Banking Standards Review Consultation – GoodCorporation’s response

GoodCorporation has submitted the following response to the Banking Standards Review

SUMMARY OF QUESTIONS

Q1. Do you agree with the objective to establish a new independent organisation with the aim of defining and raising standards of conduct and competence in banking?

We agree with the objective of creating an independent organisation to champion better banking standards in the UK.

We support its mission to define and promote good practice and agree that developing accredited training programmes and working closely with banks to raise standards should be part of its remit.

We would, however, recommend that membership be extended to individual bankers as well as banks, replicating the model of organisations such as the Law Society.

This would give the organisation a greater capacity to exert a meaningful influence on the conduct of individuals and so reinforce its credibility as a professional standards body.

Q2. Do you agree that there is a case for a collective approach calling for the participation of all banks doing business in the UK?

We agree that collective action is vital for establishing a code of conduct that will succeed in raising standards across the industry.

This is particularly important for protecting retail customers who may not always be in a position to judge whether they are being treated in a fair, transparent and ethical manner. The complexity of the products being sold and the different approaches to selling often mask unethical conduct, which does not become apparent until after the fact.

However, it is important that collective action covers all aspects of banking not just retail as misconduct has been evident throughout the industry, damaging the sector as a whole.

Q3. Do you agree with the proposed role of the new organisation to set standards of behaviour and competence for banks and building societies, and to define metrics against which they could benchmark?

We agree with the proposed role of the new organisation to set and define standards of behaviour and competence. We also support the requirement that member organisations make a public report each year on how they are meeting these standards. This will be essential if trust is to be rebuilt. It will also reinforce the new organisation’s credibility and demonstrate its effectiveness.

Defined codes of conduct must apply to all bank and building society employees and not just the institutions.

We also support the principle of defining metrics and establishing benchmarking, however, care must be taken to ensure that the metrics do not become another Treating Customers Fairly exercise which produced excessive data and management information in order to tick boxes with little assessment of, or influence on, behaviour or outcomes.

In order to be effective and have a real impact on behaviour, metrics must be developed that include a qualitative assessment of behaviour, outcomes and fairness.

Q4. Do you agree with the proposed scope of the new organisation to include all British banks and building societies, and foreign banks doing business in the UK?

We agree with the scope as defined above and with the principle of ensuring that the standards promoted by the organisation are in alignment with the guiding principles of the Financial Conduct Authority and the Prudential Regulatory Authority.

However, it is not possible to make a firm judgement on this until the guiding principles have been fully developed.

Q5. Do these proposals go far enough to ensure the body has credibility?

We agree with the proposal to create a governance structure that has independence and integrity. Independence is vital if the new organisation is to avoid the issues faced by the Press Complaints Commission and bankers must be in the minority on the board. We would recommend that either the chair or chief executive be appointed from outside the banking sector.

The new organisation recognises that conflicts of interest must be avoided in the appointment of any banker to the board and care must be taken to ensure that any recently retired bankers have no conflict of interest such as sitting on another bank’s board. We would also be wary of appointing a senior central banker who might be perceived as biased and thus damage the organisation’s credibility. Ideally any bankers appointed to the board would not be currently working in the sector. Candidates with experience of working in the sector but who are now in another industry would be ideal.

Widespread participation across the banking sector will be critical to both the new organisation’s credibility as well as its success. Strategies need to be developed to ensure that a critical mass of banks and building societies is recruited as quickly as possible.

Robust thought leadership, high-level endorsement of the new organisation’s aims and objectives and clear communication to target institutions must be developed.

As in question three, metrics should be developed that provide a qualitative assessment of behaviour, outcomes and fairness. These should be based on a feedback system which allows employees and customers to tell independent auditors whether the organisations really are working in a fair and transparent manner.

We also agree that the organisation must be seen to be accountable and to report publically. Over time, we agree that this will build credibility for the organisation with a wide group of stakeholders. An annual public report to the Treasury Select Committee would be a good route to consider.

Working towards obtaining a Royal Charter could also be an aim of the organisation. Interim measures of accountability, such as reports to the Treasury Select Committee, should be established as a means to monitor the new organisation as it develops its operating model.

However, in addition to these measures, the organisation must be seen to be effective in the way it holds banks and individual bankers to account for their conduct. The organisation must be seen not just to create a code of conduct, but also to ensure that the code and the principles are followed. Although the organisation does not set out to punish, it should consider applying meaningful sanctions if its code of conduct is breached – including the ability to ban individuals from working in the sector.

Q6. Do you agree that the new body should initially work with banks and building societies rather than individuals?

We agree that initially it might be difficult to work with individuals, however, in order to have a real impact on behaviour the new organisation should ultimately seek to be able to hold individuals to account for their conduct.

The new organisation should consider offering individual membership to bank boards and senior leadership teams. This would help create ‘tone from the top’ which should drive behaviour throughout the sector. It would also establish individual membership as beneficial and desirable.

What are the pros and cons of aspiring to build individual membership over time?

We believe that aiming for individual membership is extremely important for the success and credibility of the organisation.

In other professions such as the law, their professional organisation is seen to both support and sanction its members. This has a tangible impact on professional conduct and is a model that ideally the new organisation should seek to replicate.

Appropriate sanctions for individuals should be defined and it should be a condition of membership that banks and building societies agree to implement those sanctions in the event of malpractice and/or breaches of the code of conduct.

To promote individual membership, when banks join the new organisation they could be asked to ensure that their banking employees will become individual members as soon as such a membership scheme becomes available.

Q7. In the section titled ‘Ethics’, a case is made for a more pro-active approach to managing ethical issues. Do you agree with this, and if so how should it be done?

We agree that a pro-active approach to managing ethical issues is extremely important. Ethical challenges and incidents of ethical malpractice are not unique to the banks. Many sectors have been, and still are, prone to ethical misconduct, with recent examples in the defence, oil and gas and pharmaceutical sectors.

However, these industries have recognised their failings and acknowledged that there is huge room for improvement. Efforts have been made to correct behaviours and instil ethical discipline and codes of conduct.

In contrast, this is still a work in progress in the banking sector despite comparable reputational damage and ethical misconduct. The banking sector has appeared to circumvent new rules rather than challenge misbehaviour.

What has been missing has been a serious effort to establish compliance with ethics. Banks need to apply the systems and processes that have been adopted by other sectors to influence behaviour e.g. setting up and properly resourcing an independent ethics and compliance function which is tasked with protecting the organisation’s stakeholders and long-term reputation. This approach should be combined with a speak-up culture.

In addition, in the banking sector the current system of incentives often rewards misconduct. Incentives must support ethical behaviour and not undermine it. Ethics must be seen to come before short-term financial gain and this should be driven from the top.

Robust sanctions for ethical malpractice have not yet been applied in the banking sector; consequently behaviour appears to be unchanged. Bonus bans for unethical conduct should be considered. This could be applied to whole teams when any individual transgresses. Commodity traders for oil and gas majors often work as a team and this helps to ensure that behaviour is collectively moderated, whereas bank traders operate as competing individuals, with far greater potential for misconduct

The new organisation should set the pace and standard for a ‘pro-active’ approach to managing ethical issues, replicating what has been implemented in other sectors. The recently launched Banknote Ethics Initiative (BnEI) is successfully promoting collective action within the banknote sector. Endorsement from central banks has garnered support for BnEI and both membership and accreditation are being sought.

Q8. Do you agree with the proposal to build on best practice as set out in the regulators’ guiding principles?

In principle we agree with the proposal to align with the regulators’ guiding principles, however, it is not possible to pass judgment until they are published.

Q9. What would be the best way of assessing the implementation of a bank’s code of conduct?

We agree with the six key points that must be considered when setting professional standards for the industry, in particular the need to shun any box-ticking exercise.

We also agree that the issue for banks has not been the absence of a code of conduct, but the failure to ensure that the code is respected in day-to-day activities. Developing an effective assessment of how codes of conduct are implemented must be the focus of the new organisation.

To assess how effective a company’s code of conduct implementation is the new organisation should conduct an external, independent audit of the code and its implementation on the ground. This should combine management interviews with document review and independent and confidential feedback from key stakeholders, including customers and employees.

GoodCorporation has been conducting such audits across a variety of industries for over 12 years. We measure outcomes rather than processes, using face-to-face interviews with a cross section of stakeholders in order to test how well a code of conduct has been embedded. We assess the content of the code, its governance and how well it has been embedded. To do this we establish that appropriate policies exist, that systems are in place to implement them and that stakeholders agree that they work in practice. We also identify any concerns about issues in the code and prepare a report of the findings to the board or senior management team.

We measure this feedback systematically and can provide benchmarking information to enable organisations to measure themselves against their competitors or other industries.

We also developed the assessment methodology for the Investing in Integrity Charter Mark that offers accredited organisations a means of demonstrating their commitment to acting with integrity. This Charter Mark is run by the Institute of Business Ethics and the Chartered Institute of Securities & Investment. Accreditation involves a two stage process: a comprehensive management self-assessment survey of ethical policies, practices and procedures followed by an audit involving site visits, policy and system reviews, staff interviews and online or paper-based employee surveys.

Q10. Do you agree with the agenda outlined in the ‘standards of competence’ section?

We agree with the agenda outlined in the ‘standards of competence’ section and that the new organisation should provide a canopy under which existing professional bodies would continue to operate and grow.

We wholeheartedly support the new organisation in ensuring that existing bodies raise standards in the development, qualification and disciplining of members and agree with the notion of creating a forum for discussing issues and raising concerns.

Validating or accrediting training programmes should fall under the remit of the new organisation in order to raise standards across the industry. This would enable the new organisation to ensure that training covers ethical, as well as technical, considerations and ensure that industry bodies are using their position to influence behaviour. This should apply equally to in-house training. As John Kay says, company training reinforces the culture of an organisation, it is important therefore that the new organisation has the power to accredit in-house training programmes.

Q11. Would you support the proposed relationship with the existing professional bodies?

We support the proposed relationship with existing professional bodies and agree with the Scottish government in suggesting that membership of a professional organisation should be mandatory.

However, we feel that the proposed relationship should extend to discipline and sanctions as well as training. This would ensure an industry-wide approach to discipline and should include the notion that professional status can be removed.

Q12. Is the proposal for assessing in-house training sensible and practical? Could the new organisation play a helpful role in the certification process?

We agree that the proposals for assessing in-house training are sensible and practical and that the new organisation should play a role in the certification process.

In addition to monitoring content, the new organisation should assess the impact of industry training on ethical conduct. This should be done as part of its assessment process.

Q13. Do you think a benchmarking exercise, to help banks identify areas for improvement, would be of value?

We agree that a benchmarking exercise to help banks identify areas for improvement would be of real value. Benchmarking is often used by companies to test the robustness of their anti-corruption procedures to great effect. It allows organisations to measure themselves against their peers and judge where they are in relation to their competitors.

Q14. Are the groups of metrics outlined in the section titled ‘Benchmarking’ the correct ones? Would you propose others?

We broadly agree with the four categories for the benchmarking assessment. However, any benchmarking should be based on the Investing in Integrity or GoodCorporation methodology, not a MORI opinion poll (which could only ever measure retail banking) as that would not be sufficiently robust. Without deeper questioning to obtain qualitative feedback, the results of a poll cannot be properly interpreted and any benchmarking could be misleading.

The metrics must include an independent review of customer communication, sales material and promotions etc. to ensure compliance with the new organisation’s standards.

The new organisation must ensure that it focuses on conduct rather than indicators to avoid the pitfalls of the Treating Customers Fairly approach. This encouraged financial institutions to produce excessive management information to say that the principles were being followed. This excessive data was impossible to analyse and resulted in organisations gathering and revising indicators of behaviour rather than addressing problems with conduct and behaviour.

Q15. Would it make sense for banks to adopt a set of standard questions to add to their existing staff surveys?

We agree that a standard set of questions that could be added to existing staff surveys does make sense, however as stated above, independent qualitative research would add significant value.

Q16. Is self-reporting appropriate? Might other methods deliver better results?

We do not feel that self-reporting would be appropriate as it would not be robust or objective. The industry has not earned the right to “mark its own homework”.

The new organisation needs to have a direct role in monitoring the standards within member institutions. This will reinforce the new organisation’s credibility and ensure that its standards remain high and focussed on conduct, not indicators.

Q17. Are there non-bureaucratic alternatives to the approach outlined in the Question 17 section titled ‘discipline’ that might work better? Is there a role for kite-marking?

We agree that kite marking can be useful as a visible and recognised means of accreditation. It is also something that can be removed if standards fall, which, although the organisation is not seeking to punish – it would help with credibility if it is seen to have power.

Investing in Integrity type polling as outlined above, is much less bureaucratic than TCF type auditing. It allows more flexibility and enables small financial institutions to compete with larger ones.

Q18. Do you agree with the proposition that the new body should aim to become, in time, a membership organisation for bankers to join?

We agree with the proposition that the new body should aim to become a membership organisation. This works successfully in the medical, legal and accountancy professions and has a meaningful impact on conduct. Membership organisations with the power to deliver the ultimate sanction can have a significant influence on behaviour.

Q19. Should the new organisation aspire to a role as a thought leader in banking, sharing best practice and helping to propose solutions to challenges that arise in the future?

We agree that the new organisation should aspire to have a role as a thought leader in banking. Sharing best practice should be considered one of the key functions of the new organisation.

ENDS

For more information contact: Sally McGeachie Head of Communications at GoodCorporation

Tel: 020 8877 5300

[email protected]