Consumer-focused cultures remain underdeveloped at Irish retail banks

• Report finds differing levels of progress made in banks in their transformation towards a consumer-focused organisational culture, and all have a distance to travel.
• Central Bank will require each of the banks to submit a detailed action plan to address the issues identified and ensure the risks are mitigated.
• Central Bank recommends the introduction of legislation to support an Individual Accountability Framework, setting conduct standards for staff and ensuring clearer lines of accountability within firms.

The Central Bank of Ireland has published the Behaviour and Culture Report into the five main Irish retail banks - AIB Group, Bank of Ireland Group, permanent tsb, Ulster Bank Ireland and KBC Bank Ireland. The report, involving reviews conducted by the Central Bank in collaboration with the Dutch Central Bank (De Nederlandsche Bank – DNB, leaders in the supervision of behaviour and culture), was requested by the Minister for Finance Paschal Donohoe TD. The reviews focused primarily on the executive leadership team, due to the importance of its members in driving effective cultures. As such, the report represents a snapshot at a point in time with a particular focus on the key decision-makers in each firm who set the tone from the top.

Culture is important from a prudential and conduct perspective, given that behaviours can affect any or all areas of a firm. The Central Bank expects banks to act in their customers’ best interests in tandem with fulfilling their prudential obligations. The reviews found that some banks are more advanced in their transformation towards a consumer-focused organisational culture than others, and all have a distance to travel. Specifically, they found that two important prerequisites for successful transformation were not met in all instances:

• Collective understanding of what consumer focus actually means was not present in each case; and

• While some banks are more advanced than others in embedding consumer focus in structures, processes and systems, all still have a considerable distance to travel.

The reviews also revealed patterns in leadership and strategic decision-making as well as mind-set that may jeopardise the successful transformation towards a consumer-focused culture:

• Several executive committees display ‘firefighting behaviour’, focussing on urgent and short-term issues. This may be a remnant of a crisis-era mindset which persists because of the necessity to solve a multitude of legacy and regulatory issues.

• Concerns raised on leadership styles. In some banks, remnants of the crisis-era mindset result in occasional reversal to directive leadership styles cultivated during the crisis.

• A related recurring theme is the need to increase empowerment and decision-making ability of senior staff.

• Finally, the reviews produced concerns around over-optimism regarding the successful transition to a consumer-focused culture.

As a result, and while efforts have been made, it is clear that consumer-focused cultures in the banks remain under-developed, and that banks need to overcome obstructive patterns of behaviour in order to transition to maturity.

Diversity and Inclusion Assessments of the five banks were also undertaken, given the importance of diversity and inclusion to fostering effective culture. Similar to the Behaviour and Culture Reviews, the Central Bank found that the banks have much more work to do in terms of ensuring their organisations are sufficiently diverse and inclusive, particularly at senior level, to prevent group-think, guard against over-confidence, and promote internal challenge.

The Central Bank has engaged directly with the individual banks on their specific findings, and the banks will be required to deliver action plans to address the risks identified.

The Central Bank has recommended that legislation be introduced by Government to facilitate the introduction of an Individual Accountability Framework. This could apply to banks and other regulated financial service providers and would go significantly beyond the current requirements for staff to be fit and proper, setting conduct standards for staff and ensuring clearer lines of accountability within firms.

Derville Rowland, Director General Financial Conduct, said:

“Culture is set from the top down. It is a matter for boards and senior management, in the first instance, to set an effective culture that places the best interests of their customers first. Banks still have a distance to go to live up to their slogans of putting customers first.

Effective organisational culture builds on shared purpose and standards such as professionalism, honesty, integrity and accountability to deliver fair outcomes that have the interests of consumers at heart. The Central Bank expects to see such standards and values embedded in all the firms we regulate.

Firms can expect that we will continue to prioritise these issues. We will be requiring the banks to develop programmes to address the issues identified in the report, and we will be monitoring the appropriateness and implementation of these programmes. We are also proposing the introduction of an Individual Accountability Framework, and we will be conducting more frequent, targeted conduct supervision, including robust challenge of boards and executive management.

There is no magic wand to solve these issues all at once. Cultural issues take time to work through, so this will be very much ongoing and continuous multi-year supervisory work rather than a once-off, immediate solution."

Ed Sibley, Deputy Governor Prudential Regulation, said:

“Research has clearly shown that diversity and inclusion in all their forms are important components of well-managed, financially resilient, strategically-minded firms. Conversely, low levels of diversity increase the risk of over-confidence in decision-making, result in a lack of internal challenge, a reluctance to change, and an excessive resistance to external challenge. We are making our expectations very clear to banks – that they must move beyond a minimum compliance-driven approach to meaningfully address the lack of diversity and inclusion at senior levels.”