Corporate Governance and Culture in Financial Institutions

Edited by Andreas Kokkinis, Associate Professor, University of Birmingham and Anat Keller, Reader in Law, King's College London, UK

‘This book provides a legal and interdisciplinary take on financial institution culture, which remains an important topic today for securing the resilience and sound management of banks and financial firms generally. The interaction between ESG orientations and their impact on financial firm culture is also explored through discussions on executive remuneration, risk management and governance developments in the financial sector. This book is a valuable addition to regulators’, academics’ and financiers’ libraries.’

• ContentsForeword: The role of corporate culture in the financial sector xivIntroduction to corporate governance and culture in financial institutions1 Legal and regulatory framework for corporate governance and culture in financial institutionsA. INTRODUCTION 9B. STRUCTURAL GOVERNANCE REQUIREMENTS 111. The Conventional UK Corporate Governance Framework 1 12. Specific Corporate Governance Requirements for Financial Institutions 1 3C. SENIOR MANAGERS AND CERTIFICATION REGIME (SMCR) 171. Development of the SMCR 1 82. Scope and Applicable Framework 1 83. Elements of the SMCR 2 0(a) Senior Managers Regime 2 0(b) Certification regime 2 2(c) Regulatory references 2 3(d) Conduct rules 2 34. Enforcement 2 6(a) Regulatory sanctions 2 6(b) Criminal liability 2 85. Recent FCA Review and Reflections 2 9D. EXECUTIVE REMUNERATION 311. Legal Framework on Remuneration for Listed Companies 3 22. Framework for Remuneration in Financial Institutions 3 23. Removal of the Bonus Cap 3 5(a) Introduction of the bonus cap and regulatory resistance 3 6(b) Decision to remove the bonus cap 3 7(c) The effect of the bonus cap removal 3 8E. FCA CONSUMER DUTY 401. Nature of the Requirements under the Consumer Duty 4 12. Scope 4 33. Embedding the Consumer Duty in Governance and Culture 4 4(a) Guidance on governance and culture 4 5(b) Responsibility of senior management 4 64. Breaches and Enforcement Action 4 7F. DIVERSITY AND INCLUSION (DI) 481.REGULATORY AIMS RELATED TO DI 482.REGULATORY UNDERSTANDING OF DI 503. Current Rules on DI 5 1(a) Board diversity 5 1(b) Responsibility for DI 5 2(c) Non-financial misconduct 5 24. Proposals for a New Framework for DI 5 3G. CONCLUSION 552 Boards and regulators – Shaping and assessing organisational cultureA. INTRODUCTION 57B. MEASURING CULTURE WITHIN AN ORGANISATION USING STAFF OPINION SURVEYS 58C. ENCOURAGING TRUST AND ACCOUNTABILITY 60D. ATTRACTING, RECRUITING, INDUCTING AND RETAINING STAFF 601. Attraction and Recruitment 6 02. Who and What Gets Celebrated 6 13. ‘Casting a Shadow’ and Corporate Culture 6 24. Cultural Memory 6 3E. THE ROLE OF THE BOARD IN REMOVING OBSTACLES TO GOOD ORGANISATIONALCULTURE 631. The ‘Three Lines of Defence’ Delusion 6 32. The ‘Directed Telescope’ 6 63. Avoiding Setting the ‘Wrong’ Targets 6 7F. THE IMPORTANCE OF A CULTURE OF ‘SPEAKING UP’ 671. Speaking Up Freely 6 72. Organisations in a State of Denial Exhibit a Poor Culture 6 83. Someone Is Always Aware Where Something Is Not Right 6 94. An Open Culture Is Critical to Communications 6 95. Guidance on Raising Concerns 7 06. Culture and Organisational Hierarchies 7 07. A Parallel Reporting Process 7 18. Instilling a Culture of Listening 7 3G. THE POTENTIAL CULTURAL OBSTACLES WHICH OFTEN PREVENT BOARDS ANDSENIOR EXECUTIVES FINDING OUT WHAT IS GOING ON 741. Fear of ‘Disloyal’ Insiders Who Tell the Truth 7 42. The Psychological Fear of Taking Action 7 43. Poor Culture, Inwardly Focused Organisation, and with a Spirit of Omertà 7 44. Poor Culture and Denial 7 65. A Culture that Attacks Those Who Raise Concerns 7 76. The Risk of Approaching Concerns from a Legalistic Perspective 7 77. The Widespread Use of Non-disclosure Agreements 7 8H. TRAINING, THE BOARD AND CORPORATE CULTURE 781. Training as Evidence of Good Culture 7 82. Board and Senior Executive Training and Culture 7 9I. REGULATORY ACTIONS TO IMPROVE CULTURE IN REGULATED FIRMS 801. The UK’s Senior Managers Certified Persons Regime (SMCR) 8 02. Regulatory Focus 8 2J. CONCLUSION 833 Diversity and culture in UK financial servicesA. INTRODUCTION 85B. WHAT DOES GENDER DIVERSITY IN FINANCIAL SERVICES LOOK LIKE? 871. Senior Management and the Women in Finance Charter 8 72. Wider Corporation 8 9C. PUBLIC DIVERSITY IN FINANCE 92D. DIVERSITY AND CULTURE 931. What Is Meant by Culture? 9 32. How Does Culture Relate to Diversity? 9 53. Are Financial Services a Special Case? 9 9E. ADDRESSING CULTURE AND DIVERSITY IN FINANCIAL SERVICES 1011. UK Corporate Governance Code 1022. Gender Pay Gap Legislation 1033. Senior Managers and Certification Regime 1044. Worker Protection Act 1065. Proposed Regulation 1066. Other Proposals 108F. CONCLUSION 1104 Executive remuneration in financial firms – Driving behaviour and shaping cultureA. INTRODUCTION 112B. EXECUTIVE REMUNERATION AND THE RISK-TAKING CULTURE IN FINANCIALINSTITUTIONS 115C. REGULATION OF EXECUTIVE REMUNERATION IN FINANCIAL INSTITUTIONS 1211. Long-term Incentives 123(a) Deferral 123(b) Malus and clawback 1252. Risk-adjusted and Stability-based Performance Metrics 127D. EFFECTS OF REMUNERATION REGULATION ON RISK-TAKING 129E. THE ESG TREND IN EXECUTIVE REMUNERATION 134F. CONCLUSION 1405 The Irish Individual Accountability regime and cultural changeA. INTRODUCTION 143B. SEAR 1461. Statements of Responsibilities 1462. Management Responsibilities Map 149C. CONDUCT STANDARDS 150D. STATUTORY DUTIES OF RESPONSIBILITY 1541. Reasonable Steps 1552. Enforcement 158E. COLLECTIVE RESPONSIBILITY 160F. APPLICATION OF SEAR TO NON-EXECUTIVE DIRECTORS 165G. CONCLUSION 1686 Professionalism, corporate governance and purposeful culture in bankingA. INTRODUCTION 171B. HISTORY 174C. STRUCTURE 1781. Commercial Banking vs Investment Banking 179D. PURPOSEFUL CULTURE 1811. Counter Culture 183E. CORPORATE GOVERNANCE 185F. PROFESSIONALISM 1871. CBI Efforts to Restore Banking Professionalism 190G. THE DEMISE OF THE BRANCH 191H. REGULATION 194I. CONCLUSION 1977 ESG strategies and their impact on corporate cultureA. WHAT IS ESG? 200B. THE KEY TENETS OF COMPANY CULTURE 201C. CSR: AN INEFFECTIVE ADD-ON 203D. THE EMERGENCE OF ‘ESG’ 204E. THE ‘G’ OF ESG 206F. THE IMPACT OF ESG ON CULTURE 2091. Trust and Transparency 2092. Values 2113. Purpose 2154. People 215CORPORATE GOVERNANCE AND CULTURE IN FINANCIAL INSTITUTIONS5. Innovation 2176. Boards and Executive Leadership 218G. STRATEGY NOT TACTICS 220H. THE DAWNING OF A NEW FINANCIAL SERVICES CULTURE 223I. CONCLUSION 2258 Purpose-led companies in financial services – A case studyBE HELPFUL. AND KIND. THE END. 227A. SOCIETY TODAY 2281. The Incumbent Finance Sector 2282. Disparity between Rich and Poor 2293. Just How Rich Is the UK? 2304. Is the UK Happy? 2315. How Does Money Make You Feel? 2326. A Bit of Corporate Governance 2337. The UK’s Online and Mobile Bank Transfer System – The Faster Payments Scheme 234B. THE NEXT LAYER OF PAYMENTS INNOVATION 2351. The Impact of Open Banking 2362. The Limitation of the CMA Order and the Need to Expand Open Banking 2373. Competing with Cards 2394. The PSR’s 2023 Christmas Present 2415. What’s the Case for Purpose? 241C. ORDO’S STORY 2431. The Past 243(a) The Faster Payments Access project 243(b) Turkeys voting for Christmas 244(c) The governance project 2462. The Present 248(a) The origins of Ordo 248(b) Our Purpose and financial wellbeing 249(c) As academics and regulators would say: ‘Operationalising Purpose’ 250(d) The inside story on Purpose-driven companies 251(e) When the going gets tough, the Purpose-driven stick with it 2543.THE FUTURE 255D. REFLECTIONS 2561. Beyond the Web Page 2562. How to Do Things Differently and Be Believed 2573. Customer Attraction 2604. Is Being Purpose-driven a Winner? 2619 Internal compliance, risk management, and their impact on culture in financial firmsA. INTRODUCTION 262B. AN ORGANISATION FRAMEWORK OF INTERNAL COMPLIANCE IN FINANCIALINSTITUTIONS 2651. Risk Management Frameworks in Financial Institutions 267C. TOWARDS A DEFINITION OF REGULATORY CULTURE IN FINANCIAL SERVICES 2692. How Does ‘Good’ Culture Look for Compliance Departments of Banks? 271D. INSIGHTS FROM THE ECB ON RISK CULTURE 272E. RECOMMENDATIONS FOR A SOUND RISK CULTURE IN COMPLIANCE DEPARTMENTS 278F. CONCLUSIONS 28210 Banks’ anti-money laundering efforts – The role of RegTech and AI and cultureA. OVERVIEW 285B. CATALYST FOR AML COMPLIANCE IN BANKS 287C. IS REGTECH/AI THE ANSWER TO COMBATING FINANCIAL CRIME? 290D. IS POOR CULTURE HINDERING THE FIGHT AGAINST FINANCIAL CRIME? 2951. Culture of Tick-box 2952. Culture of Resistance to Change 2983. Culture that Does Not Instil a Sense of Responsibility for AML 3004. Culture of Optimism 3035. Culture of Gaming the Rules 3056. Culture of Minimal or Non-compliance 3067. Culture that Prioritises Revenue Generation over Market Integrity 309E. CONCLUSION 31111 New technologies, corporate governance and cultureA. INTRODUCTION 312B. CORPORATE GOVERNANCE AND CORPORATE CULTURE IN THE FINANCIAL SECTOR 3141. Corporate Governance (in the Narrow Sense) 3162. Corporate Culture 323C. THE IMPACT OF NEW TECHNOLOGIES 3261. Measuring Corporate Culture using Machine Learning 3292. Changing Corporate Culture: ML-Informed Appointments to the Board 334D. CONCLUSION 33812 Future developmentsA. THE RISE OF CULTURE 340B. THE CLIMATE EMERGENCY AND CULTURE AND GOVERNANCE IN THE FINANCIALINDUSTRY 342C. TECHNOLOGICAL DISRUPTIONS AND THEIR IMPACT ON BANK GOVERNANCE ANDCULTURE 343D. PROFESSIONALISM AND REGULATION 346