The changes still needed to tackle the banks’ bad management cultures
Regulation: Unlike the UK authority, the Central Bank of Ireland does not have competitional law enforcement powers, an issue which deserves to be reconsidered
Banking culture contributed significantly to the financial crisis in Ireland. The Honohan, Nyberg and Regling and Watson Reports chronicled cultures of irresponsible risk-taking, the lack of gender diversity on boards and widespread group-think.
The financial regulator was characterised by timidity, deference to bankers and light-touch regulation. Bad organisational cultures in banks and regulators were at the heart of the problem.
New laws were introduced to allow the Central Bank of Ireland to take a more stringent and intrusive approach to regulating financial institutions and their managers.
In 2010, legislation introduced ‘fitness and probity’ requirements aimed at ensuring people in key management positions are honest and capable of discharging their functions effectively.
In 2013, legislation doubled the maximum fines the Central Bank can impose on banks and individuals.
Firms and individuals who breach regulatory requirements now face a credible threat that the Central Bank will take enforcement action.
It has imposed fines of approximately €99m to date. Last year, the Central Bank imposed its largest ever fine on a single financial entity, €21m, for overcharging customers in the tracker mortgages scandal. Prior to the crash, the largest fine was €5,000.
Moreover, the Director of Public Prosecutions has prosecuted some of the most senior former bankers in Ireland. Some, such as David Drumm, former CEO of Anglo Irish Bank, have been convicted and imprisoned.
Despite the more stringent and intrusive regulatory approach, the Report on Banking Culture in 2018 concluded leadership styles in banks remained too directive, exhibiting a “command and control mentality”, and remained insufficiently diverse to “prevent group-think, to guard against over-confidence and promote internal challenge”.
Though some banks have made more progress than others, the report determined 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”.
Such findings suggest generative conditions inside banks may not have changed as much as the external architecture favouring enforcement.
The Central Bank of Ireland suggests that the problem partly lies in the absence of sufficient individual accountability.
It has recommended the introduction of an individual accountability framework to make it easier to record which individuals are responsible for wrongdoing within their sphere of influence. According to this regime, responsibilities may be delegated but not abdicated.
Nevertheless, widespread bad practices in the banking community, such as those involving the tracker mortgage scandal, suggest that problems are systemic and not simply the result of individual wrongdoing.
Moreover, the individual accountability framework may do little to address directive management styles, a lack of gender diversity and insufficiently consumer-centred behaviours.
While tougher regulatory sanctions may be helpful, a greater focus both on organisational dynamics to promote constructive dissent and broader market conditions to increase competition are necessary.
One reason banks may be insufficiently consumer-oriented is that there is not enough competition in the market.
Whereas in the UK, the Competition and Market Authority said that only 3pc of customers switching their personal accounts to another provider indicates a concerning lack of competition, the equivalent figure in Ireland is 0.02pc.
If customers don’t vote with their feet for better deals, is it any wonder they are walked all over? Unlike the UK authority, the Central Bank of Ireland does not have competitional law enforcement powers, an issue which deserves to be reconsidered.
Furthermore, organisational dynamics must change. At the board level, ‘group-think’ produces scenarios where directors are disinclined to challenge existing strategy, especially when that strategy is preferred by a strong personality or where they experience social bonds with other directors.
Greater female and minority ethnic representation on boards is an important part of the solution. More diverse boards can reduce group-think and improve monitoring and decision-making in companies, particularly those which experience corporate governance problems.
These are among many reforms which will help to generate a better banking culture for consumers, businesses, and the economy.
They do not displace traditional supervision and enforcement practices but complement them in the broader regulatory and compliance environment.
The next government must legislate for individual accountability, but not neglect the organisational contexts and markets within which those individuals act.
Dr Joe McGrath is a law lecturer at UCD, which hosts the Regulating Banking Culture conference on Thursday.
Photo by Floriane Vita on Unsplash
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