I’d like to welcome you all here this morning.
I want to begin by acknowledging the work of Professor Blanaid Clarke and her colleagues in putting this conference together. I also want to particularly thank Blanaid for her eight years of service on the Central Bank Commission during some of its most challenging times.
I know that Blanaid’s fellow Commission members greatly appreciated her legal expertise and the academic rigour she brought to the Board.
Her work illustrates the importance of marrying the knowledge and expertise that exist within our universities with public policy and regulatory decision making.
Introduction
It is my very great honour to give the opening address at this conference.
As some of you may know, I was a student here at Trinity, so it is a novel experience to be back here in the lecturer’s position, although I certainly don’t intend to lecture you.
This is the first opportunity I’ve had to speak at length on the issue of culture and diversity since, following my request, the Central Bank published its report on behaviour and culture in the five main retail banks in Ireland.
I have taken this time to reflect on the findings of the report, and to consider its implications.
The Edmund Burke Theatre is certainly an appropriate setting for a discussion about culture and values and while I was preparing my remarks for this address, I considered what he might have had to say on this subject.
One of Burke’s life-long concerns was the moral codes governing the behaviour of individuals as citizens and the social obligations that flow from participation in the commercial life of a society.
In keeping with this, one of the clear takeaways from the Culture Report is that employees in the banks did not feel able to speak up and stand up when something was happening, whether it was mistakes being made, poor processes and controls in place, or outright wrongdoing.
We will all face times when we have to choose between a quiet life and ‘doing the right thing’, but such choices are made even more difficult when the lines between right and wrong are blurred, and our colleagues and peers, people we admire, are engaged in the ‘wrong’.
However, in charting a course through these dilemmas, Burke provides clarity when he states that:
“There is, however, a limit at which forbearance ceases to be a virtue.”
It is easy to single out bankers, but we have many examples across many professions in this countrywhere an excess of forbearance has been damaging to public trust in our institutions and to our public life in general.
It is also easy to think that this is a problem confined to Ireland but it occurs across the world, as illustrated by the roll-out of senior manager regimes across developed financial systems.
Nonetheless, as members of society, regardless of our role, it is our moral obligation to make choices which will not be to the detriment to our community, not only in our work but in our everyday lives.
By making these statements I am not unduly criticising those working in financial sectors but instead encouraging them to speak up if they feel or know that something is wrong.
Culture
The culture of any organisation encompasses values and behaviours that contribute to its unique social and psychological environment.
One straightforward definition of culture that is particularly noteworthy is that ‘culture is what people do when no one is watching’.
Because this focus on culture is such a new concept in the spheres of banking and regulation, much of our understanding comes from the academic research in this area.
According to David Needle, lecturer of business at King’s College London, an organisation’s culture represents the collective values, beliefs and principles of its members.
It is a product of factors such as management style, and the organisation’s vision, norms, environment, and habits.
Taking this analysis, culture is not just the rules set out by management, or the laws that a business must follow, but is made up of the choices that each individual makes.
The nebulous intangibles of culture present a difficulty for regulators and policy makers.
Nonetheless, we have an opportunity to bring about real change in the financial services industry – changes that are not reactionary, but proactive and carefully considered.
I mentioned that I had taken time to reflect on the findings of the Culture Report; I am also taking time to consider how legislation can be used to best effect.
Many of the specific issues unearthed by the mortgage tracker scandal took place more than a decade ago. The regulatory landscape has been utterly overhauled since the financial crisis, with the Central Bank Reform Act 2010 and the Central Bank Supervision and Enforcement Act 2013.
Likewise, the European Single Supervisory Mechanism, which was introduced in 2014, changed regulation and supervision of the banking sector almost beyond recognition.
I want to assure you that the Central Bank of Ireland is acknowledged now as being one of the most robust and challenging institutions in Europe, and that so-called “light touch” regulation is a thing of the past.
Our Central Bank, like many public institutions, has learnt the hard way from the crisis and made radical changes to its own behaviour, operations and organisational culture. Now it is time for industry to do the same.
It was Christine Lagarde who said that:
“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”.
I, and the Government, are determined to drive the necessary changes. We are now fortunate to be in a period of growth, a chapter where we can take the time to do things properly.
The word ‘culture’ stems from the Latin meaning ‘to cultivate’.
My objective in legislating for expanded Central Bank powers, is to cultivate a sustainable financial services industry, with rewards reaped over the long-term for customers, staff, and shareholders, and where consideration of the impact on individuals, the economy and society as a whole is firmly embedded in organisational culture.
In order to achieve these objectives, I intend to seek Government approval for a Central Bank Amendment Bill in early 2019. In drafting the proposed legislation, my officials have been undertaking detailed analysis of how best to further enhance the regulatory and enforcement powers of the Central Bank.
My Department is engaging with the Central Bank and other stakeholders, while also evaluating best practice, in order to ensure that the legislation addresses the recognised failings set out by the Culture Report, while also being fit for purpose.
The banking sector is heavily regulated for a variety of reasons, including:
- its critical economic functions,
- the need to maintain financial stability, and
- the need to address the very significant information asymmetries between the bank and the individual consumer.
As part of this regulatory regime we must insist that individual customers are getting superior protections and better treatment.
We want to work in partnership with the Central Bank and the financial sector, as a change of culture will only work if there is buy-in on all sides.
Rules can change, but it is up to banks and firms themselves to put in the work to change attitudes and practices.
To that end, we are throwing down the gauntlet to industry to rise to the challenge and ensure the necessary internal changes are made.
This involves industry working constructively with the Central Bank.
Nevertheless, the Central Bank must fully rely on the credible sanction of enforcement to deter potential wrong-doing. However, this should not be to the detriment of cooperation.
Firms, and the individuals working within them, should feel confident in approaching the regulator with concerns at an early stage.
We want industry and individuals to take ownership and learn from mistakes.
I think this is something the Central Bank itself recognises, as the culture review gave it plenty of food for thought on how it interacts with industry.
Key themes
It was back in October 2017 that I said it was clear to me that there were significant cultural failings in the banking sector.
In the year since, I’ve put much thought into what ‘good’ culture might look like.
There are three key principles which I believe the changes should focus on in order to impact banking culture.
These are:
- Responsibility;
- Accountability; and,
- Diversity.
These three principles set out many steps, which I will now set out in further detail.
Responsibility
Responsibility should exist at both a personal and organisational level.
At the personal level, individuals must be empowered to speak up – within their own organisations, and to the Central Bank.
At the organisational level, responsibilities should be clearly defined and ownership taken.
The Responsibility Maps envisaged under the Senior Executive Accountability Regime should not be bringing new or ground-breaking concepts to industry, but rather formalising good governance practices as a regulatory requirement.
It is worrying to think that any organisation is not already clearly documenting its key management and governance arrangements, reporting lines or interaction with its parent company.
My own Department publishes its own Governance Framework on its website.
Regardless of whether there is a legal requirement to do so, it should be a basic management tool. And for any firm not already doing these things, it should be a wake-up call.
Accountability
Accountability means not only being responsible for something but also ultimately being answerable for one’s actions.
A great deal of work has gone into making non-executive directors accountable for their actions, now this needs to be carried through to the executives, making senior management and middle management accountable for their decisions.
Accountability is not about scapegoating, and should not be used to create a fear of failure.
Regulatory powers to enforce individual accountability will not be used prosecutorially. Intent and actions taken are at the core of accountability.
This regime should be designed to call to account those taking unnecessary, uncalculated risks; who engage in moral hazard, who refuse to follow the correct protocols and processes, who lie to or mislead their colleagues and clients, and who knowingly commit wrongdoing.
It is for the protection of firms’ own reputations and the industry as a whole.
This regime is not about taking action against any individual who has taken all the steps, caution and due diligence that could be reasonably expected, and is acting in good faith.
Diversity
Finally, and most importantly, it is clear that changes need to be made to foster diversity and inclusion in the banking sector.
When we are cultivating the ‘right’ type of culture in banks, it must be one that is reflective of the broad spectrum of our society.
The Ireland of today is vastly different to the one Edmund Burke inhabited, but often, it seems, that the balance of power remains in the hands of a homogenous few.
As the financial services landscape and society itself evolve, firms need to learn how to adapt.
For banks and other financial services firms, it can be difficult to strike the delicate balance between adhering to the strict obligations imposed by virtue of operating in a heavily regulated sphere, and the need to be nimble and responsive to customer and market demands in order to stay relevant.
Indeed, the Culture Report found that the banks have much more work to do in terms of ensuring their organisations are sufficiently diverse and inclusive, particularly at senior level.
Then again, the stringent regulatory requirements for suitably qualified individuals can often be self-limiting on the diversity front, and this is something that the Central Bank must also consider.
Without diversity – of experience, perception, and thought – firms will be unable to prevent group-think, guard against over-confidence, or promote internal challenge; all characteristics that were seen in banking in the lead-up to the financial crisis.
For the long-term future of the industry, there is a need for firms and those working in the industry to take an active part in mentoring and outreach programmes that encourage participation by a more diverse range of people.
This is also the time for firms themselves to step up, and we can see that some banks are taking the lead by publically setting themselves diversity targets, which is to be applauded.
But these efforts need to go beyond a single dimension of diversity, and must be at all levels, particularly senior and middle managerial positions in order for the benefits of diversity and inclusion to truly be reaped.
Practical Implementation
The practical implementation of these measures will play a vital role in determining whether culture changes or not.
I will await the Central Bank’s recommended approach but the following broad thrust would appear to have merit:
- A phased introduction – over time and across financial sectors;
- A consultative approach – hearing from all sides so as to identify potential unintended consequences. Industry should engage with the Central Bank and my Department at an early stage to ensure that any valid and reasonable concerns about the regulatory changes are addressed.
- Clear guidance from the regulator – however, this can only be guidance as the very spirit of changing culture is to foster a different and better approach, and firms must take the initiative to improve themselves.
There needs to be a clear move by banks and industry away from incentivising short-termism and rewarding behaviours that negatively impact on individual customers, and the wider economy and society.
This will require changes to performance related salary structures, to how firms view and treat their employees, and to organisational strategies and goals to move towards more holistic priorities.
I am interested to hear the views of participants on how best to implement a regulatory approach to culture.
Closing Remarks
There are challenges here for the Central Bank, for Government, and for industry.
The culture review has been described by some as a watershed moment for Irish banks.
I think the true test of whether this is a turning point for Irish banks, and the financial services industry more widely, will be if we find ourselves with firms who truly do consider the impact of their business decisions on individuals, the economy and society as a whole.
I trust there will be plenty of spirited debate from today’s panellists and I look forward to hearing the variety of opinions on culture and behaviour, and learning from them.
As I finish, I will leave you with a few more words from Burke, which I hope will colour your perspective on today’s discussions:
“It is not what a lawyer tells me I may do; but what humanity, reason, and justice tell me I oughtto do.”
Thank you very much for your attention.
ENDS