Mary Clarke, CEO, Cognisco

In light of the numerous banking scandals over the past seven years, from Libor and currency fixing to the mis-selling of PPI, new accountability reforms to regulate financial intuitions are coming into effect in 2016.

The new Senior Managers Regime and Certification Regime are being implemented by the Prudential Regulation Authority (PRA)[i], created by as a part of the Bank of England by the Financial Services Act (2012), and the Financial Conduct Authority.

These reforms are much needed because of what has been called a ‘toxic banking culture’ which exists within our financial institutions; one in which ‘unethical behaviour went too far, was unchecked, proliferated and became the norm’, according to Bank of England’s Governor, Mark Carney[ii].

The new regulations will bring “people risk” to the forefront of the banking agenda in a bid to change banking culture for the better, however, the big question is how prepared the banks are for these reforms?

The new accountability regime sets out the standard of behaviour expected by the PRA of those in positions of responsibility.

Under the Senior Managers Regime[iii] individuals who hold key roles and responsibilities will have more checks placed on them. Whilst they will still need to be pre-approved by regulators, the legal onus will be on the banks to ensure there are procedures in place to assess their fitness and propriety before applying for approval, and at least annually afterwards.

The Certification Regime applies to other staff who could pose a risk of significant harm to the bank or its customers. Firms will need to put in place procedures for assessing the fitness and propriety of staff, for which they will be accountable to the regulators. This will include recruitment and ongoing reassessment of those staff that fall under this regime.

A recent article on the BBA web site[iv], the leading trade association for the UK banking sector, highlights that it’s the HR departments in banks who are most likely to feel the impact of these reforms.

The article highlights that “the ‘people risk’ element in banking has suddenly escalated to a must have agenda item for all Risk Committees and be on the Board agenda” and that implementation of the new regime is going to fall on HR.  Those that have not done so already need to begin start preparing for its impact

However, whilst the article points out how HR departments will need to meet the demands of the new reforms, it fails to mention that banks and their HR teams also need to be looking at how to identify and address the root cause of unethical behaviour.

To drive a cultural change, which is what these reforms are intended for, 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.

Whilst many banks have strengthened their governing processes since the financial crisis, and in the lead up to these reforms, 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 uncover what people really know and understand 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, not just process but people related where the continuous improvement of staff capability and confidence drives a change in behaviour, particularly with customers.

Our competency management system my*KNOW provides the data, analytics and evidence needed to make strategic people based decisions and deployments ­to evidence regulatory compliance, to reduce the cost of audit and mitigation and to more accurately target training investment and interventions.

Banks must understand where their people risks lie, to ensure they meet the accountability reforms coming in next year. Only by understanding the root causes of behaviour can the sector hope to create a cultural shift for the better.