Customers suffer as Irish bankers caught in crisis-era ‘firefighting’ mindset

Banks underestimate the work required to transform their culture, says Central Bank

“Culture is set from the top down. It is a matter for boards and senior management, in the first instance, to set up an effective culture that places the best interests of their customers first,” said Derville Rowland, director general of financial conduct at the Central Bank.

“Culture is set from the top down. It is a matter for boards and senior management, in the first instance, to set up an effective culture that places the best interests of their customers first,” said Derville Rowland, director general of financial conduct at the Central Bank.

 

A Central Bank report into the culture of Irish banks in the wake of tracker-mortgage scandal has found that top banking executives retain too much of a crisis-era “firefighting” mindset to place customers at the heart of the all decisions.

The report, ordered by Minister for Finance Paschal Donohoe last October and published on Tuesday, also said that senior executives in banks still struggle to shake off “directive leadership styles” and give senior staff more power speak up and make decisions.

In addition, banks have viewed their emergence from the crisis as a “significant achievement”, meaning they may underestimate the work required to transform their culture.

Failings

The Central Bank has recommended, as first reported last week by The Irish Times, that laws be introduced to make senior bankers accountable for failings under their watch, as they would be required to set out clearly where responsibility and decision-making lies for their business.

A so-called senior executive accountability regime would replicate a similar system, known as a senior managers regime, which was set up in the UK two years’ ago.

The tracker mortgage examination, which began in late 2015, has resulted in Irish banks paying more than €557 million in refunds and compensation to affected customers by the middle of June.
The tracker mortgage examination, which began in late 2015, has resulted in Irish banks paying more than €557 million in refunds and compensation to affected customers by the middle of June.

It also recommends that conduct standards be set out for all workers across the sector, requiring that they act with honesty and integrity, care and diligence.

The regulatory authority has found differing levels of progress across the country’s five surviving banks on their transformation towards a consumer-focused culture. It has provided each bank with individual feedback and directed them to deliver action plans to address identified risks. It has also vowed to conduct more frequent, targeted conduct supervision across the industry.

“Culture is set from the top down. It is a matter for boards and senior management, in the first instance, to set up an effective culture that places the best interests of their customers first,” said Derville Rowland, director general of financial conduct at the Central Bank. “Banks still have a distance to go to live up their slogans of putting customers first.”

Culture

Mr Donohoe directed the Central Bank last October to prepare a report on the culture, behaviours and associated risks in the retail banks, as he piled pressure on lenders – amid political and public uproar at the time – to acknowledge, once and for all, the extent to which customers were impacted by the tracker-mortgage scandal.

“Cultural failings within the banking sector were a significant contributory factor in the financial crisis. They were also a trigger for the Central Bank of Ireland’s Tracker Mortgage Examination, which found that such failings, in addition to poor systems, weak internal controls and poor governance, caused detrimental and in some cases impacts on customers,” the report said.

Group-think has been identified as a contributing factor to the financial crisis

The tracker mortgage examination, which began in late 2015, has resulted in Irish banks paying more than €557 million in refunds and compensation to affected customers by the middle of June. The industry ringfenced a total of €1 billion to draw a line under the controversy, including money to cover their own costs and expected fines as all five main banking groups are now subject to Central Bank enforcement investigations.

Banks globally have incurred fines of more than €270 billion since onset of the financial crisis. Mark Carney, chairman of the Financial Stability Board and Bank of England, said last year that the resources paid in fines, had they been retained as capital, could have supported up to $5 trillion (€4.2 trillion) in lending to households and businesses.

Standards

“Culture is a matter for each individual bank in the first instance, and no two cultures will be precisely the same,” the report said. “However, organisations that have an effective culture share a commitment to high standards and values with consumers at the heart of their decision-making. This means consumers can be confident that banks are acting in their best interests throughout their entire relationship with the bank.”

Minister for Finance Paschal Donohoe ordered the report.
Minister for Finance Paschal Donohoe ordered the report.

The Central Bank cultural review, conducted with the help of officials from the Dutch central bank, which is considered a European leader in this space, focused on executive teams within the banks. It involved 1,400 hours of desk-based research, over 500 surveys of staff within banks, the completion of 75 self-assessment questionnaires by senior executives and 75 detailed interviews.

The Central Bank also carried out diversity and inclusion assessments of the five banks, which found shortcomings across the board. Men made up some 80 per cent of candidates that the banks put forward between 2016 and 2016 for regulatory approval for senior roles, though that fell to 71 per cent last year.

It also found that 68 per cent of such applications were for Irish nationals, while a further 21 per cent were for British natives.

“Group-think has been identified as a contributing factor to the financial crisis” the report said. “The Central Bank’s own experience is that a lack of diversity and inclusion at senior management and board level in organisations is a leading indicator of elevated behaviour and culture risks.”