Banks have made progress in addressing the conduct misdemeanours that were exposed by the financial crisis and its aftermath. Many have put in place frameworks, structures and measurement tools to manage conduct. But the journey is far from complete.
New incidents and fines are still occurring, with several high-profile cases continuing to emerge in the last year. And there are growing concerns that the proliferation of metrics, controls and surveillance technology that have been implemented are costly to maintain and may have some unintended consequences on conduct.
Leaders in banks are asking how they can generate the confidence that they are addressing the right areas of concern in an effective and efficient manner – targeted and effective conduct culture change to reduce conduct risk.
Banking conduct: one of the biggest risks since the financial crisis
The stakes of getting it wrong are high. Conduct has emerged as one of the biggest material risks since the financial crisis and has eroded shareholder value with hundreds of billions of dollars of fines to date and still growing.
At wholesale firms, these fines and settlements accounted for up to 75% of non-financial risk losses over the last five years. Fundamentally, this has impacted the trust that customers and clients have in the financial services industry. Moreover, top executives now take direct accountability for poor conduct outcomes, due to both the implementation of the Senior Managers Regime in many jurisdictions, and the scrutiny of the media.
To drive the desired changes and improve leaders’ confidence, banks need to be more targeted and go deeper in the next phase of their conduct culture work, specifically the application of behavioral based techniques and insights. Conduct-related events and outcomes typically result from individuals’ behavior: what they say and what they do. These behaviors are a result of the stimulus of highly complex neural networks that have not been fully understood by most large organisations.
Generating a fact-based understanding of the current culture and then driving the cultural and behavioral change is possible, through systematic diagnosis and programmes of intervention which draw on behavioral science. The Oil and Gas industry has demonstrated a step change in behavior is possible.
Establishing a banking culture
For example, our work over the past 15 years in this sector started with driving safety towards the industry’s “goal zero” – a target focused on no fatalities. Companies have been through several iterations of refining their understanding of what is required to create a safe workplace getting deeper and deeper into what motivates people to change. Now they are focused on establishing a culture where everyone cares about the business, their colleagues, and themselves – creating a safe work environment. These same techniques can be applied to great effect in the banking context to dramatically improve the risk and conduct culture.
In this paper we cover the two main factors that make for successful behavioral change: firstly the identification of specific current and target behaviors and their root causes, and secondly a sustained commitment to support individuals as they go through the process of behavioral change – typically through waves of change and 90-day cycles of nudges.
This support ranges from simple interventions at the individual level, to structural changes that affect groups. The interventions are aimed at encouraging and reinforcing right behaviors and limiting those that do not serve the organization.
For more information on conduct and culture in banking, download the full report or contact a member of our dedicated team.