Tuesday 13 November 2018

Richard Curran: 'Banking course on how to do the right thing is a welcome step'

Setting standards: The Central Bank has taken a more hands-on approach to ensuring suitably qualified people are managing our banks and also that board directors know what they are doing. Photo: Bloomberg
Setting standards: The Central Bank has taken a more hands-on approach to ensuring suitably qualified people are managing our banks and also that board directors know what they are doing. Photo: Bloomberg
Richard Curran

Richard Curran

"I do not think you can trust bankers to control themselves. They are like heroin addicts." - Charlie Munger, vice chairman of Berkshire Hathaway

"Irrational lenders come and go - mostly they go!" - John Stumpf, chairman and CEO of Wells Fargo

The first quote above sums up the feelings that many may have about the stereotypical "untrustworthy" banker who doesn't have the customers' best interest at heart.

The second carries the warning about the perils of taking too many risks in banking.

Right now, there is a significant sea change taking place in how banks and bankers are regulated. The focus for regulators and banks themselves is on changing culture.

The first wave of regulatory change came after the €64bn banking crash which was characterised by foot-to-the-floor lending and risk-taking more than it was about breaking the law.

Naturally legislators, regulators and taxpayers want to make sure that isn't allowed to happen again.

The second wave has come more recently from the €1bn tracker mortgage scandal where the interests of customers were not put first. This one was about the culture of banks. Now there is a big push to try and change that culture. The Central Bank has responded to the first issue by ensuring greater scrutiny of balance sheets, lending practices and setting boundaries on practices like mortgage lending.

It has also taken a more hands-on approach to ensuring suitably qualified people are managing our banks and also that board directors know what they are doing.

The regulator is responding to the tracker issue by introducing new rules around individual accountability among bankers for the decisions that they make, as well as introducing very specific codes of conduct dealing with behaviour and culture. The industry itself is responding by setting up a new Banking Culture Board. And now the Institute of Banking is running courses in conjunction with UCD, on leading cultural change and ethical behaviour in financial services.

Can you teach ethics in a course to a bank chief executive? Can you change the culture of an industry by attending a course?

Mary O'Dea, CEO of the Institute of Banking, believes this kind of education can form part of the solution, but on its own, won't achieve all of those goals.

Junior staff in banks may feel let down by their leaders in recent years, as they had to take a lot of the front-line flak from customers. One might think that only the top executives, who set the tone in an organisation, need to learn about these things. But the courses are geared towards staff at all levels and will examine things like group-think, group dynamics and how decisions get made. The institute has come up with two courses. One is a certificate course aimed at more front-line staff dealing with customers and the other is a diploma which should be attractive to middle and senior management.

The courses will deal with issues like ethical practices and conflicts of interest, and will instil an understanding of the importance of culture in ensuring good customer outcomes.

They will also deal with ethics and what it means to be ethical in financial services, and the obligations financial services companies have to customers.

The brochures refer to case studies from the industry and how they will examine issues like understanding organisational culture and mindsets, as well as instilling a culture of empowerment and accountability.

It all sounds like good stuff but will it work in changing banks' culture? The impact of the courses stands or falls on how the banks respond to the content. So you can teach any number of bankers about ethical behaviour, their obligations to customers and the importance of diversity of opinions, but how does the organisation respond when somebody sees something going on that doesn't meet those standards? Ms O'Dea says the ability to speak up goes right to the heart of an organisation and there is no point teaching these skills unless there is real leadership when it comes to how you respond to staff when they speak up about something. There is another positive point to the courses. Just getting bank staff and management to spend time studying, reading and talking about these issues, will surely prompt some of them to raise questions when they see behaviour that falls short of these standards. But the industry will have its work cut out. In 2010, Peter Nyberg was asked to conduct an investigation into the banking crash. He blamed group-think, a lack of questioning within banks and sheer recklessness in lending policies.

He concluded that among the litany of banker failures and mistakes was that banks had "forgotten the very nature of credit". He went on to say: "It appears now, with hindsight, to be almost unbelievable that intelligent professionals in the banking sector appear not to have been aware of the size of the risks they were taking."

Fast forward nine years after the crash and the Central Bank has had to conduct a report into the tracker mortgage scandal. It said it was "clear that consumer-focused cultures in the banks remain under-developed and that banks need to overcome obstructive patterns of behaviour in order to transition to maturity".

There is something in the culture of banking, not just in Ireland, that makes it very difficult to bring about deep lasting change from within. It often has to be forced on banks from the outside.

Now the industry is at least taking its own steps to bring about some change. This isn't an Irish banking problem. It goes a lot further. You only have to look at the sub-prime mortgage scandal in the US, the scandal around Wells Fargo bank or the foreign exchange and Libor scams in London. In some ways, they were a lot worse than anything we have seen in Ireland.

The British Banking Standards Board did a survey of 28,000 bank staff across 22 lenders last year. It found that one in eight bankers said it is difficult to progress their careers without "flexing their ethical standards". More than one-third worried about the negative consequences of voicing any concerns. Six out of ten agreed that "our internal processes and practices are a barrier to our continuous improvement" and one in eight had seen unethical behaviour being rewarded. These are not encouraging statistics. Another survey conducted by the 'Guardian' newspaper saw 200 bankers in the City of London interviewed. It found the language used in the profession consistently side-stepped the possibility of ethical discussion.

The banks' use of tax loopholes to help clients cut tax bills was described as 'tax optimisation'.

Lawyers and regulators who went along easily with bank proposals were described as 'business friendly'. Cases of proven fraud were referred to as 'mis-selling'.

On ethics, bankers were found to be amoral rather than immoral. They really did not want to break any rules and were afraid to do so. But they felt that as long as something was compliant with regulations, then it didn't matter.

Being amoral on some issues means that terms like good or bad do not play a part in the decision-making process.

When it comes to organisational culture and ethics, most banks in the UK have a form of in-house training. Mary O'Dea says the new courses here in Ireland are different and go further because they are externally accredited.

Non-executive bank board directors in Ireland have had courses available to them since 2012 - another follow-on from the crash. Trust in banking has been hugely damaged by the events of recent years. Anything the industry can do to rebuild that trust and begin the long road towards cultural change has to be welcomed.

Ms O'Dea said culture is being looked at in banks partially because we don't know what the next major financial crisis might be. She wants the courses to encourage a culture where people will feel they can speak out rather than sit back and say: "This is the way we do things around here."

The Institute of Banking courses begin in February.

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