May 2, 2017    6 minute read

Ethical Banking Can Reshape the Future of the Industry

Moving Beyond The Toddler State    May 2, 2017    6 minute read

Ethical Banking Can Reshape the Future of the Industry

On April 27th, as Republican lawmakers in the US drafted an alternative to the Dodd-Frank Act, the set of rules spanning from the Volcker Rule legislation to the imposition of substantial capital and liquidity standards on financial institutions defined “too big to fail”, the FT Banking Standards Conference, a major event focused on the increasing betterment of professional behaviour and ethical standards adopted by banks and other financial institutions in the last years, was taking place in London.

Setting the Scene

Since the Great Recession started in 2007, confidence in the banking sector has dramatically fallen by close to eighty percent, compared to twenty percent ten years ago, according to RBS Chief Executive Ross McEwan. When culture is one of the main factors that define an organisation, or, as in this case, a whole sector, there is need of a change in the relationship between banks, their shareholders, clients, and the wider public. More resources should be invested to improve the banking culture not only towards higher professional and ethical standards, but also to improve welfare among employees.

The Main Challenges

Culturally speaking, banks have passed their ‘toddler state’, as stated by Julia Dunn, CRO of Nationwide Building Society. The main targets now are sustainability, improving customer experience, simplifying the bank, supporting institutional growth, and engaging more with employees. What can make the difference, is putting into practice the new framework of objectives, with incentives and consistency between theory and action. Still, as Andrea Orcel, Member of the Group Executive Board of UBS, rightfully pointed out, banks should also be careful not to achieve the opposite effect; a ‘police state’ where employees have a fearful perception that mistakes may have negative consequences at a personal level, leading to worse behaviours such as hiding losses.

Banking’s Cultural Struggles

One of the principal culture challenges in banking, according to a McKinsey’s report, is the lack of ownership at a personal level among employees. This includes little-shared vision and values, lack of innovation, creativity, and investment in human resources, the overwhelming authority of senior management, and too much competitiveness among employees. The consequences of these factors combined are usually overreliance on external actors for risk and compliance divisions, and the increasing loss of competitiveness of the firm. In the first case, the outcome may be incomplete, or biased reports due to the different methods and views adopted by agents coming from a different culture, sometimes seen with hostility by insiders. In the end, the outcome is a drastic reduction of profits, with all its related outcomes.

Still, listening to customers’ needs does not imply a simplification of either the decision-making process or the choices themselves (e.g. shutting off unprofitable branches). There is a perceived need for financial education for the general public, who does not always fully understand certain aspects and services delivered by the banking sector. For example, many of the individuals that see banks with a negative attitude, are the same persons who have a history of bad debt, and credit card interest to be paid.

Another topic of discussion emerged during the conference, were the recent scandals in the banking word, from the one involving Barclays CEO trying to uncover a whistleblower, to the conflict of interest among Bank of England deputy governors, to the Wells Fargo fake accounts. In this case, is evident a need of stringent regulations, but as Steve Pateman, CEO of Shawbrook Bank, pointed out, a slower course should be taken to ensure that all the procedures and safety measures are taken, a process that may last more than one generation. The transitional process towards a more ethical banking culture is also increasingly being fostered by fintech firms, who compete with banks for both talent and customers.

Banking Standards Board: A Model for Financial Regulators Worldwide

To “help to develop a culture within the banking sector, of responsibility and accountability, rather than blame” and “help to promote personal resilience and well-being among employees, enabling them to serve their customers, members and clients well”, the Banking Standards Board was established. Set up in 2015, the Banking Standards Board is an independent organization funded by the biggest banks in the City of London. BSB’s annual report doesn’t measure a bank’s culture, but it surveys only the characteristics usually associated with a positive banking culture (honesty, respect, openness, accountability, competence, reliability, responsiveness, personal and organisational resilience, and shared purpose).

Among the 28,000 employees surveyed, 32 percent saw a conflict between the firm’s values and the way business is conducted, while negative behaviour has been rewarded only in 15 percent of cases. More than 25 percent reported a positive correlation between work and health problems, but according to 90 percent of the surveyed, customers are always prioritised, and in general, the workforce has the skills and competencies to achieve respectable results. However, as Dame Colette Bowe, Banking Standard’s Chairman, highlighted, BSB provides solely impartial evidence and helps to identify good practice, and only banks and building societies can act to make the difference, and raise the standards in the banking sector.

During the conference, emerged from members of the Federal Reserve Bank of New York, an interest to create also in the USA an institution modelled on the Banking Standards Board. Michael Held, Executive President of the Legal Group and General Counsel of the New York Fed, put emphasis on the worries of American financial institutions about their reputation. But as Dame Colette remarked, it is up to the banks to act and create their version of the BSB, whose role in this can be only of the model to be imitated.

Work in Progress

In conclusion, the global banking culture can be considered as a work in progress, and as Mrs Bowe said, in some circumstances, acts like whistleblowing should be interpreted differently, more like speaking up about problems in the organisation, rather than something illegal that has to be punished. Ethical thinking, especially in the long term, appears to be the only way viable by banks to regain their momentum, in an era during which many bankers are not proud of being who they are (another point mentioned in the conference). But still, there is widespread recognition that a basic financial education is needed, also to reduce among the general public, the stigma associated with banks. Both parties can have benefited from this situation. It is in the banking sector’s interest to foster a more ethical culture, because of a bank’s original aim, as remarked by Orcel, is to help individuals achieve their ambitions.

 

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