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Beware the grey areas: how to create banking standards for good market practice

21 January 2016

The article at a glance

It’s no secret that banking has had to clean up its act, and quickly. The culture of the industry has been severely …

2016-execed-greyareasbankingstandards-883x432

It’s no secret that banking has had to clean up its act, and quickly. The culture of the industry has been severely criticised – yet with no baseline standards in place it has been tricky to define what “good behaviour” might actually look like. Now, a new initiative led by the Centre for Compliance & Trust at Cambridge Judge Business School and the CCP Research Foundation could help bankers make more ethical decisions.

The problem, at least in the public mind, was that the reckless behaviour that helped create the financial crisis was a product of a win-at-all-costs culture, within which bankers felt it was acceptable to use underhand methods, or legal or regulatory loopholes, to maximise profit. This was what the Governor of the Bank of England, Mark Carney, speaking in June 2015, called an “ethical drift” in the sector, which meant that unethical behaviour “went unchecked, proliferated and eventually became the norm”.

Carney was making a speech at Mansion House to mark the publication of the Fair and Effective Markets Review (FEMR) of fixed income markets. That report called for the establishment of common standards of market practice, and identified what it called “grey areas” between direct regulation or legislation and a company’s own promises to act in a more ethical way, as communicated via high level public commitments from senior management.

And in a move to address these grey areas, the Centre for Compliance & Trust and the CCP Research Foundation have jointly launched an initiative to help companies avoid further scandals, reputational damage and more restrictive regulation, which Carney warned would be “inevitable” if firms and their staff fail to take the opportunity common standards would present.

The initiative, which will run throughout 2016 and 2017, will be based on direct engagement with financial companies to create a case study-based understanding of how firms respond to the grey areas. It will allow firms to share approaches and experiences confidentially. The scenario-based responses will then be used to construct common standards for market practice.

It must involve participation from personnel employed at all relevant levels of the bank, says Roger McCormick, managing director of the CCP Research Foundation. “This has to involve a willingness to address difficult questions in the company of colleagues, who are, as far as is possible, in the same room at the time,” he says.

Richard Hill, executive director of the Centre for Compliance & Trust, stresses the value of industry-wide standards. “By drawing together lessons from across the sector you can highlight divergence between firms, and risk areas that require more focus,” he explains. “At the moment, firms don’t know how well they’re performing against other banks, in terms of conduct. That leads to misperceptions about risks, opportunities or the strengths of the firm. At a very high level, knowing how well they’re performing should help them make better business decisions.

“From the consumer perspective, knowing firms are getting a clear picture of the way in which their staff respond to areas where there is no rule but there is a ‘right’ way to act will hopefully help address the lack of trust between consumers and the industry.”

The initiative comes in light of the publication of the FEMR report, and of the Banking Standards Review Council report a year earlier (which had a broader remit across the banking sector, made similar recommendations and called for common standards for market practice), and the fact that neither financial companies nor regulators currently show much inclination to address the issues they raised. Indeed, the FCA’s announcement, in December 2015, that it would not be conducting a planned enquiry into the culture, pay and behaviour of staff in the banking sector might reasonably be described as sending the wrong signal to the industry.

So if neither regulators nor financial companies themselves seem likely to drive forward development of common standards for addressing the grey areas, the suggestion is that perhaps civil society organisations should take the lead, through initiatives such as that being driven by the Centre for Compliance & Trust and the CCP Research Foundation. Banks and other financial companies should see this as an opportunity to prove they are actively seeking to restore public trust in the sector, says McCormick: “The public have heard statements of good intentions but haven’t seen much in terms of action. If the banks continue to do nothing concrete and visible the public will remain sceptical or cynical about these statements coming out of the banks. The only way to test whether there is a genuine resolve to change is to invite the banks to participate in initiatives of this kind.”