The only thing worse than being blind is having sight but no vision. ~Helen Keller
My first historical novel (Almost Perfect) I wrote while living in a stone Chateau in the South of France in the middle of Cathar Country. The Cathars were a popular religious sect in the 13th Century in the Languedoc region of southern France and the subject of a 100-year long Crusade by the Catholic Church to eradicate the heretics and “save” the faithful from their evil ways. (Actually the whole thing was about money and power, but that’s another story)
During my research about the Cathar religion and the Crusade I came upon a rather gruesome story. The leader of the crusading army, Simon de Montfort, in order to teach the heretics a lesson, took 100 prisoners and totally blinded all but one with hot pokers. The last man he only blinded in one eye. He then tied them all together, with the one-eyed man at the lead and told them to walk to safety in the next village. Can you imagine the terror and fright of the people in the region upon seeing a long line of blind people stumbling along the countryside led by a one-eyed man?
Conduct Risk, Banking and the Financial Conduct Authority
In a reaction to the plethora of ethics violations among big banks and as a result of over $250 billion in fines between 2009-2014, the public and government has moved to curb these excesses through regulation, since it seems like monetary fines are not doing the job.
Recently, the UK regulators have moved beyond just assessing market risk, operational risk or credit risk to address, measure and reduce “Conduct Risk”, which is loosely defined as: “the risk that a financial institution’s actions and employee behaviour will result in poor outcomes for customers”
The UK Financial Conduct Authority is a financial regulatory body which operates independently of the UK government and is financed by charging fees to members of the financial services industry, whom it regulated. Its aims are to identify, and hopefully measure, the risk associated with the culture of a financial organisation, the business impact of culture, and employee behaviours which do not support regulation, internal company policies, and/or customer/client interests.
However, by leaving the definition of ‘conduct risk’ deliberately undefined, the FCA has stated that it is up to individual firms to decide what ‘good’ conduct and customer outcomes mean for them. Moreover, the onus is on firms to show that they have done this thinking and modified their business accordingly. There are no set procedures, policies and frameworks to follow; the FCA has said they will assess conduct risk by looking at areas across the firm’s business and behaviour to get a holistic view of conduct activity.
Regulation alone does not change behaviour, but weak regulation only adds to the confusion and illusion of change!
So, here we are again dealing with the concept of corporate culture, knowing full well that there is no clear definition. Even the academics can’t agree on what culture is or how to measure it. So the FCA has basically said, we know culture and the behaviours inside a company are important to whether or not unethical activities are taking place, but we don’t really understand the concept of culture, so we will leave it to the financial institutions to define it for themselves. And we call this regulation and protecting the public?
And I don’t blame the leadership of the major banks for complaining about the growing cost of regulation and compliance, especially when the regulator won’t do their job of really understanding what they are tasked to regulate.
Yet one can argue that it is in the self-interest of the large financial institutions to find a solution to the recurring unethical actions that are creating huge fines and also damaging the reputation and integrity of big banking and threatening the future existence of their businesses. Already alternative sources to capital are springing up by the hundreds to provide people with access to borrowing outside of the normal (and highly distrusted) banking channels. And even some of the more profitable internal banking businesses, like FX, are loosing customers to entrepreneurial businesses that offer better service, smaller fees and more transparency.
So why have the global banks continued to be plagues with fines for unethical activities? Simple, they really don’t understand that it’s not the problem of one or two rogue individuals, it’s their internal corporate culture.
“It’s not a case of a few rotten apples. We’ve had PPI, Libor, forex and all the rest. The problem is probably the barrels”. ~Mark Carney, Governor, Bank of England
One of the ways to tackle the issue of unethical behaviour in banking, by both the regulators and the companies themselves, is to fully understand the drivers of corporate culture. What creates a certain company culture to evolve? What actions and activities causes it to be perpetuated? What are the real levers for culture change?
Until the leadership of banks, and the regulators, start from a common ground of knowledge and understanding, the situation will remain one of the “blind leading the blind”.
“We simply do not know if we have the tools to change the culture of banking!” Lord Turner, FSA Chairman
Written and Posted by:
John R Childress
Senior Advisor on Corporate Culture, Leadership and Strategy Execution
Author of LEVERAGE: The CEO’s Guide to Corporate Culture and FASTBREAK: The CEO’s Guide to Strategy Execution
Visiting Professor, IE Business School, Madrid
PS: John also writes thriller novels