Mary Clarke, CEO, Cognisco

The news that the Financial Conduct Authority is to scrap its review into banking culture has prompted many to speculate that the banks have been let off the hook. The shadow chancellor has even urged George Osborne to step into try and pressurise the FCA to reinstate it, despite the FCA insisting the Government had nothing to do with its decision.

A Treasury spokesperson responded by saying: “The government has been absolutely clear that the integrity of the City matters to the economy of Britain, which is why we have taken action to improve conduct across the banking sector and deal with the abuses and unacceptable behaviour of the past.”

The review into banking culture was part of the FCA’s business plan for 2015, but it’s now been dropped after it became clear it was difficult to compare different cultures inside the banks. The FCA is being accused of ‘softening’ its approach after several banking scandals from Libor and currency fixing to the mis-selling of PPI have rocked the sector.

These scandals led to banks being accused of having a ‘toxic banking culture’; one in which ‘unethical behaviour went too far, was unchecked, proliferated and became the norm’, according to Bank of England’s Governor, Mark Carney[i]. Now it’s unclear how the banks will actually be held accountable for their actions, given the starting point needed to be a review of what current banking culture is like inside each institution.

The FCA has defended scrapping the review by saying individual firms themselves need to be responsible for driving culture change and highlighted new accountability rules that come into force in March this year.

It is clear that all banks need to do something to counteract their “people risk” and make lasting changes to their culture, which means the mistakes of the past can’t happen again, and that consumers can once again trust the banks. One thing for certain is that banks need to be looking at how to identify and address the root causes of unethical behaviour.

Banks need to find new ways to identify, measure and evidence, unethical behaviour and also acceptable market behaviour. Only by getting to the root causes of why an individual behaves as they do can banks have any hope of eliminating people risk and improving banking culture in the long term.

Whilst some inroads have been made and banks have strengthened their governing processes in recent years, many still don’t have systems in place to measure how people act or behave at work or that enable them to identify patterns of risky decision making.

They need to find out what people really know and understand their jobs and how likely they are to act, work or behave in any given circumstance. We are currently working with a number of firms to help them mitigate risk, looking not just at their processes but how the continuous improvement of staff capability and confidence can drive a change in behaviour.

Time will tell if the FCA have made a mistake in dropping this review, but its clear banks need to take responsibility themselves to address their people risk and embed lasting positive cultural changes collectively. The impact of not doing this will create a negative domino effect around existing risk agendas, compliance, regulation, and customer experience and shareholder value.