The Blind Leading the Blind: Conduct Risk in Financial Services

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The only thing worse than being blind is having sight but no vision.  ~Helen Keller

Almost Perfect newMy 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 Pieter_Bruegel_the_Elder_-_The_Parable_of_the_Blind_Leading_the_Blind_(detail)_-_WGA3512gruesome 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 cultureknowing 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 aTrust_Banks_TRUKBIvsMPBANK_SOC_2007-07--2012-09_labeled-clipped 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

email: john@johnrchildress.com

PS: John also writes thriller novels

About johnrchildress

John Childress is currently Visiting Professor in Strategy and Culture at IE Business School in Madrid and a pioneer in the field of strategy execution, culture change, executive leadership and organization effectiveness, author of several books and numerous articles on leadership, an effective public speaker and workshop facilitator for Boards and senior executive teams. In 1978 John co-founded The Senn-Delaney Leadership Consulting Group, the first international consulting firm to focus exclusively on culture change, leadership development and senior team alignment. Between 1978 and 2000 he served as its President and CEO and guided the international expansion of the company. His work with senior leadership teams has included companies in crisis (GPU Nuclear – owner of the Three Mile Island Nuclear Plants following the accident), deregulated industries (natural gas pipelines, telecommunications and the breakup of The Bell Telephone Companies), mergers and acquisitions and classic business turnaround scenarios with global organizations from the Fortune 500 and FTSE 250 ranks. He has designed and conducted consulting engagements in the US, UK, Europe, Middle East, Africa, China and Asia. Currently John is an independent advisor to CEO’s, Boards, management teams and organisations on strategy execution, corporate culture, leadership team effectiveness, business performance and executive development. John was born in the Cascade Mountains of Oregon and eventually moved to Carmel Highlands, California during most of his business career. John is a Phi Beta Kappa scholar with a BA degree (Magna cum Laude) from the University of California, a Masters Degree from Harvard University and was a PhD candidate at the University of Hawaii before deciding on a career as a business entrepreneur in the mid-70s. In 1968-69 he attended the American University of Beirut and it was there that his interest in cultures, leadership and group dynamics began to take shape. John Childress resides in London and the south of France with his family and is an avid flyfisherman, with recent trips to Alaska, the Amazon River, Tierra del Fuego, and Kamchatka in the far east of Russia. He is a trustee for Young Virtuosi, a foundation to support talented young musicians. You can reach John at john@johnrchildress.com or john.childress@theprincipiagroup.com
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