May 2021

Culture & Conduct Risk in the Banking Sector

Why it matters and what regulators are doing to address it

Contributors

In Focus
- RAVI MENON
  President & CEO, The Institute of International Finance
  'Regulatory Refresh Requirements'
- CLARE BOLINGFORD
  Director of Banking & Insurance, New Zealand FMA
  Addressing the blind spots
- MOTONOBU MATSUO
  Secretary-General, Japan SESC
  Japan’s ‘Digitalization’ agenda
- ONG-ANG AI BOON
  Director, Association of Banks in Singapore
  'Our inaugural Banking Trust Index'
- BRIAN BROOKS
  Former Acting U.S. Comptroller of the Currency
  The role of tech in supervision
- MARK ROE
  Head of Risk Culture, Australian Prudential Regulation Authority
  Our approach to transforming risk culture
- ALISON COTTRELL
  CEO, Financial Services Culture Board
  Organisational resilience and banking culture
- KATHERINE GIBSON
  Member of the FSCA Transitional Management Committee
  Our culture & conduct reform journey
- JONATHAN DAVIDSON
  Former Director, UK FCA
  Supervisory interests in corporate purpose
- CHRIS WHITEHEAD
  CEO, FINSIA
  Professionalization of the Australian banking sector
- MICHAEL HELD
  EVP, Legal Group, NY Federal Reserve Bank
  The lawyer’s role in bank culture reform
- CHRIS WOOLARD
  Former Interim CEO, UK FCA
  ‘Outcomes Based Regulation’
- HO HERN SHIN
  Deputy Managing Director Financial Supervision, MAS
  Trust, integrity & technology in banking
Ground Breakers
- MIREA RAAIJMAKERS
  Global Head of Behavioral Risk Management, ING
  From policy to practice
- SHEE TSE KOON
  Country Head, DBS Singapore
  Leading on culture & conduct
- LORETTA YUEN
  EVP, Group Head Legal & Regulatory Compliance, OCBC
  Elevating culture risk management
- JOHN FLINT
  Former Group CEO, HSBC
  'The Healthiest Human System'
Our View
- JOHN SEELY BROWN
  Former head, Xerox PARC
  ‘Wicked Problems’ & 'Infinite Games'
- JAMES FREIS
  Former Director, FinCEN
  Lessons learned at Wirecard
- GARY COHN
  Past Pres. & COO, Goldman Sachs
  What comes next?
- RICK KETCHUM
  Former Chairman & CEO, FINRA
  What comes next?
- KAREN COOK
  Ray Lyman Wilbur Professor of Sociology, Stanford
  'Social Capital & Superminds'
- THOMAS MALONE
  Patrick J. McGovern Professor of Management, MIT Sloan School
  'Social Capital & Superminds'
- TOM CURRY
  Former U.S. Comptroller of the Currency
  'What Comes Next?'
- AMY EDMONDSON
  Professor of Leadership & Management, Harvard Business School
  Psychological safety, diversity & inclusion
- ANN PENDLETON-JULLIAN
  Fellow, Standard Center for Advanced Study in the Behavioral Sciences
  ‘Wicked Problems’ & ‘Infinite Games’
The Academy
- DAMON CENTOLA
  Professor of Communication, Sociology & Engineering, University of Pennsylvania
  'How Behavior Spreads'
- KATHY MATSUI
  Adjunct Professor at the Kyoto University Graduate School of Management
  'On Womenomics'
- TOM READER
  Associate Professor of Organisational Psychology, London School of Economics
  Measuring culture and conduct risk
- CHRISTINA SKINNER
  Assistant Professor of Legal Studies & Business Ethics, Wharton
  Legal views of culture & conduct risk
Closing Comments
- CAROLYN ROGERS
  Secretary General, Basel Committee on Banking Supervision

Key Takeaways

Social Capital – Broad us-them antagonisms were replete in the past year, many exacerbated by the COVID-19 crisis, leading to a heightened demand that we rebuild our ‘social capital.’ Many look to the business-sector to take the lead. Mitigating misconduct, and the social harm it may cause, is not enough: there is now insistence that firms demonstrate an ability to do social good.
ESG Imperatives – Social and economic tensions and imbalances laid bare by the Covid-crisis have very clearly contributed to calls for ‘reimagining capitalism,’ and this is seen in the growing emphasis on ESG interests across global markets. Concern for good governance and beneficial social outcomes, such as improved DE&I, are now especially prominent amidst the culture and conduct risk reform agenda.
Governance, Audit & Regulatory Failures – The last year brought stark examples of governance failures at firms in many industries, compounded by startling lapses on the part of the auditors and regulators relied upon to assure the integrity of market participants. The audit profession and many bank regulators now face calls for the urgent reform of their own culture and conduct risk governance.
Outcome vs. Intent – Against the backdrop of the Covid-crisis, we see the heightened significance of firm culture for regulators. Their emphasis has shifted from an examination of the inputs of good culture, governance and risk management to the outputs of relevant control measures. Firms are expected to demonstrate an ability to assure good outcomes ex ante.
Personal Liability – The steady march of executive ‘accountability regimes’ saw continued expansion over the past year, increasing the individual liability for executives who preside over misconduct scandals. With this comes a marked shift away from the traditional ‘detect and correct’ approach to conduct risk management towards a ‘predict and prevent’ imperative.
Forward-Looking Metrics – Past consumer, investor and social harms, coming as a consequence of overt misconduct and/or well-intended risk management failures, has led to a call for the development of leading indicators of such outcomes. These predictive metrics must move beyond assessment of risk management systems and processes to examine the cultural norms and ‘people dynamics’ within a firm.
Behavioral Science – In recent years, bank regulators have looked to behavioral science to better assess conduct norms, propensities and risks among firms. Now, many firms have begun to turn their own attention to behavioral science, in the context of operational risk management, but also with a view to improving the performance of business units and corporate functions.
Psychological Safety – Among others, bank regulators are asking whether employees feel free to issue challenge when faced with questionable management instructions or peer conduct. They argue that firms must promote an atmosphere of ‘psychological safety’ if such a ‘speak-up culture’ is to prevail. This element of firm culture will see greater attention from supervisors, investors, and media.
Work-Life Balance – Work-from-Home protocols have blurred definitions of ‘the workplace,’ and the established parameters for the ‘work day,’ even as staff are left feeling cut off from the social support structures they previously enjoyed on the job. The result is a new range of culture, conduct and performance risks for which we struggle to devise effective management.
RegTech – The RegTech ecosystem has achieved greater maturity in many key financial markets. We now see more regular and coherent collaboration with RegTech pioneers among regulators, central bankers, industry associations and standard setting bodies, investors, board directors, and firm leadership, at a pace accelerated by Covid-challenges.