The search for industry standards focuses minds on fostering an open and innovative environment where good conduct and good performance co-exist.

In November 2015, the Financial Stability Board (FSB) delivered a report to the meeting of G20 heads of state on progress with measures to reduce misconduct risk in the financial sector. Inevitably, the FSB’s focus is on regulatory steps including rules on pay and enforcement powers for supervisors. However, the FSB also noted guidelines produced by the Basel Committee on Banking Supervision in July 2015 that exhort bank boards to set a code of ethics or conduct intended to “foster a culture of honesty and accountability to protect the interest of its customers and shareholders”.

“Given recent events, a better understanding is needed of the effectiveness of financial institutions’ governance frameworks and the tools, beyond compensation schemes, to promote appropriate behaviours. This should involve both supervisors and institutions,” said the FSB.

The report is permeated with a sense that regulators are now establishing a substantial body of conduct rules, such as the UK’s senior managers and certification regime due to come into force in March 2016, and a global code of conduct for foreign exchange markets that is expected in 2017. Increasingly, the initiative must pass back to the industry itself to do more than just complying with rules and codes. The FSB convened a high-level panel with industry representatives in September 2015, whose conclusions included the need to “integrate behaviour and ethics considerations in staff hiring, professional development, compensation and promotion decisions”.

In the UK, the response from the industry is being spearheaded by two independent bodies created with regulatory encouragement – the Banking Standards Board (BSB) and fixed-income, currencies and commodities markets standards board.

“Every bank is at a different starting point, but the industry has a collective challenge to demonstrate that it can manage itself appropriately and focus on the customer, setting standards especially where you most want them – for instance, the treatment of staff or customers. These responsibilities cannot be delegated to regulators,” says Alison Cottrell, chief executive of the BSB.

Responding to regulation

The UK senior managers’ regime introduces high-level rules including the requirement for executives and board members to attest that they have done everything possible to prevent misconduct. The institution must also demonstrate that key risk-takers and decision-makers are suitably qualified.

“The senior managers and certification regime is a compliance challenge, but also a huge opportunity for banks to look at whether they have the right people in the right roles, both in the management and on the board, and to fill in any gaps,” says Mikael Down, director of policy and analysis at the BSB.

In practice, industry efforts to raise standards pre-date the work by regulators. The Chartered Banker Institute set up a professional standards board in 2010 and produced a code of conduct in 2011. To date, about 187,000 banking professionals have attained the foundation standard, and the intention is for all customer-facing staff in the UK to have achieved this level by the end of 2015.

“There is some overlap with the UK accountability regime, and banks see professional standards as part of the evidence that they are implementing individual conduct rules. But our standards are much more detailed and go well beyond regulatory requirements on integrity and putting customers first. What we want is not just a positive culture in each institution, but an industry aggregate culture,” says Simon Thompson, chief executive of the Chartered Banker Institute.

Ms Cottrell says conduct legislation such as the senior managers’ regime tends to be intentionally high-level because regulators actively want banks to take ownership of their approach.

“Good governance, professionalism and fitness to practice mean many different things, and there are advantages to developing a common sense of what ‘good’ looks like across the industry and how to measure and assess it. This may not be the same as a compliance minimum that a purely legal focus might imply,” she says.

The BSB has been undertaking an assessment exercise with an initial 10 banks, to be extended in 2016. This aims to elicit input directly from chairs of boards, and from junior and mid-level staff in different business units and locations. Topics covered include how respondents see the culture of the bank, how far the tone set by the management is resonating, and how readily staff feel they can speak up or innovate.

“These are bilateral conversations with each member intended to provide material for meaningful and challenging feedback. Our interest is in the detail, not the average, so this is not a league table exercise,” says Mr Down.

Rules versus principles

However, there is a debate within the industry about how far standards or codes should go into detail, regardless of whether they are defined by regulators or the industry. The alternative is a broader examination of how organisations operate and the principles that they seek to instil. Roger Steare, visiting professor of organisational ethics at Cass Business School and a strategic advisor to EY, suggests that any codes emerging from the BSB and other industry initiatives should be kept simple, based on an appeal to human virtue.

“The BSB is an opportunity to create a microculture among its members, to discuss how to act with integrity and develop diagnostic tools to provide client solutions. It can contribute to an environment of constructive dissent, where people feel able to discuss what to do and how to do it. The best way to learn is to emulate good practice that already exists in many parts of an organisation – that is more effective than a half-hour ethics training session,” he says.

Mr Steare was one of the creators of MoralDNA, an online ethical psychometric profile that assesses people based on three decision-making preferences: the law, logic and love.

“By understanding how people think and make decisions, we are more likely to be able to predict their likely behaviour, and in particular to notice any change in how people act in the workplace compared with their personal profile – while the person stays the same, the context changes,” says Mr Steare.

One crucial insight from this process is the concept of microcultures. Large companies are highly unlikely to have a single uniform culture, but instead present a series of different environments from the board itself to individual teams. Each may be subject to specific cognitive biases that can lead to poor decision making.

“When you investigate a crisis episode such as a rogue trader, you almost always find a tipping point, and that is usually to do with individual or team profit and loss going wrong. It is a binary outcome – do people feel able to raise the problem with their manager, is the management style fostering honesty, or does fear drive people to break the rules,” says Klaus Woeste, a partner in the EY financial services human capital practice.

Mr Woeste assesses staff and business units based on a four-box grid of high and low performance, and high and low integrity. Regulators see their aim as fencing off the high-performance, low-integrity corner, but Mr Woeste says many bankers consider themselves to be in the high-integrity, low-performance corner.

“The challenge is to work out what the high-performance, high-integrity corner looks like; essentially a business model for sustainable performance. Excessively detailed rules will stifle innovation, and that is perhaps why we are seeing innovation shift to the financial technology sector – these companies are not being told what they cannot do, so their decision making has a different quality to it,” says Mr Woeste.

Global and local

The report of the FSB high-level meeting noted a further difficulty in building a corporate culture that discourages misconduct. This is the challenge posed by large, global banking groups, which need to find a balance between maintaining a coherent organisation while operating on a localised basis.

“The issue was not the articulation of codes or standards, but their effective implementation and enforcement across diverse business lines and across jurisdictions. The ‘tone at the top’ is not always supported by consistent actions that demonstrate that conduct and ethical considerations visibly determine hiring, promotions, professional standing and success,” the report observed.

Banks have tended to drive standardised interventions such as training and performance management modules, seeking to set a single tone from the top and break down silos. But in reality, the conduct of most staff is shaped by their direct line manager. Some global banks have developed high-performing, high-integrity teams that are relatively separate from the rest of the organisation, and find it difficult to disseminate the positive aspects of those teams more widely.

“There is a real tension between operating effective teams that stay close to clients, and wanting efficient control and surveillance over the whole organisation. We are not yet at equilibrium on that question, and banks will arrive at different answers,” says Mr Woeste.


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