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A message to Martin Wheatley: Cultural change starts at the top

Corporate cultures won’t change in financial services unless CEOs and Boards are forced to do it

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FCA chief executive Martin Wheatley’s speech at the gloriously-named Worshipful Company of International Bankers last Tuesday, as reported in Money Marketing the following day, was a timely intervention.

But the FCA must start getting tough if we are going to see a genuine change in the culture in our banks and financial institutions.

Wheatley is right to have serious concerns that economic recovery may drown out the call for culture change at the top end of our industry. This is precisely what will happen unless the FCA is willing to force our banks to change the way they work.

Without clear rules on culture change and genuine penalties for the reticent, too many institutions will simply continue to pay lip-service to the issue – to the continued detriment of their clients and of course the taxpayer, who again will be forced to bail them out come their next financial crisis.

The charge sheet against our banks is long and ugly.

It begins with the acts of 1) selling mortgages to people who couldn’t afford to repay them, 2) packaging these up into opaque investment instruments in an attempt to mask the level of risk involved, and then 3) convincing rating agencies and investors alike that these piles of toxic nonsense were actually A-rated investments. To my non-legally-trained mind, these are three unconscionable cases of fraud that in combination brought the Western economy to its knees.

Yet no executive in any bank has been charged with any sort of criminal negligence. This is not solely due to the difficulty of finding conclusive evidence of personal fraudulent behaviour, but also due of a lack of regulatory or political will to take on The City / Wall St in such a direct manner.

The charge sheet continues with the systemic manipulation of the Libor exchange rate, the universal misselling of mortgage payment and protection insurance and the misselling of interest rate swaps to businesses. “Misselling” is such a gentler word than “fraud”. The end result is the same of course, with customers conned out of their money by seemingly unscrupulous individuals who were aided and abetted by the sales-at-all-costs culture of the organisations that employed them.

And 5 ½ years since the collapse of Lehman Brothers, very little has really changed, culturally-speaking. Bankers are still earning massive bonuses. Almost 500 Barclays employees enjoyed pay packets of more than £1 million in the last year. Even the serially-disgraced RBS has come out in defence of big bonuses, citing the universal excuse that it is a global war for talent and if they didn’t pay their traders outrageous sums, the “talent” would simply ply their trade elsewhere.

I know that every good fib contains a grain of truth, but I can’t help but wonder how many of these roles genuinely require such an astronomical remuneration package to deliver the investment results the bank needs. But that isn’t the issue …

Through Quantitative Easing,, the Bank of England has merely exacerbated the problem; rewarding the banks and bankers who caused the financial crisis with the ability to replenish their balance sheets and bonuses respectively through the selling of hundreds of billions of government bonds.

And the Government, too, has done little to encourage the banks to change their cultures. In fact, George Osborne has actively gone into battle with the European Commission on behalf of The City in defence of their right to pay large bonuses.

Let me be clear; I am not against paying people a lot of money when they genuinely add a lot of value to an organisation; the bigger the value, the bigger the pay they deserve.

But if the Government and the regulator genuinely want to change the culture in our banks and thus avoid another dramatic economic collapse, they must understand that the fact that the City’s blatant bonus culture still remains intact is a major sign that culturally speaking, it is “business as usual” for bankers.

Further proof of the lack of genuine desire for culture change is the Economist Intelligence Unit’s findings that 53 per cent of financial services executives believe career progression at their firm will be difficult without “flexibility over ethical standards”. Un-be-lievable.

Martin Wheatley thinks this suggests some business leaders are still struggling to get their message across. Surely it is far worse than that. Surely it indicates that more than half of our CEOs are simply not seen as being genuine in their desire for culture change. They may broadcast politically-correct sound bites regarding the need to change the way their companies work; about the need to be “aligned to the needs of the customer” … but their people see these pronouncements merely as something you have to say to keep the regulator happy; something to distract the media until the next boom takes off and all will be forgotten.

According to Wheatley, “The key issue here is how do firms create cultures that are genuinely different from those pre-crisis?”

That bit is actually quite straightforward. Successful culture change requires the adoption of a 7-point checklist; the most important of which is Leadership. A culture stems directly from the behaviour of the organisation’s leaders. Leaders must be the first to adopt the new behaviours, leading very much by example. Otherwise the culture simply will never change.

And to get our banking leaders to change will obviously take a great deal more than fine words of encouragement. It will require direct instruction from the authorities.

It’s time to bring out the big stick.

Campbell Macpherson is managing director of Campbell Macpherson & Associates Ltd. He has held executive roles in Zurich, Openwork and Sesame

Look out for part two: “Compared to banks, life insurance companies are enjoying an almost saintly glow.” How well are life insurance companies heeding the call for culture change?

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Good points well made (Barbera :¬)).

    I think that the very title of worshipful bankers shows where they see themselves…Hardly demi-gods though, given recent events and I would suggest that this title actually borders on gross misrepresentation!

    I think that it would be a good thing if Banks became completely self-categorised within the regulatory structure for ‘all’ activities and this would enable the FCS to better identify where their endeavours would be better focused (although I think they already know this). For my part, I am fed up of being castigated for their wrong-doings and past sales practices.

  2. Well written article Campbell. The misselling and scandals created by these self-serving pompous idiots (excuse my language!) are also the main causes of the cumbersome regulation imposed on the professional advice community within the IFA sector. My question is when is the regulator going to change its approach and recognise that these institutions should be their focus, not professional independent advisers who should have their regulation moved to the auspices of the professional bodies? (good idea Nick Bamford). I appreciate we now have the FCA and the PRA, but come on, the time to recognise the differences in approach towards customers between self-serving product floggers and independent fee based professional advisers, who have no products of their own, is well overdue.

  3. FCS (?) doh!..FCA..FSCS..MAS…IOU, whatever!

  4. “Worshipful Bankers” can definitely be shortened and would be much more apt!

    The article is spot on but you missed an extra point in how they pay lip service. They hire ex-FSA/FCA senior staff into “compliance” roles and say look how wwe are cleaning up our act.

    Until a 5 year gap is placed on ex regulator joing banks and ex bankers joing the regulator this will never change. You can also include the big 4 accountants in that who colluded with the banks and the ratings agencies to commit another act of fraud in the mis-representation of the true financial postion of these banks.

    I call it corruption!

  5. brian weatherley 7th March 2014 at 1:58 pm

    “global war for talent” is a specious argument i.e. plausible but without merit. One assumes the banks prior to 2007 bought “the best” but what did these expensive individuals achieve. Answer the biggest banking crisis in many a long year. So if that did not work, what justification do banks have to repeat the experience? None whatsoever. Why not simply pay a salary compatible with the job specification for a particular post, and the degree of responsibility in achieving a Banks aims while protecting client interests ? Then cut out bonuses altogether.

    Years back I had a friend who was a US Marine Corps fighter pilot who had a range of colourful expression. For incompetence, “kick arse and take names in that order” No banker appears to have had his rear quarters so treated and certainly no names have been taken.

    The article summarised a malaise that appears to have grown over the last decades and we have yet to find a “vaccine” to eliminate the carrier

  6. I think perhaps many have overlooked the collective noun for bankers – A Wunch – as in a Wunch of Bankers.

    Speaking of cultural change coming from the top – how about that also applying to the Regulator. I know Mr Wheatley is making valiant efforts, but please – take a look at your spending habits. (Also relevant to your encyclical regarding incentives I would have thought).

  7. Clearly there are those in the banks with planks in their eyes. But there are plenty at the FCA (and FOS) too that see fit to persecute small time advisers over specks.

  8. @ Harry

    Almost sounds as good as a ‘Clowder of Katz’…

  9. Campbell Macpherson 7th March 2014 at 6:02 pm

    Great comments thank you. Phil – excellent point. What an omission. The movement of ex-regulators to baking boardrooms must only be making this situation worse. This must cease if the government, regulator and BoE are genuinely serious about culture change. All the evidence to me is that no-one in authority is.

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