Blog series – Peter Montagnon

In advance of our event at the Bank of England on 21 March 2017, we asked interested parties to write on the theme: Worthy of trust? Law, ethics and culture in banking…

Are banks any different from other companies? Many bankers would probably answer ‘yes’ because of their role in financing the economy, the power and responsibility that it gives them, the special skills they need to do their job and what they would like to think of as the status this confers. Most regulators would answer “yes” because of the banks’ essential role in the payments system, the public dependency on their services and the high degree of leverage with which they operate.

So banks are seen as different because of the nature of their activity and because they are heavily regulated. Yet they also share with other companies a need for embedded purpose and values which sustain their business and secure its long term prospects.

Not long ago I was treated to some quite aggressive pushback when presenting this point of view to a group of bankers. The problems which gave rise to the crisis, I was told, were dealt with because bankers were now required by regulation to consider whether the product they were selling was suitable to the customer. So everything was now OK.

I replied that it was not OK because the public at large might reasonably expect banks to want to sell them a product that met their customers’ needs, not that they would do so purely because they were required to, by their regulator. As long as bankers are only constrained by rules from selling unsuitable products, the crisis could easily recur. Some people, after all, only regard rules as being made to be broken.

This is why banks need to move beyond obsession with compliance and take a look at what actually drives behaviour in their businesses. They will find the same principles, which apply to other businesses, apply to them as well. First, all businesses must have a sense of purpose which includes delivering something which society really wants and needs. Businesses which want to survive and thrive must deliver genuine value to their customers, not extract value from them.

Second the core ethical values which underpin durable businesses apply to banks as well. Such values include reliability, honesty, openness and respect for stakeholders, which means society from whom the social licence to operate is derived. Companies which can articulate a clear purpose and embed their values will tend to be worthy of trust. Those which do not may succeed for a while but will always be at risk.

Admittedly the task of building a good culture is harder for banks because it has to be carried out in parallel with a focus on compliance that consumes so much energy. Also, large banks are complex businesses with many silos with different characters and different motivations. Money market dealers rarely have much in common with provincial branch managers. Can we really expect them to have a shared loyalty to each other and to the organisation they all represent?

Perhaps we can if we can persuade them to converge around a common sense of what the business is there for. Perhaps those silos which do not fit the common purpose need to be abandoned and the structure simplified. Whatever they conclude, bank boards and managements need to keep reminding themselves that only by making themselves trustworthy can they hope to lift the burden of regulation.

Peter Montagnon, Associate Director, Institute of Business Ethics