New Frontiers in Business Ethics - Remarks by Colm Kincaid, Director of Consumer Protection

The following remarks were delivered at the Vincentian Business Ethics Conference in Dublin City University on Thursday 26 October 2023.

Introduction

Good afternoon Ladies and Gentleman.

Thank to you to Dr Alan Kearns and the team at DCU for the invitation to attend today’s conference. It is my privilege to open the proceedings for the 30^th year of the International Vincentian Business Ethics Conference.

As we enter into our discussion today of New Frontiers in Business Ethics, I thought a good place to start would be to reflect on the times we are in, and the challenges and opportunities they present.

What strikes me most is that we are living through a period of extraordinary change. Moreover, with technology, each change seems to accelerate the next– change in consumer behaviour and expectations, change in how we communicate, change in how risks manifest (including how quickly they do so) and changes in the financial services people need and how they are delivered. And, when I look at technology, I have no doubt that when we look back years from now, we will find that the biggest changes were ones that, today, we had not even conceived of.

We are therefore living in a time of particular uncertainty and rising complexity. But it is also a time of opportunity, since the prospect of change brings with it the opportunity to do things better than we did them before.

So, with this opportunity in mind, I believe we all need to reinforce our commitment to the fundamentals of ethical behaviour. We also need to continue to evolve our thinking about what the application of accepted fundamentals of ethics mean in a time of such change. At the Central Bank of Ireland we are live to this topic, as I will speak to shortly – including as evidenced by our recent publication on Data Ethics within Insurance.¹

Turning to financial services in particular, the starting point is of course that the very concept of financial services – indeed the very concept of money itself – is built fundamentally on trust. Ethics, and ethical behaviour, is core to building that trust. This means going beyond the legal requirements that any business must comply with, and establishing decision making processes and behaviours that are guided by ethical values. As noted by research from the DePaul University Institute for Business and Professional Ethics “trust is built over repeated interactions, while distrust can take only one– it is always easier to burn a bridge than build one²”.

In my remarks today, I will discuss this in the context of our work in the Central Bank of Ireland as a regulator and our predominant aim to work for “the welfare of the people as a whole”³. I will discuss how culture, behaviours and ethical challenges have informed and directed this work. I will also talk about what we have learned as regulators and the position regulators and other public authorities now find themselves in, whether we are concerned with financial services or any other regulated sector.

The role of financial conduct regulation

A stable and well functioning financial system is essential to society. For an economy to function it needs lenders to provide credit to people and businesses. Insurance products reduce uncertainty by protecting against the risks of future events; we rely on financial firms to keep our money secure and give us options to invest for the future; and we rely increasingly on electronic payment services. In the context of the rapid change I have just described,  the regulatory framework supporting this and our approach to supervising that framework must be future focused and adaptive to that change.

It is worth therefore considering the component elements of that framework. I would like to suggest to you today that you can see the position as being akin to a three legged stool:

• Rules: The rulebook provides the first leg of our stool - to set out the rules to drive positive behaviour and enable people to be held accountable for misbehaviour. The oversight of these rules by regulators provides an important and essential safeguard to the soundness of the system and the protection of the interests of consumers at large.
• Culture: But the rules and their enforcement only get you so far. In particular, rules intervene in people’s behaviour only at very particular times and, as we now realise, people’s day-to-day behavioural norms are heavily influenced by the prevailing culture – whether in a firm, a sector or society at large. So, for the second leg of our stool, firms themselves must have a culture of promoting ethical behaviour – and I would say support from their industry body to do so.
• Education: The third leg is that consumers themselves need certain basic knowledge and ongoing information in order for them to be equipped to also look out for their own interests. This reflects that a well-informed and confident consumer is far better equipped to identify their specific needs and to hold firms to account to meet their ethical expectations in the context of that consumer’s individual experience.
• Continuous progress is needed on each of these three legs, recognising that progress on one is not a substitute for progress on another since they play different roles, albeit towards the same goal.

Towards a culture of placing consumers at the heart of commercial decision making

I said earlier that in a time of such accelerating and unpredictable change, it is essential to maintain a core of strong ethical behaviour. So too for financial services, although in financial services we often use the word ‘culture’. Increasingly, regulators are placing a focus on culture as a ‘common denominator’ to mitigate risk in a context where events unfold so rapidly and it is not possible to set detailed rules to anticipate every scenario.

My core assertion to you today is that one of the most powerful of these cultural ‘common denominators’ is that of placing consumers at the heart of commercial decision making.

Now, this is not to dispute the right (indeed the need) for businesses to profit and prosper. But is this a profit from providing consumers with a service they need on a basis that is explained transparently and properly understood and accepted by that consumer? Or, is it a profit based on strategies and practices that are unfair or seek to exploit consumers’ vulnerabilities or behavioural biases to their detriment?  Put even more simply, in the case of any given commercial decision, if you were to look consumers in the eye and explain your decision truthfully to them would they, in the round, find it acceptable (even if they might not like all elements of it)?

In recent years we have seen examples where decisions made in the financial system led to systemic consumer harm, such as the tracker mortgage scandal and the practice of price walking in home and motor insurance (now banned by Central Bank regulations). We have also seen examples where firms taking a system-wide perspective and a customer-focused approach has supported a more positive outcome for customers, including the successful mass migration of current and deposit accounts from KBC Bank and Ulster Bank to other providers.

At its core therefore, financial regulation is about supporting positive outcomes, protecting consumers and investors, and, ultimately, contributing to the economic well-being of the community as a whole. It aims to put the interests of consumers at the heart of firms’ decision making, recognising that having this ethic at the core of financial services is one of the best protections we have against the risks and challenges we face in a context of such rapid and accelerating change.

In our work as a supervisory authority, we have underpinned this by developing detailed frameworks to guide our supervision of retail conduct and the behaviour and culture in the firms we regulate. Our thought leadership in this respect has been recognised for example by the World Bank in its report ‘Developing a Risk-Based approach to Financial Consumer Protection Supervision’⁴. And we are seeing firms make progress in developing and implementing consumer protection risk frameworks that meet the standards we have set, although the position is still one that varies between firms more than we would like to see.

To further support this work by regulated firms, this year we published the Consumer Protection Outlook Report where we articulated Five Key Drivers of Consumer Risk⁵ for the years ahead. We also set out what we expect of firms and their senior management to identify, mitigate and manage these risks. We believe that sustained, year-on-year action by firms on these risk drivers would make a positive difference for consumers of financial services. This provides another practical tool for firms and their senior managers to use as a compass for enshrining positive ethical behaviour in their day-to-day business activities.

One of the Key Drivers we identify is ‘technology based risks’. Here I would say we also face a particular question of ethics where we see the intersection between the traditional management and governance styles and norms of financial service providers and the emergent styles and norms of technology based firms⁶.

At the Central Bank, we are also revising the framework of rules that underpin our regulation of firms’ behaviour, through our Consumer Protection Code Review, and our implementation of the national legislation to provide for a more explicit  Individual Accountability Framework in financial services. These policy measures will provide a stronger platform for ethical behaviour within regulated financial service providers. We have also recognised that we can usefully provide more detailed guidance for firms, while also recognising that firms need to internalise this in the context of their business and own the issues and the risks. Under the Code Review, for example, we have proposed specific guidance as to how firms can secure their customers’ interests. We also need to be more open and engaged with stakeholders to continue the conversation on how to evolve a more ethical approach over time.

The challenges faced by public authorities

In this final section of my remarks, I would like to take a step away from financial services specifically and consider the role and challenges faced at this time by public authorities more generally.

It is clear that consumers’ expectations of services, service providers and public authorities is transforming in tandem with the transformation of business practices and norms⁷. With digitalisation we see an internationalisation of things together with a more blurred line between what is regulated or not, what is official or not and what is trustworthy or not. This requires that public authorities work harder to reinforce the importance of regulatory protections and the ethical standards they promote.

In a context where, post-pandemic, some people’s views have changed on the proper role of government, we also need to communicate more effectively which ethical judgment (and the accountability for that judgment) sits where. This includes supporting consumers to understand their own responsibilities and the potential consequences of their behaviour, recognising that no environment (regulated or otherwise) is risk-free. Nor can (or should) the State or public authorities shoulder the burden of solving all problems.  There is also more regulated firms can do, individually and collectively, to foster a more ethical approach in their industries. Only if we openly place responsibility where it properly belongs can each actor be properly accountable for discharging that responsibility. And only through making each actor properly accountable can we ensure a sustainably ethical approach.

In this more fast-paced and fragmented digital world, consumers need better information as to the risks they face, as well as their options and rights in the face of those risks. As well as supporting consumers to protect themselves in the judgments they make, this will also equip them to challenge businesses to live up to their expectations of ethical behaviour. In financial services for example, Ireland has a strong rules-based framework for consumer complaints backed up by an independent statutory ombudsman⁸. But are consumers aware of this, or what they are entitled to in the first place in order to complain? I welcome therefore the initiative underway by government on a National Financial Literacy Strategy.

Finally, the rapidly changing digital landscape is also reshaping how risks form and manifest. Two aspects of this strike me in particular:

• One is that risks are crystallising with ever greater velocity. In financial services, we have seen this in the sudden failure of Silicon Valley Bank and others⁹ and there are plenty of similar examples in other industry sectors and aspects of our lives. This means public authorities need more sensitive risk identification tools that are closer to real time.  This includes public authorities enhancing the tools for identifying and understanding the risks to and from consumer behaviour (where our combined capability is weak compared to economic and financial analysis).
• The other is that risks increasingly transcend how public authority roles and responsibilities are set out within jurisdictions and across jurisdictions. This makes how we coordinate as public authorities at national, EU and international level as important as how we do our own jobs in our own fields and jurisdictions. It reflects why at the Central Bank of Ireland we place such importance on our work at EU and International level, as well as our engagement with fellow authorities in Ireland.

Concluding Remarks

To conclude, at a time of rapid change accelerated by digital innovation I believe we all need to reinforce our commitment to fostering ethical approaches to business. For our part at the Central Bank of Ireland, we are working to advance this through an increasingly systematic approach to supervising conduct risk as well as enhancing the rulebook to support this.

As we do so, public authorities around the world face challenges. This includes the challenge to ensure that accountability sits where it belongs and that there is a clear understanding of the roles and responsibilities of all the actors involved (public and private, and consumers themselves). It also includes the need to enhance how we equip consumers with information to protect themselves, especially in the digital context. Finally, it is imperative that we continue to develop better data and tools to understand and anticipate human behaviour.

It has been my pleasure to open your conference today and I once again thank DCU for the opportunity to do so. I wish you well in your discussions on this important topic of business ethics. I hope my remarks will serve to encourage you in this endeavour and assure you that the Central Bank of Ireland is with you on this journey.

¹Data Ethics within Insurance Central Bank of Ireland, August 2023

²Werhane, Patricia H., Laura Hartman, Crina Archer, David Bevan, Kim Clark. “Trust after the Global Financial Meltdown” Business and Society Review Vol. 116, Issue 4 (2011): 403-433

³Central Bank Act 1942