You can trust Trust is on the regulatory agenda

Lest anyone think the apparently newly found interest by banks and boards in trust and social licence is purely marketing rather than a recognition of its fundamental importance, they can be reassured banking regulators are deadly earnest.

Rarely a does an event involving regulators take place in public nowadays without the implicit recognition of the importance of an improvement in industry culture or indeed a direct instruction to do something.

"Rarely a does an event involving regulators take place nowadays without the implicit recognition of the importance of improvement."
Andrew Cornell, Managing Editor BlueNotes

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Take for example a recent UK Banking Standards Board panel,“Worthy of trust? Law, ethics and culture in banking” addressed by both the governor of the Bank of England and the chairman of the US Federal Reserve Bank of New York; or the latest in a series of presentations by Reserve Bank of Australia deputy governor Guy Debelle on establishing a global, enforceable code of conduct in foreign exchange trading.

Indeed, in many economies, including Australia, the financial services industry has both recognised it is in the interests of its shareholders to be good – more satisfied customers, more engaged staff, fewer fines for misconduct, lower costs of compliance, better shareholder returns – and that it needs to stay ahead of public intervention, via regulation.

(It’s worth noting too the regulators themselves are being driven by societal expectations of tougher supervision and harsher sanctions, lest the regulators themselves feel the wrath of higher powers in parliament and the general public sitting in the ‘gods’).

One may object, as did Socrates in his dialog with Euthyphro on the nature of piety, that there is a distinction between an action being ‘good’ just because the gods expect it; or that the gods expect it because it because it is inherently good - but doing good is being demanded of banks anyway by the regulators on high.


This week the Australian Banking Industry, under the auspices of the Australian Bankers’ Association, released its response to the independent review of the proposed Code of Banking Practice, generally endorsing the recommendations.

According to the ABA’s Diane Tate, the Code is “central to making sure banks do the right thing by their customers”.

Obviously critics may be cynical about such an industry move but the particular measures proposed will certainly enhance the public’s ability to engage with banks.

Most are quite straightforward: plain-English language so customers can better understand their banking rights and responsibilities; a commitment to simplify terms and conditions for small business; increased help for people experiencing, or at risk of, financial difficulty, so they can take control of their finances.

“Mr Phil Khoury, the independent reviewer, consulted widely as part of his review and it is clear the Code needs to change to meet the evolving needs of customers and the wider community,” Tate said at the launch, adding “the new Code will have a clear commitment to ethical behaviour by banks, in a similar way that the Banking and Finance Oath demonstrates a personal commitment to high ethical standards”.

Some will say this should have been happening anyway or that banks are simply trying to fend off a Royal Commission or more intrusion but the result, for consumers and other stakeholders, should still be more trust in the financial services sector. And that is good.

The deeper scepticism may well be whether the industry will do what it says. And that’s where the regulators come in.

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Velvet glove

Wearing the velvet glove, the RBA’s Debelle noted the enforcement agencies, such as the Australian Securities and Investments Commission, would be looking at the FX Code as a basis for action.

“Why is the work going on? As I have stated before, the foreign exchange (FX) industry has been suffering from a lack of trust in its functioning,” Debelle said. “This lack of trust is evident both between participants in the market and, at least as importantly, between the public and the market.”

He was pointed on actual compliance: “Clearly, that has been an issue with the various existing codes that have been in place in a number of markets over many years. It is evident that they were ignored on occasion, wilfully or otherwise.” Hence the presence of enforcers, the muscle.

The FX Code is also emblematic of the broader approach of regulators to restoring trust. It will be principles not rule based. That means culture rather than cleverness is essential.

In his speech to the Banking Standards board, the Fed’s Dudley articulated what such principles were based on.

“I would like to highlight three issues that are critical to improving culture within the financial services industry,” he said.

They were:

  • defining and clarifying purpose, because clear goals are necessary if one is to assess performance;
  • measurement of how firms and the industry are performing; and
  • assessing whether incentives encourage behaviors consistent with the goals one wishes to achieve.

Purpose was critical: “For any bank, a statement of purpose should emphasise sustainable success, not short-run profit,” Dudley said.

“This is because of the many important roles that banks play in the economy. They are critical intermediaries between savers and borrowers; they provide essential infrastructure; they support well-functioning financial markets; and they act as custodians of our wealth.

“These functions require long-term commitment. They should not be erratic or ephemeral. The economy needs a steady supply of competent, honest, and reliable banking services in order to function. That is why any bank should emphasise the long term over the short term.”

Dudley finished his speech with a litany that should probably not just be painted in large print in any organisation’s foyer but required reading for those who think companies wishing to be good corporate citizens are forgetting their shareholders and indulging in activities not in their knitting patterns.

  • Good culture means fewer incidents of misconduct, which leads to lower internal monitoring costs.
  • Good culture means employees speak up so problems get early attention and tend to stay small.  Smaller problems lead to less reputational harm and damage to franchise value.  Habits of speaking up lead to better exchanges of ideas-a hallmark of successful organisations.
  • Good culture means greater credibility with prosecutors and regulators - and fewer and lower fines. 
  • Good culture helps to attract and retain good talent.  This creates a virtuous circle of higher performance and greater innovation, and less pressure to cut ethical corners to generate the returns necessary to stay in business.
  • Good culture builds a strong organisational story that is a source of pride and that can be passed along through generations of employees.  It is also attractive to clients.
  • Good culture helps to rebuild public trust in finance, which could, in turn, lead to a lower burden imposed by regulation over time.  Regulation and compliance are expensive substitutes for good stewardship.

Banks may have lost the trust of some sectors of the community and it is essential they be serious at getting it back – because it is their business.

Andrew Cornell is managing editor at BlueNotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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