Financial Services Ireland


Culture and conduct have moved centre stage for leadership teams

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Behaviour and culture have moved steadily up the agenda for financial services firms, with the Central Bank of Ireland indicating that regulated entities can expect more intensive scrutiny of their norms and conduct in 2019. The pressure for change will increase in 2019, influenced by such factors as the CBI’s reform proposals, including the introduction of Conduct Standards and a Senior Executive Accountability Regime; the findings of the Irish Banking Culture Board Survey, which may identify and quantify levels of resilience and psychological safety in retail banking; and a continuing focus on diversity and inclusion that includes progress on the Gender Pay Gap Information Bill. But while reflecting on how the leadership team makes decisions and investigating why specific behaviours exist can be time consuming, such efforts also present an often welcome opportunity to consider steps to the creation of a more effective culture, writes EY’s Brian Binchy.

As we look ahead to 2019, trust in financial services remains low, conduct and operational issues continue to impact firms and attracting the talent that financial services firms need to deliver their strategy is an increasingly competitive activity. Leadership in firms recognise these issues and have been hearing a consistent message from supervisors on the need to address behaviour and culture.

Supervisors have kept the behaviour and culture of financial services firms at the top of the agenda throughout 2018 and the Central Bank of Ireland (CBI) has indicated that regulated entities can expect more intensive scrutiny of their norms and conduct in 2019. It is expected that the leadership of regulated entities understand what is required of them and it is no longer sufficient to pay lip service or explain culture as a nebulous peripheral matter.

It is accepted that there is no prescribed ideal culture that is appropriate for all firms but supervisors are assessing firms against well-defined characteristics of an effective culture. At a global level, supervisors have put an onus on: tone from the top; accountability; effective communications and incentives to drive the appropriate behaviours.

Locally, the behaviour and culture examinations of the retail banks, published in July 2018, provide an examination template for assessing culture across all financial services sectors. The CBI has been clear that it expects the customer to be at the heart of decision making, resulting in better customer outcomes. Through 2018, at EY we have helped our clients consider existing practice and potential interventions in relation to how decisions are made. We have been working with them on leadership style, communication of purpose and values, recognising group dynamics and mind-set in the organisation, as well as having a meaningful diversity and inclusion strategy for the business.

Culture and conduct

Changing behaviour is hard

Most firms have a clearly defined purpose, values and strategic objectives which guide the type of organisation that they aspire to be. Typically, the leaders of the firm do not have a lot of time to reflect on where they are on this journey or how, as individuals, they live and demonstrate the desired behaviours and values. Reflecting on how the leadership team make decisions and taking time to investigate why specific behaviours exist is an important step in ensuring that aspirations on paper transform into the desired behaviours and outcomes.

We have found that leadership of firms enthusiastically engage in such reviews and welcome the opportunity to consider steps to a more effective culture. It is an opportunity to put existing constraints onto the leadership agenda. For example, this may include delegation and accountability, the level of bottom up information from staff and customers and consideration of the type of decisions which merit leadership discussion.

Changing behaviours is hard, even for firms that have reflected on what is expected of them and have a clearly defined aspiration. Realistically, change is incremental. Change must be embedded throughout the organisation and there is a risk of fatigue if this process is rushed. Our clients are carefully prioritising the interventions that have the greatest impact. These interventions vary from firm to firm and typically include measures across a wide range of areas, including: performance management; talent management; embedding accountability; encouraging a ‘speak up’ culture; diversity and inclusion strategy; coaching leadership; inclusive decision making; conduct risk management; product governance; error management; and encouraging customer-centric innovation.

What can happen when it goes wrong

Following a number of conduct issues across the Commonwealth Bank of Australia (CBA), the Australian Prudential Regulation Authority (APRA) undertook a review of the Group and reported its findings earlier this year. The APRA found shortcomings in CBAs governance, culture and accountability frameworks, particularly in dealing with non-financial risks. As a result, CBA has to carry an additional $1 billion capital requirement and undertake a remedial action plan subject to independent oversight and public scrutiny.

While the recommendations from the inquiry are specific to CBA, the report contains lessons applicable to all financial services companies, including the need for rigorous board oversight, exacting accountability standards reinforced by remuneration practices, upgrading the authority and capability of risk management and compliance functions and customer-centric decision making. It also highlights the need to move from being reactive and complacent to empowered and challenging.

When taken together with the CBI examination of Behaviour and Culture at the Retail Banks, there are plenty of recommendations and examples of best practices for leaders of regulated entities to consider.

What can we expect in 2019?

We anticipate that behaviour and culture will remain at the forefront of the regulatory agenda and there are additional drivers to watch out for in 2019:

  • Extension of behaviour and culture examinations to the insurance and asset management sectors;
  • CBI reform proposals, including the introduction of Conduct Standards and a Senior Executive Accountability Regime;
  • The findings of the Irish Banking Culture Board Survey, which may identify and quantify levels of resilience and psychological safety in retail banking;
  • Ongoing focus on diversity and inclusion, including progress on the Gender Pay Gap Information Bill; and
  • Market trends, including increased focus on responsible banking and sustainable investing.

All of the above require careful consideration from leadership as to how they can effect real change and transform behaviours within their organisation.In determining the appropriate steps to be taken, leadership must also consider the appropriate sponsorship and oversight. Given the level of disruption facing industry players, any plan will be iterative and somewhat short-term, but should be cognisant of sustained leadership focus on changing behaviours. Noting that the focus is on changing behaviours and customer outcomes, leadership must also consider how they will measure progress and take on board insights from customers and colleagues.

This article first appeared in the January 2019 issue of Finance Dublin. If you have any questions, please don’t hesitate to reach out to us.