Following the 2008 global financial crisis, the financial services industry has come under intense scrutiny. Firms need to boost trust, create socially responsible products and prevent future financial crises. In its latest publication, Culture and purpose in financial services, the Financial Services Faculty recommends actions that the industry, boards and ICAEW Chartered Accountants should be taking.
Financial crises occur when banks, investment managers and pension providers stop offering the products that society needs and lose touch with their customers.
In response to these crises, particularly the 2008 crisis, the industry and its regulators have worked to improve behaviour.
However, incentives and targets are not yet fully aligned with the industry’s purpose – to empower businesses and individuals and give them financial security.
By focusing on cultural change, the financial service industry can do more to improve its reputation and public trust.
Until this alignment occurs any progress will be fragile, and new values and practices will remain vulnerable to further shocks.
To support the sector in addressing these corporate governance challenges, the Financial Services Faculty offers practical recommendations covering the following issues:
Why financial service providers need to address culture and purpose
Since 2008, much work has been undertaken by regulators to fix aspects of the financial services industry that allowed the financial crisis to occur. This work has largely focused on conduct, incentives, profits and purpose. The resulting changes have led to a safer and more trusted industry, and a continued focus on these areas is helping ensure that the industry does not become complacent.
However, while regulation and policy changes might help facilitate cultural change, this must be driven by the institutions themselves. Banks, insurance companies and investment managers are increasingly reflecting on how they do business, and how to move beyond simply meeting regulation.
The public is keenly aware of the social responsibility issues facing business across many different industries and the financial services industry provides particularly acute examples of the need for change.
In Culture and purpose in financial services, the Financial Services Faculty looks at how firms can focus on ensuring good behaviour and deal with misconduct effectively and consistently.
Organisations must foster a culture that does not allow misplaced incentives to take root and flourish. They must also understand and be clear about where profits are generated. For example, focusing on return on equity (ROE) and financial targets as ends in themselves has time and again led to suboptimal behaviour and decision-making.
This new perspective and mind-set must be underpinned by purpose. A change in culture and attitude is needed, with a focus on long-term sustainability. Providing services that meet the economic needs of society should be placed above short-term profits and bonuses. New initiatives and developments in the essential functions of financial services should be rooted in the same purpose, that is, empowering individuals and giving them security. This will prevent new businesses from seeking simply to extract value from customers.
Organisational culture is an important driver of behaviour, and good cultural values can help people and businesses do their best. A culture that encourages customers to be passionate about a company’s products provides direction as well as a sense of belonging and relationship with the customer. Conversely, distance from the customer makes it harder for employees to understand how the outcome of their actions affects people, and encourages them to prioritise ROE and other objective metrics.
Businesses should promote customer-centric thinking, and ensure that staff understand the business’s mission and cultural values. Accepting that human behaviour is imperfect and understanding why bad behaviour has previously occurred can also help organisations address aspects of their culture that may enable misconduct.
Consistency is vital to cement good behaviour, but demonstrating it can be challenging. Tacit messaging about how bad behaviour is dealt with will override official lines that remain undelivered in reality. The board, executive team and all managers must model expected behaviours consistently, and incorporate the firm’s values into day-to-day decision-making.
The board must first understand their existing culture, and then clearly articulate what culture they want to have. Consistency across all parts of the organisation is essential. Human resources in particular should ensure that conduct and treatment of customers form a significant part of objectives, performance ratings, training and remuneration. Ignoring such steps creates an environment in which staff are less likely to care about non-financial risks and issues.
For those working in financial services, the financial rewards are often high, and can come with the need to take risks on behalf of the organisation.
Those outside of financial services often believe that financial incentives are the main drivers of behaviour and decision-making. However, soft factors, such as recognition and promotion, have been found to be equally important.
Firms must balance the role of financial and other cultural incentives to foster desired behavioural outcomes. This will help align incentives and deterrents with good customer outcomes.
Prioritising financial targets may lead staff to feel they must pursue sales and profits at all costs, even at the expense of good customer outcomes. Chartered accountants can play a critical role in resetting the balance between profit and customer outcomes by pursuing appropriate ROE alongside good customer outcomes. To achieve this, there must be a coherent framework for setting ROE targets that properly aligns risk and reward.
It can be challenging for financial services firms to understand how and where they make money at a product and customer level. A greater depth of understanding with regard to product income, costs and profitability will help deliver better conduct outcomes.
Financial teams must be more involved in sourcing and interpreting these data, and should use their expertise and insight to challenge the figures robustly, and bring potential issues to light.
The financial services industry has enhanced the lives of much of the world’s population. Banks, insurance companies and investment managers create money, enable payments, store value, provide finance and investment opportunities and help manage financial risks. These functions empower businesses and individuals, and provide them with security.
Unfortunately, the 2008 financial crisis made it clear that banks, insurance companies and investment managers had lost the ability to connect with people. A lack of understanding of their proximity to customers and the essential role of financial services allowed misconduct to flourish.
Since then, the industry has accepted that things must change and is working to meet regulatory and societal expectations. As financial services continues to change rapidly, a sense of external purpose may help preserve good behaviours and values by providing a link to the customer and the real outcomes of one’s actions.
Remaining connected to purpose provides the necessary grounding and direction to work ethically, regardless of timing, circumstance or other pressures. It can also help us judge the value of products and services in simple terms. A good culture will reinforce individuals’ ability to act with purpose and create accountability for doing so.
A clear understanding of and belief in purpose gives individuals and businesses the context and resilience to make difficult decisions, and is necessary to cement good culture and conduct. Purpose can be easily understood by all employees and customers, and provides coherence to new initiatives, developments and practices.
Due to their essential nature, customers cannot simply walk away from financial services. This can make it easy for companies to take advantage of their customers. Purpose will allow institutions to prepare for the future in a coherent and sustainable way, and will help ensure that innovation and profit do not occur at the customer’s expense.
This article was originally published by ICAEW.