Tracker fines prove banks need a cultural revolution before they put customers first
The banks had better watch out. Culture is coming. In the wake of the tracker mortgage scandal, there is a growing sense of the need to fundamentally examine and change the culture at Irish banks.
The tracker scandal wasn't just a few mistakes by a couple of banks. It was widespread, and as Ed Sibley, deputy governor of the Central Bank told an event in Dublin this week, all the main banks will most likely be subject to enforcement proceedings.
It sounds like a pretty stern rap on the knuckles but in a way it might have been better if some had reacted better than others. If all of the main banks end up getting punished, they could comfort themselves with the fact that they were all at it and therefore no worse or better than some other banks.
Mr Sibley compared and contrasted the approach to regulation and compliance at Irish banks before and after the crash. His verdict on the banks is not very positive. When it comes to the high-growth boom years of the past, there was insufficient follow-up and enforcement.
Since the crash, there has been a much more proactive and intrusive form of compliance regulation and enforcement. According to Mr Sibley, when there was lighter regulation the banks didn't have the right culture and problems happened - well €60bn worth of bank crash problems.
But the recent tracker mortgage scandal, he said, showed that with greater levels of compliance, more rules and more active regulation, problems still occurred anyway.
The regulatory pendulum has shifted but not enough has changed.
All of this will be factored into a review of culture at the banks about to be undertaken by the Central Bank. It will involve a series of processes aimed at assessing and even measuring culture inside the banks.
The event, organised by legal firm Eversheds Sutherland, also heard from Wijnand Nuijts, head of governance, culture and development at the Dutch financial regulator, DNB.
He outlined a post-crash relationship between the banks and the regulator in the Netherlands which is heavily focused on culture within the banks. The Dutch regulator ensures the boards of banks conduct oversight of the culture within the organisation. It also ensures that internal audits on culture are performed, along with ensuring each bank has the right attitude to whistle-blowers.
It has even hired a team of psychologists who help in assessing the culture of the organisation. This involves actually sitting in on board meetings and observing behaviour.
Is the chairman open enough to discussion happening? Is there too much conformity without challenge? Is there evidence of an in-group among the board members ?
The Dutch regulator regularly presents findings of these reviews to the banks. This is followed by what Mr Nuijts described as "challenging" conversations with the bankers.
The sceptics might argue that such an open approach between the regulator and the regulated will never happen or catch on in Ireland. Perhaps, but there is a window now through which the question of culture at Irish banks can be addressed.
Ed Sibley outlined several initiatives that are open to the Central Bank to consider as a regulator when it comes to influencing the culture of the banks. He mentioned greater board oversight on culture, internal audits, regular interviews and the possibility of board sub-committees dealing with culture.
He also expressed an interest in the approach to individual accountability that has been taken in the UK.
There has been a clamour for greater accountability in banks in the wake of the tracker scandal here.
There is a sense that it will eventually end up running into the sand because many people in senior positions will say they were not aware of specific actions being taken.
Ciaran Walker of Eversheds Sutherland, a regulatory lawyer and former head of enforcement at the Central Bank, talked about the concept in the UK of "wilful blindness". The British regulations now counter that by putting in place a regime where if somebody responsible for a particular part of the bank says they didn't know about something untoward, they must be able to give a reasonable account of why they didn't know.
Mr Sibley said he has looked at the UK approach, and while he had some reservations about how it has been applied, he did not rule it out for Ireland. In fact, he seemed quite open to it. This would be a major move in bringing about greater personal accountability in the sector.
The Dutch model, which appears to be working, is based on trust - between the regulator and the regulated. This cannot be created overnight.
In the wake of the tracker mortgage scandal, Ireland doesn't appear to be starting in the best place at all. There is a clear sense that trust has broken down, as the banks have been dragged into taking a new and more customer-focused approach to cleaning up that mess.
Bankers will have their own perspective on all of this. They see a world of greater regulation, more compliance and more rules to be observed. The idea of imposing a new set of regulatory measures around culture will not sit well.
There is a big debate in the corporate world about the role of culture in certain sectors. Banking is one which has been shown to fall foul of short term thinking and profit, at the expense of long term more sustainable business models.
Bankers might also want to see an opportunity for being rewarded in some way for showing positive attributes of culture in their organisations. When asked about this, Mr Sibley pointed out that while there had been 13 published breaches by banks in the last year, in reality there had been "hundreds" of breaches discovered or reported by the banks themselves.
He gave this an example of how the Central Bank is prepared to be flexible and ensure there are benefits to self-disclosure where rules have been breached.
The event also heard from Dan Denison of the University of Michigan, a leading scholar on Organisation Development and Culture Change. He talked about the need to incentivise management at banks to do things better. He said it was part of a longer term commercial imperative that they put their customers first.
It is quite extraordinary to think that just a few years after a €60bn taxpayer bailout of Irish banks, a regulator would point to obvious current failings within the culture of banks.
The review of culture is expected early in the New Year and the Central Bank has said it has already developed a framework for going about it. Its terms of reference and methodology will be drafted in the coming weeks.
It is clear that the Central Bank is aiming high - it wants to see culture change led from the top. Mr Sibley talked about the gender imbalance that still exists at the top of banking and the need for greater diversity of different kinds on boards.
He alluded to international studies around the tendency to appoint optimists and not pessimists who will question and challenge boards. He also referred to the 'consensus seekers' often found on boards internationally.
A big focus of the Central Bank in all of this will be how bankers are incentivised to behave. What are they rewarded for doing and how?
It seems highly unlikely that a regulator will be able to influence the culture of banking organisations in Ireland in a meaningful way without carrying a big stick behind its back at the same time.
Corporate governance, risk assessment and management systems have all improved at the Irish banks since the crash. They don't want to go bust again.
But transforming their entire culture to become more customer-driven, is a tall order. Surely, it has to come from within the banks themselves.
There are some senior figures in Irish banking who want to make those changes. Perhaps there is a chance to begin that process now.