No more wilful blindness, much more individual accountability

Major change is on the horizon for banking culture.

By Ciaran Walker Eversheds Sutherland

AS THE TRACKER mortgage scandal unfolded in 2017, the Minister for Finance, instructed the Central Bank of Ireland to carry out a ‘culture review’ of retail banks in Ireland and report on “the actions that may be taken to ensure that banks prioritise customer interests in the future”.

Published in July 2018, the resulting report was extremely critical of the retail banks.

It noted, in particular, that all of the banks had “a distance to travel” to develop customer-focused organisational cultures. It also raised concerns about leadership styles, indicating that in some cases they were too “command and control”.

The CBI found that the banks had to do a lot more work to ensure their organisations were sufficiently diverse and inclusive, particularly at senior level, to prevent group-think, guard against over-confidence, and promote internal challenge.

As retail banks have found out the hard way, getting culture wrong can be very damaging to the bottom line.

A recent CBI report into the tracker mortgage scandal, for example, stated that, as of July 2018, the banks had paid out nearly €700 million in redress and compensation to affected customers. The final costs to the banks, which have been revised significantly upwards in recent days, are estimated to be in the region of €1.5 billion.

Getting culture wrong also undermines public trust, which may have longer-term negative impacts on banks.

The retail banks in Ireland recognise they must improve their culture and are making efforts to do so. This includes the work of the Irish Banking Culture Board – established in 2019 and funded by the retail banks – whose mission is “to make banking in Ireland trustworthy again”.

A role for regulation 

Regulators internationally have recognised that corporate cultures that lack individual accountability often give rise to misconduct, to “wilful blindness” and worse behaviours, particularly at senior levels.

Accordingly, regulation is needed to impose this kind of accountability.

Individual accountability regimes have been implemented across financial services sectors in a number of countries, notably the UK, which first introduced it in 2016.

Early indications from the UK are that this regime has improved governance and focused the minds of senior management in particular on ensuring proper accountability for decisions made, so “willful blindness” to misconduct is far less likely to be tolerated.

The CBI has recommended that new primary legislation be adopted to implement a strengthened accountability regime in Ireland, on the basis that this is necessary to promote cultural change. The proposal is broadly similar to the one introduced in the UK.

Key features of the Irish initiative will be a new ‘Senior Executive Accountability Regime (SEAR)’, under which senior management will be required to have ‘Statements of Responsibility’, clarifying exactly who is responsible for what.

The CBI has proposed that ‘Conduct Standards’ – obligations to act honestly, ethically and with integrity – be codified and apply to all staff in financial services.

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Additional conduct standards are to apply to more senior management, in particular obligations to take “all reasonable steps” to ensure that the firm is controlled effectively and complies with all relevant regulatory requirements.

The proposed regime will force senior individuals to ensure not only that good process is followed (and that all the right boxes can be ticked) but also that they have engaged substantively to ensure the right outcomes. This will include, for example, encouraging diversity, speaking up within the firm and not turning a blind eye to potential issues.

These proposals are a necessary step on the road to improving the culture of banks, insurance companies and other financial services firms in Ireland.

Preparation of draft legislation to introduce the new regime is well advanced, but the incoming Government should ensure that it is progressed without delay and signed into law this year, for the benefit of all.

Ciaran Walker is a consultant in the financial services regulation and governance group at Eversheds Sutherland.

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