Will planned new Central Bank legislation really change Irish Banking Culture?

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By Simon O’Neill

In the words of Christine Lagarde, IMF “Those working in the financial sector must be as serious about values as they are about valuation, and just as passionate about culture as they are about capital”. Culture has been referred to as the system of shared values and norms that shape behaviours and mindsets within an organisation.

The Department of Finance have announced its intention to bring forward legislation, the Central Bank (Amendment) Bill 2019 due to be published towards the end of 2019, intended to address serious cultural failings in the banks.

Introducing a senior executive accountability framework (SEAR), following recommendations from the Central Bank, the legislation will reinforce the Central Bank’s powers to hold individuals responsible for being held responsible for misconduct in performance of their role/professional duties on foot of ‘statements of responsibilities’ which will be required to be documented by financial services providers. The premise of the measures being that individual accountability is a key cultural driver of misconduct, and its introduction mirrors approaches adopted internationally in the UK, Hong Kong, Singapore and Australia.

The decision to introduce legislation arises from a report carried out by the Central Bank of Ireland, The Behaviour and Culture of Irish Retail Banks report (July 2018), which identified significant cultural indicators standing in the way of fair consumer outcomes at Irish retail banks including in particular the tracker mortgage scandal which is estimated to have cost the Irish banks roughly €1billion (€580 million of which in redress payments).

The Central Bank report was highly critical of the culture in the 5 largest banks operating Ireland, but what has happened and what are the likely changes?

The industry response has been to establish the Irish Banking Culture Board (IBCB) to act as a transformative influence on culture in the banking sector and promote fair customer outcomes. Whether this will make an impact will become clearer when it’s work programme is announced in Autumn 2019.

In the meantime, the Central Bank issued risk mitigation plans to the individual banks and proposed to the Department of Finance, the introduction of the senior executive accountability regime (SEAR).

The 2018 Edelman Trust Barometer ranked Ireland as the least trusting of the financial services sector. How can Banks’ regain trust and reorient their culture?

The financial sector has already identified the benefits, opportunities and begun to take steps to embed change in the context of sustainability and climate change into their businesses. Learnings from this process will be of benefit in realigning their culture. As with the sustainability agenda, cultural change must and should be led from the top, from the CEO, board and senior managers down throughout an organisation. It is from these individuals that the organisation’s culture primarily set and formed by their values, and conduct. It is for this reason that the SEAR proposals and Central Bank will focus primarily on individual accountability and senior management.

How can organisations address and change their culture?

  1. Development of a corporate values framework, aligning the institutions policies, procedures and conduct with its overall strategy and desired outcome.
  2. Establish an implementation group across all functions in the organisation, developing transparent internal policies (such as remuneration and other performance criteria) and procedures with impact driven reporting.
  3. Setting key milestones for integrating values into overall operations, products and services, reviewing and disclosure of progress and positive outcomes, and ultimately improving accountability with minimal regulatory intervention thereby delivering efficiencies and reducing costs.

If one thing is clear from the tracker mortgage scandal, it is that developing an effective, positive culture drives better risk management, organisational sustainability and ultimately delivers better shareholder returns and customer engagement in the long run. Critically however, it will now be an imperative from the point of view of authorisation and supervision of regulated financial services provider and individual employees and ongoing fitness and probity of such individuals with the forthcoming introduction of the SEAR accountability legislative measures.

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