By Steve Maguire, Head of Financial Services at North Highland, a global management consulting firm

Steve Maguire, Head Of Financial Services At North Highland, A Global Management Consulting Firm

Banks and building societies have been told to clean up their act following the Financial Conduct Authority’s review of sales culture at Britain’s largest financial firms. The regulator concluded that many, if not all, of the recent mis-selling scandals had dysfunctional incentive schemes at their root.

Since then, Lloyds has eradicated quarterly sales targets and restructured its bonus scheme so that staff are rewarded for customer service. Many banks, including Deutsche Bank and Citi, are developing and implementing sweeping culture change strategies to restore trust, accountability and put customers back at the forefront of their business.

Moreover, Sir Richard Lambert, former Director-General of the CBI, has been funded by the industry to set up new organisation monitoring standards. He will act as an independent champion for better banking standards to rebuild trust and confidence in the sector. To this end, Lambert has pledged that banks will have to report each year on behaviour and competence, led by people from outside the industry to establish its independence and credibility.

While these are positive steps, transforming the culture of a financial services company from one where breaking rules is universal to one where bankers follow regulations is no easy undertaking. In the last month, we’ve seen wide criticism of banks’ decisions to increase bonus pools while profit falls and jobs are cut. It is still an inherent part of the incentive system to reward staff for taking risks, not playing it safe. But with banker bonuses a hot political topic, now more than ever, the traditional model of reward at financial institutions is under scrutiny and there is an urgent need to incentivise staff by a different means.

So what steps should be taken to successfully transform banking culture? We’ve considered this carefully and believe the following should guide culture strategies at institutions:

• Embrace the new normal:  Accept the fact that increased regulation is here to stay, along with higher capital requirements and, for now, reduced fee income. Rather than lament these facts,  consider the opportunities made possible by tectonic shifts in consumer expectations and buying patterns, seismic advances in technology, and an expanded global market. Staff should be encouraged to create openings by rethinking processes, services and products.
• Human Resource transformation: An institution’s ability to respond to the challenges and demands of the changing industry depends to a very large degree on the quality and productivity of its workforce. As a result, financial services companies are reliant on human capital more today than ever before.

At the same time, increased scrutiny by regulators and customers has resulted in massive changes in our compensation structure. Financial services institutions need to figure out how to attract, retain and reward a new breed of talent that cannot be won over with the size of their bonuses.

The role of human resources must become more strategic as financial services organisations compete for talent and seek to create a new generation of leaders. HR is one of several functions, alongside risk and compliance departments, that has been found wanting as the crisis unfolded and that needs to be an integral part of the solution.

• Remuneration:  Bonuses need to be better aligned with risk. As mentioned in the report from the Parliamentary Commission on Banking Standards in 2013, “Public anger about high pay in banking should not be dismissed as petty jealousy.”  Rebalancing reward towards equity will be positive for banks, encouraging a long term view to work and discouraging the kind of short term risk taking that led to the financial crisis in 2008. Without metrics in place, measurement becomes a “finger in the air” exercise based on networking and relationships within the company rather than on performance.

Culture of Change

The UK needs an accountable banking sector which discards the bonus-fuelled ethos of the past and puts the needs of consumers and businesses back at the heart of what they do. Success will not be achieved by returning to the way things were; instead the savvy financial services organisation will rethink company culture so their employees’ sense of purpose is to achieve a leaner, more nimble and responsible way to drive profits and growth.