Culture in Financial Services
Culture and diversity, alongside remuneration, risk management and individual accountability, have become a key focus for financial services regulators
Regulators have come to a clear view that well-designed formal governance processes and controls are not, by themselves, enough to secure good regulatory outcomes: unless the right cultural mindsets and behaviours are embedded throughout an organisation at the operating level, the control environment can still be undermined. Recent statements from senior regulators emphasise responsibility and accountability, changing behaviour and mindsets, and recognition of the wider public interest and social outcomes. What has been much less clear is how, in practice, front line supervisors will assess a firm’s culture and by implication the performance of the board and senior management in this area.
To assist firms, the Deloitte EMEA Centre for Regulatory Strategy has drawn together examples of key positive and negative indicators, across six areas, which we expect supervisors will evaluate through the supervisory process, and which we consider will strongly influence their ultimate judgement as to the culture of a firm and hence their supervisory strategy and approach towards it.
Regulators have repeatedly emphasised the importance of moving the industry away from shorttermism and a “tickbox” compliance mentality towards an approach that puts regulatory priorities and public interest objectives (such as the protection of customers) at the heart of decisionmaking. The role that behaviours and attitudes or mindsets play in securing this shift is seen as key.
Diversity and inclusion
One of the key questions that supervisors consider when assessing a firm’s culture is whether it promotes constructive challenge at all levels in the organisation. If appropriate challenge is not encouraged, accepted and acted upon, even the clearest articulation of a firm’s culture and values, or the best designed control frameworks, will fail to prevent excessive risktaking and misconduct. The underlying supervisory concern is whether there is any tendency towards “group-think”, especially at board level. In this crucial regard, supervisors are highlighting, with increasing frequency, the role that diversity and inclusion play in improving culture within firms. The Central Bank (CBI), in its recent report on the behaviour and culture of Irish retail banks, found that the banks “have much more work to do in terms of ensuring their organisations are sufficiently diverse and inclusive, particularly at the senior levels, to prevent groupthink, guard against over-confidence and promote internal challenge”. The CBI observes that, in its experience, a lack of diversity at senior levels is a leading indicator of “elevated” behavioural and cultural risks. The CBI is therefore expecting all banks to take meaningful action to address the lack of diversity and inclusion at senior levels in order to improve cultures. If, in its view, improvements do not materialise, it will “consider whether it is necessary to put further specific requirements in place”.
At the European level new board suitability guidelines from the EBA and ESMA came into force in June. These guidelines, which have been incorporated into the ECB’s fit and proper assessments, seek to strengthen corporate governance, inter alia, by setting out how different aspects of diversity should be taken into account in the recruitment process for members of the Board. And from a global macroeconomic and systemic perspective, Christine Lagarde, reflecting on the financial crisis ten years on, has highlighted the IMF research finding that a higher proportion of women on the boards of banks and supervisory authorities is associated with greater financial stability to this challenge, boards and senior managers need to be able to point to insightful MI which demonstrates how they understand, monitor and manage their culture.
In order to do this effectively, the first step is to articulate what “good” behaviours look like and choose appropriate metrics and indicators to measure these behaviours. MI on culture has to be drawn from diverse sources and impartially analysed and assessed.