By Chartered Banker, UK

The ‘trolley problem’, ‘ticking time bomb’, and ‘lying doctor’ are all fairly well-known examples of moral dilemmas – whereby individuals are presented with a scenario and a choice between two or more options – each of which has both positive and negative consequences. The aim of these is to explore the moral reasoning around decision-making.

In Plato’s Republic, meanwhile, we have the story of the Ring of Gyges. When given a ring, a shepherd named Gyges becomes invisible and anonymous. Through his invisibility he seduces a queen, kills her king, and takes over the kingdom. The argument is made that invisibility and anonymity are the only barriers between a just and an unjust person. It also states that we would all be unjust if we had a cloak of anonymity.

“The Greeks asked this question about being invisible,” says Chris Cowton, Emeritus Professor of Financial Ethics, the University of Huddersfield, which amounts to, ‘Would you be ethical if you couldn’t get caught?’ It’s an ancient question and it’s one that can be applied to banks. Do they act ethically today purely because they don’t want to get hit by the regulator and upset the market? Or are they doing it at least in part owing to the fact that it’s the right thing to do – because it fits with the kind of bank they want to be and the culture they want to have?”

In order to examine this question in depth, it’s important to take a step back and look at where we were with regards to ethics and banking, and where we are now.

Scandals, Tech, and Competition

Samar Yanni, Assistant Director and Head of Membership & Professional Standards, Chartered Institute for Securities & Investment (CISI), explains that over the past few years, there’s been a greater focus on the ethical landscape in banking. “This has been driven by regulatory changes and public scrutiny as well as advancements in technology,” she says. “The emphasis on sustainability and introduction of Sustainable Finance Disclosure Reporting (SFDR), meanwhile, are also adding to the already complex landscape.

“There have also been a few cases in the public domain that came under public and regulatory scrutiny, following on from high-profile financial scandals. Additionally, the rise of technological advancements, such as AI (artificial intelligence), digital banking, and fintechs have also highlighted new ethical considerations.

“Interestingly, as the ethical landscape in financial services becomes more complex, we’ve started to see a rise in disciplinary cases being communicated to us at the CISI, with a 33% increase in cases declared in 2023 compared with 2022.” Cowton looks further back in order to assess where else this focus might have come from. “The ethical culture of banks took a hit prior to the [2008] financial crisis, and that was obviously driven by a number of factors. These included stock market expectations, competition, and what boards were interested in. Everything had become much more about selling.”

Friendly Advisers or Salespeople?

He explains that, in his opinion, there are two current characteristics of banking that really matter. “One is regulation, the other is the nature of the product banks sell. But because of what it is that they sell, people can’t easily evaluate them and we don’t have a tradition in this country of people being willing to pay for financial advice. So, coming up to the financial crisis, people tended to think that the bank was their friendly adviser. What they didn’t realise was that there were strong targets behind what they were being spoken to about.”

Cowton says that today, banks are being managed like other big organisations. “But what happens with FS (financial service) products really matters. If I have, for example, the wrong insurance policy – it really matters. If I’ve invested in the wrong sort of pension – it really matters.

“Conversely, if I buy a burger and I don’t like it, it doesn’t really matter. I might eat it, I might not – but I’m probably not going to go back to the place I bought it again. I’ll put it down to experience, but a lot of what banks sell are so-called credence goods: even after you’ve bought something, you don’t know whether it’s a good product or not.

“But since the financial crisis, banks have taken a good look at themselves. They’ve understood that some of the systems and procedures that they had in place weren’t actually appropriate when it came to dealing with vulnerable customers. So, as a result, they rethought some of their systems – the ones that a lot of us predicted would end in tears –and because of this, they aren’t as exploitative as they once were. But this doesn’t mean that they suddenly became values-based organisations, of course.”

Yanni turns her attention to the role that the Financial Conduct Authority (FCA) has played in shaping and enforcing ethical standards within financial services. “The FCA has defined accountability and responsibility,” she explains. “For example, the individual conduct rules and the Senior Managers and Certification Regime (SM&CR) place a greater onus on firms and individuals to act with integrity, skill, care and diligence, and treat customers fairly. The Consumer Duty, which came into force in 2023, sets clearer and higher standards and expectations to treat customers fairly.

“The rules and requirements have been put in place to support banks in achieving the right outcomes, which means putting the client first and delivering suitable services,” she continues. “There are also rules and requirements to guide firms on best practice. Similarly, the CISI provides a range of resources to help members and firms.”

The Million-dollar Question

Cowton believes that, crucially, most banks have done some thinking about their own purpose. “This might attract recruits and it might make people more confident in the bank,” he says. “It has probably helped them think through some of their issues. Of course, the danger is if the purpose piece turns out just to be window dressing.

“On top of all this, we now have the FCA’s Consumer Duty. Does that help embed ethics in banks? I think that’s the million-dollar question. I personally have my doubts.”

He states that a large part of the problem is that banks are allowed to handle Consumer Duty in the way they think is appropriate. “We have to consider if the current regulation encourages banks to think of Consumer Duty in the right way,” he points out. “If it doesn’t, then it’s going to be very hard to embed ethics in the relationship between a bank and its customer.

“Unless there is intelligent regulation of Consumer Duty, it will descend into box-ticking and it won’t accomplish its aims and this will be another nail in the coffin of ethics-based behaviour in the banking industry.

“What we find in organisations is that when people are doing something for the sake of doing it, all ethical intelligence disappears. This is because they’re not trained to think and they’re not given discretion. We know that most things go wrong ethically not because people are deliberately ‘naughty’ but because they didn’t even notice what was happening.”

With regards to the likes of Consumer Duty, Tanya Retter, Executive Director of Education, Chartered Banker Institute, stresses the need for leaders to understand the playgrounds within which they are operating. “This means having strong support – from the regulators, the board and the teams – that enables people to understand certain frameworks and therefore operate the right way within them.

“When a new piece of regulation comes in or there’s a concern that’s been raised through a review, having the right people in place to deliver against that outcome is really important, and knowing what frameworks and systems to put in place is crucial, too.”

The North Star

Cowton’s fear is that without this intelligent regulation, the opportunities for a bank to truly have an ethics-based – rather than a rule-driven – culture are limited.

“This is why it’s really got to start with the board,” he says. “The board has conversations with the regulators, both official and unofficial and via various channels, and it’s the board that decides what kind of organisation it wants to be.”

Retter believes that while the board decides the purpose – the north star – of the organisation, it’s leadership that will ultimately embed and sustain it. “The board absolutely will support the strategy, but when it comes to fulfilling it, that’s down to their leaders. These are the people who are actually supporting their teams, driving the right behaviours and implementing and executing the strategy through various frameworks, systems, and processes. So, they need to have the right skills and an understanding of what it is they need to do and how they need to do it.”

Crucial to this, Retter believes, is their ability to story tell and narrate. “A leader’s ability to bring to life a vision is critical. They need to be able to transcend different audiences depending on how senior their teams are and depending on whether they have flat structures or not.

“They also have to translate and communicate because one person can’t make all the difference – it takes a whole body of people to do so. Leaders, therefore, have to be able to achieve that organisational change and sustain it long after they’ve gone. The cultural way of operating has to be something that comes from the DNA of the people within the company.”

Retter stresses the need for critical thinking and an appreciation for continuous development. “Leaders need to be capable of questioning what organisational concepts mean for them and their teams, and how they can make sure they are supporting individuals with regards to attitudes to always-on learning and growth mindsets – as well as how they can all be ahead of the curve.”

“As an institute,” she continues, “we’re proud of the fact that we support people at every stage of their banking career – whether members are in front-line or functional teams. We support them through a variety of different qualifications, educational content, and continuing professional development (CPD) that enables them to progress and hone some of the skills that will help them be professional, responsible bankers.”

Honest Reflection

Cowton recalls a two-day roundtable consultation process he was involved in with senior banking figures and regulators not long after the financial crisis. “I asked the question, ‘What is banking for?’” he says. “And what was really interesting was that most of them said that they take small short-term deposits and transform them into longer-term loans, which is traditional financial intermediation.

“My next question was, ‘What about the rest of it? Everything that got you into trouble?,’ and the response I received was essentially that they just didn’t know what use it was, but everyone else was doing it and they didn’t feel able to be the odd ones out.

“But what we’ve seen recently is banks taking a step back and asking themselves what they are actually here for,” he continues. “Today, most of the UK-based clearers have some sort of expression of that. It might not have seeped through yet, but it’s at least embedded in systems. And, of course, one of the factors that has changed in the past 50 or 60 years is that you can actually drive a bank from the centre in a way that couldn’t be done in the 1960s. Back then, the local branch was its own kingdom.”

What are the next steps in this space, according to Yanni? “Developing an understanding and awareness of non-financial misconduct is essential to avoiding falling short, which could result in disciplinary cases.

“At the CISI, we put great emphasis on supporting our members in achieving the highest ethical standards. One way we do this is via a requirement for new members to complete a module on integrity and ethics and a commitment to undergo a number of CPD hours on integrity and ethics on an annual basis. We also deliver an Annual Integrity Event, where a panel discusses various dilemmas and members can vote on the most ethical resolutions. Finally, we publish ethical dilemmas under the title Grey Matters in the digital and print editions of our member magazine, The Review.”

The Ripple Effects of Change

Yanni stresses that while building a positive culture internally at banks is absolutely vital when it comes to ethics, it is by no means an instantaneous process. “It can’t be achieved overnight,” she says. “It takes time and the small changes have the ripple effect of creating larger ones. Small incremental changes will enable firms and banks to build a more positive ethical workplace, where the behaviours expected by the regulator, customers, and colleagues are embedded into the culture.

“The rules and requirements have been put in place to support banks in achieving the right outcomes, i.e. putting the client first and delivering suitable services. There are also rules and requirements to guide firms on best practice and, similarly, the CISI provides a range of resources to help members and firms.”

Cowton, meanwhile, points out that the UK Corporate Governance Code requires the board to have a view on its corporate culture. “This means that board members have to be able to state what kind of culture they want in their organisation” he explains. “They also have to be assured about how management will try to implement the various tools that might help the organisation achieve and maintain that culture.

“Cultural management is really difficult,” he continues. “What kind of culture do banks want? and particularly, do they want a mere compliance culture or something more than that? Have they done some real thinking around purpose and how they feed codes of ethics – and there are some good codes of ethics in place – into the organisation? Key here are training, communication, tone from the top and role modelling by middle management. It’s also about making it relevant. Banks might have espoused values – but what are the words and what do they mean for us here, in this part of the bank?”

Sniffing the Culture

Yanni agrees: “Ensuring that ethical values and commitments are correctly cascaded throughout an organisation starts at the top, with senior leaders modelling the expected behaviour.

“It’s also vital that organisations do everything they can to embed a positive work culture – one that enables honest, open, and transparent conversations,” she continues. “This will, in turn, enable individuals to speak up and raise concerns where needed, learn from mistakes, and continue to build on the ethical behaviours. Finally, it’s essential that companies develop training, regular monitoring and have the right policies in place.”

Cowton adds: “People often worry about measuring culture. But it is possible to get a handle on it. You can define your own numbers and there are various indicators you can use around where you currently are and where you want to get to over time.

“Sometimes, however, it can be much simpler than that. You can often walk into an organisation and even without being there very long you can somehow sniff the culture – it’s instinctive and intuitive. From the outside, a lot of banks will look and seem the same – but as soon as you walk inside, even if it’s just into one particular department, you can get a sense if something is off.”

Improving Public Perception

Cowton is very much of the opinion that the signals people receive when they first join an organisation are worth serious consideration. “This is especially important around what really matters internally and what people get promoted for,” he says. “A common problem is that the people who are candidates to become big players are the ones who have stunning numbers. But later, it becomes apparent just how they achieved these numbers.

“Management needs to control the messaging about what really matters and this can be in terms of performance appraisal and in promotion criteria. It can be how the culture feels day to day.

“When it comes to recruitment, it’s one thing to have fantastic messaging about the kind of organisation you are, how all are welcome and that purpose matters. But if people don’t see that when they join, they’ll rightly think they were sold a false narrative.

“Microcultures and subcultures will of course exist,” he continues, “and some of these will depend on the function that people are in. But there should be some underlying values that somehow make it seem different.”

Yanni concludes: “To succeed, banks need individuals who are open to communicating, learning, and developing themselves and others continuously. While the goals remain the same, we have seen the expectations and deliverables change over the years. With the introduction of hybrid working, there is a greater focus on building trust and, in turn, ethical behaviour.

“What’s more, the public perception of bankers in the UK is considerably lower than it is for other professionals. Improving the ethical behaviour of financial services providers is essential for continuing to build consumer trust and confidence in the profession.”

This article previously appeared in the Chartered Banker magazine, UK, Issue 1 2024 edition.