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Ensuring appropriate conduct and culture in the financial services industry - New trends in the financial sector

Failure to deepen cultural change leaves banks at risk of damaging intervention

By Machado Pedro - Co-Lead Partner of Regulation & Risk, Advisory Financial Services, PwC, Portugal

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Regulators have culture in their sights, responding to the widely held belief that poor conduct was at the root of the financial crisis and more recent market scandals. Whilst the initial regulatory priority was promoting a more risk-aware culture to support prudential regulation, the growing focus on conduct and customer protection extends the cultural lens into the murkier areas of ethics and integrity: what does “good” look like?

For their part, bank boards have made serious efforts to set the right tone from the top. But high level intentions do not necessarily impact on the main cultural pillars of accountability, communication and incentives. It’s certainly questionable how far tone from the top influences the key decisions and interactions that shape the ‘moments that matter’ within the business, ranging from assessments of product suitability to why some people are selected for promotion and not others. By the measures of ‘are banks more trusted?’ and ‘are they at less risk of fines?’, the job is still far from done in established banks. And the gap between what’s said and what’s done will apply equally to the financial sector as a whole.

Brief window
Banks still have a brief window of opportunity to engage their workforce in cultural change. But if banks miss this window, regulators are signalling they will move to fill the void. The very personal accountability and tough penalties ushered in by the UK’s senior managers’ regime offer a taste of what lies ahead if banks don’t move quickly enough. And this may only be the beginning.

Leaving regulators to shape culture won’t just be bad for banks; it could actually be counterproductive all round. If employees see cultural change as just more compliance, the response can become narrowly legalistic. Culture should be grasped as a driver for aligning behaviours with the overall bank’s risk strategy and appetite.

If banks miss this window, regulators are signalling they will move to fill the void.

Driving change
The big challenge is that culture, especially ethics and integrity, are difficult to operationalise and measure. Like an iceberg, much of what is most important lies below the surface, in a profusion of shared assumptions, which are communicated and reinforced through a series of subtle signals, many of them undocumented.

Experience suggests that an effective approach is to identify and influence the traits and assumptions which shape behaviours in the moments that matter. Some of these behavioural drivers may need intervention and change, but many others are positive and should be actively reinforced. The risk culture can provide a bridge for addressing ethics and integrity. By measuring and targeting behaviours most in need of attention, banks can demonstrate real differences.

Benefits go beyond simply satisfying regulators. Banks can strengthen reputation, retention and returns. They can also give employees more licence to capitalise on opportunities and embrace innovation, confident that they’re doing the right things.