The combined failures of management, supervision and culture that led to the 2007-09 global financial crisis, as well as scandals around rigging the London interbank offered rate and mis-selling of products, shone a spotlight on misconduct in the banking industry for the world to see.
To rebuild the public’s trust in the sector, the UK government set up the Parliamentary Commission on Banking Standards (PCBS) in 2012 to investigate the breakdown in banking culture and make recommendations as to how to prevent such failures again.
The PCBS’s final report, ‘Changing banking for good’ (CBFG), published in June 2013, included three key proposals: establishing a new senior management regime to ensure individual and senior executive accountability; reforming institutional governance and risk management; and enhancing competition to give customers greater choice.
Many jurisdictions followed the UK in launching inquiries into banking professional standards, as well as introducing rules around executive remuneration and senior management accountability, similar to its Senior Managers’ and Certification Regime.
In light of the recent collapse of Silicon Valley Bank and the forced rescue of Credit Suisse, however, many are asking whether these regulations were successful in improving bank culture and bankers’ behaviour.
Ten years on from the publication of the CBFG report, the Chartered Banker Institute and Starling Insights have compiled essays from leading figures, academics and regulators from across the world to assess the effectiveness of these reforms on conduct and culture, as well as the lessons learned along the way. While many believe that the personal accountability and risk culture in banks has improved somewhat, others argue that the scope of accountability does not go far enough.
It is fitting that the first essay is penned by Baroness Susan Kramer, who sat on the PCBS and is currently a member of the House of Lords. She outlined the three pillars that the committee’s recommendations stood on: a focus on financial stability as the main objective of supervisors, not competitiveness; the ring-fencing of investment banking from retail banking; and insisting on the “individual responsibility” for management failures in place of the prevailing “collective responsibility”.
She voiced concerns over the weakening of the reforms, which she said is “in full swing in the UK with the latest Financial Services and Markets Bill, which brings back a competitiveness objective for the regulator, and with the sweeping so-called ‘Edinburgh Reforms’, which undermine both ring-fencing and individual responsibility”.
In his essay, Stuart Mackintosh, executive director of Group of Thirty, an international body of financiers and academics, argued that the CBFG report had “shifted the narrative, altered incentives, changed the penalties, and so moved UK banking toward a recognition that banks have ‘a duty of care’ to their customers. However, “UK banks continue to argue their corner and press for a weakening of regulatory requirements — such as bankers’ bonus restrictions,” he said. “Dismantling existing standards, just as institutional and political memories fade and regulators retire, is a foolish move.”
He added: “The lesson here: do not lose sight of the importance of continued focus on the basics. Do not weaken rules, norms and conduct expectations laid down in CBFG. Leadership, effective risk management, board oversight, performance metrics, auditing, supervision and regulation, remain constant requirements.”
University of Stirling professors, Rob Webb and Markus Krebsz, pointed to the fines at major UK banks in the years following the PCBS recommendations as evidence that not much has changed in the interim years. “Given that embedding effective organisational culture is one of the best ways to prevent conduct risk from arising, it would appear there is still too great a focus by regulatory authorities and policy-setters on ticking compliance boxes rather than fostering good culture and values,” they wrote.
Looking to the future, Mr Webb and Mr Krebsz highlighted how artificial intelligence, machine learning and large language models, such as ChatGPT, has the potential to perpetuate bad behaviour throughout the organisation. “Embedding the right culture and conduct throughout the decision-making and financial product lifecycle will remain key,” they wrote.
According to Stephen Scott, founder and CEO of Starling Trust Sciences, the industry has reached an inflection point. “Ten years on, it has become clear that ‘changing banking for good’ implies changing supervision for good as well,” he said. “Success in both directions demands attention to culture as a central risk governance concern, and that bank boards, management and supervisors develop and deploy ‘behaviourally informed’ risk oversight capabilities.”
He added: “This requires collaboration among firms, supervisors, academic experts and leading technologists, and such collective action requires determined leadership. Much has been made of the unprecedented speed with which recent bank failures took place. If we hope to conclude, 10 years hence, that banking has indeed been changed for good, then this governance and supervisory reform agenda much be conducted with commensurate haste.”
Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight
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