes so much energy. Also, large banks are complex businesses with many silos with different characters and different motivations. Money market dealers rarely have much in common with provincial branch managers. Can we really expect them to have a shared loyalty to each other and to the organisation they all represent?

Perhaps we can if we can persuade them to converge around a common sense of what the business is there for. Perhaps those silos which do not fit the common purpose need to be abandoned and the structure simplified. Whatever they conclude, bank boards and managements need to keep reminding themselves that only by making themselves trustworthy can they hope to lift the burden of regulation.

Peter Montagnon, Associate Director, Institute of Business Ethics

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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