Ethics and professions: banking

In the week Barclays and the Royal Bank of Scotland were fined £3 billion for rigging the foreign exchange market, and days after a General Election campaign which featured debate about bankers’ bonuses, two experts discussed issues of regulation, morality, ethics, accountability and professionalism in banking and accounting.

Dr Susan Rice

Dr Rice recalled a story from her time as a banker in the USA which showed how banks could act for the greater good. A corrupt developer, who was funded by her bank, was jailed before completing a shopping mall in a particularly poor district. The bank chose to complete and expand the development so that it became a social benefit to the area and a commercial success. Dr Rice said: “It focused the mind on determining value based on activity beyond the spreadsheet. We made a virtue of operating outside of conventional regulation because we had a greater good in sight.”

Dr Rice admitted that things looked very different amid the turmoil of the financial crisis. But she argued that it is sometimes only from crisis that transformational change can be realised. “My proposition is that we need such change; we need banking to demonstrate once again that it enables the economy, and therefore society, to function and flourish by creating wealth and protecting assets,” she said. “Banking is not an end in itself – it serves a purpose.”

Dr Rice focused on three key areas of change – regulation, professionalism and culture – which need to be woven together. In regulation, she said there have been changes in controls, capital requirements, competition and compensation, but currently there is an emphasis on accountability: “It is not just what bankers do but how they do it.” The impact of regulation on the actions of individual bankers is important. “Tick-box’ compliance is insufficient and too many complex rules make it impossible for bankers to exercise judgement and hence take responsibility.

Banking has all the hallmarks of a profession. It requires specialised knowledge and skills, accountability and confidentiality, and it provides a service for the public good. There is currently a groundswell to recast banking as a profession. This requires standards, not just qualifications, above and beyond regulation.

Dr Rice is one of the first non-executives of a new body, the Banking Standards Board, which is seeking to explain what standards might be established. She also chairs another body, the Chartered Banker Professional Standards Board (CB:PSB), which was launched in 2011. The CB:PSB aims to restore trust, confidence and pride in banking by developing a suite of professional standards for bankers. Well over 100,000 bankers in the UK have achieved the foundation standard set by this voluntary, industry-led initiative and by 2016, a leadership standard will be implemented.

A cultural change is also required as to how bankers see themselves collectively as part of a profession. Dr Rice said that every institution has its unique culture, but during the boom years, a degree of homogeneity spread across banking. Concepts such as stewardship, integrity and accountability were replaced by a focus on profit. Whilst nearly all chief executives say the right things about their institutions and their operating principles, the question is how their colleagues below them exemplify those principles and values. How is their performance judged and how are their decisions made? Is getting it done or getting it done right valued more?

Looking ahead five years, Dr Rice said she hopes banking will be built on professionalism, with a culture that reinforces that bankers and banks should be working for customers through good times and bad and consult their conscience, not just the numbers, when they make decisions taken for the long term.

Anton Colella

Mr Colella said he wanted to explore the whole idea of ‘profession’. He said that young people today have less sense of profession than ever before. ICAS train over 3,000 students from the UK’s top universities. But he is concerned that, for the vast majority, it is more about gaining a qualification than joining a profession. That qualification is largely seen as an access point to a good job, good earnings, potential success and wellbeing. Mr Colella warned that accountancy is in danger of losing the sense of profession if action is not taken.

The motto of ICAS – seek the truth – constitutes a promise. Mr Colella said there is a need to rediscover the sense of promise. Society needs strong professions led by strong professionals. There is an opportunity for the professions to rediscover their place in society and, with that, a renewed respect. Young people want to be part of something noble, and Mr Colella wants their professional identity and promise to last their entire life. He hopes that great-great-grandchildren will take pride in the fact that their great-great-grandparents were accountants, not just because they sought the truth but because of the contribution they made to the good of society

Codes and standards are not enough to create an ethical profession. In 2012, ICAS introduced an oath, a public declaration for all new members. They promise to conduct themselves in a manner that maintains and enhances their professional reputation and commit themselves to act in the public interest, conducting themselves with integrity and objectivity in accordance with the highest ethical standards. Mr Colella said that ethics and professionalism are about consistency of behaviour. “The sense of privilege and responsibility that goes with being a professional in society should act as a check against excess and wrongdoing,” he said. He listed ethical standards as including objectivity, confidentiality, integrity, professional competence and professional behaviour, but argued for a sixth standard – moral courage.

A new narrative on integrity is needed. Mr Colella said: “It is the unwavering determination in the heart to do the right thing no matter what. Integrity is not just what people see, it’s what you are.” He proposed that young people need the example of moral leadership. Men and women have to pass on that moral courage to the next generation of professionals, so that doing the right thing is what one aspires to in order to attain success.

Mr Colella said that honour, respect and the service of public good are the characteristics of success. He said that a priority is replacing short-term gain, greed and excessive materialism. This new narrative could inspire even the long-toothed professional to see accountancy as noble and virtuous; a profession which not only serves truth but also the good of society.

Discussion

Mr Linklater began the discussion by observing that the competitive edge in banking has, if anything, sharpened since the crisis. Dr Rice argued that there would be a very different sense of competition if banking had a longer period of time than the current three-month quarterly reporting in which to be judged.

Mr Linklater noted that large, multinational companies turn to the accountants, who can deliver the sharpest advice on avoiding taxation. Mr Colella replied that more exotic tax schemes are in breach of the spirit of the legislation. However, he said there are 63,000 pages of tax legislation. With that level of complexity, it is possible to identify methods of tax evasion. Mr Colella challenged government to dramatically simplify that system.

Mr Linklater asked if Mr Colella agreed with the suggestion that too much regulation allows people to retreat behind it; whereas lifting regulation would throw responsibility back on the individual. Mr Colella replied that people will find ways around standards, rules and codes. He predicts that there will be another banking or accounting crisis because of such human behaviour.

Mr Linklater observed that when there is a scandal in the banking world, the first thing the media demands is tighter regulation. Dr Rice pointed out that every time there is a problem, a new rule comes out. That is a failure. She said that good regulation allows room for judgement and questioning, rather than thinking it can anticipate every single issue. Self-regulation should involve a sense of the impact of decisions on society and people, not just on the numbers of a spreadsheet.

Mr Linklater asked how the public could trust that a profession was capable of regulating itself after being found guilty of whatever the latest scandal was. Mr Colella admitted that external regulation is required. However, in the professional bodies, if the agreed ethical code is breached, it should lead to disciplinary action. He said that the issue is primarily about the behaviour of individuals. When banks interview to bring new people in, they need to ask whether a person is liable to let the bank down, or if their credentials mean they can be trusted.

Mr Linklater said a key problem is international competition. The argument goes that if banks and accountancy firms are to hold their own in an intensely competitive world, they have to pay the bonuses that bankers expect or they will go elsewhere. The banks have to go into the casino banking that everybody recognises is where the big profits are made. Dr Rice said that whilst short-term profits come today, the losses come tomorrow. She added that the source of the salary escalation began in the late 1990s as an unintended consequence of greater transparency. Mr Colella said that short termism and short-term perspectives produce bad behaviour. He suggests replacing quarterly reporting with mid-year reporting.

A member of the audience asked whether, if he was standing outside a tiger’s cage and there was a notice saying ‘regulated by the Zoological Society’, he should go in; or should he realise that he’s dealing with a tiger? He said that attempting to put a pretty face on what is a very competitive industry actually misinforms the public. It is better to say: ‘this is a tiger – it has valuable properties but extreme dangers as well’. Dr Rice said competition could lead to good; it does not have to be nasty. Banking does not have to be a tiger.

Mr Linklater asked if the proliferation of scandals is, in itself, a sort of regulator of behaviour. Dr Rice replied that that was true to an extent, adding that there is a limit to how much money banks want to give to regulators because they have misbehaved.

An audience member asked whether action is needed to protect whistle-blowers, as it seems that a lot of people knew what was going on during the Libor and foreign exchange rate scandals, and whether there should be stiff punishments for the individuals blamed. Dr Rice responded that people are beginning to be punished – banned from operating in the banking industry or fined. She added that such practices are not always observed or understood and, in fact sometimes people thought they were doing the right thing, not the wrong thing. Mr Colella said that some of the failures were ‘sins’ that began as ‘sinlets’; a major ethical breach beginning as something small before reward psychology kicked in. He argued that it is better to be surrounded by moral colleagues who have the moral courage to say ‘don’t do that’.

An audience member accused Dr Rice of not living in the real world regarding ethical progress in banking and that the scale of misconduct in some financial institutions is now so great as to risk the stability of the whole financial system. Another audience member observed that traditionally, professions are self-regulating bodies that discipline their own members. If governments have to start regulating them, then the professions have failed. Dr Rice observed that it is reprehensible to just blame rather than make progress in improving banking.

An audience member said that ethics are self-driven and internal – they can come from outside regulation. He added that anyone who wants a bonus is not a professional. The professional does his work because he loves it. Another audience member said that ethics can go out of the window when the rewards are substantial, and that recruites the wrong sort of person. He suggested that salary limits could be an effective answer to this.

Another audience member asked what happens within a bank when it learns that it has been fined billions of pounds for something such as foreign exchange rate manipulation. Dr Rice responded that such events prompt a huge amount of soul-searching and an effort to identify other possible problems and work out how the decisions that led to the situation were made. But it is often very complex and difficult to say who was responsible. However, she said it is important that people along the way alert the organisation to the consequences of particular decisions.

An audience member said she was shocked that none of the bankers who attended a House of Commons Select Committee meeting had a banking qualification. She asked whether that was one of the reasons for the crisis. Mr Colella responded that qualifying is the easy part. The challenge is for professions to inculcate values through moral leadership. Dr Rice said it is folly to think someone who qualified as a banker 30 years ago is still effectively qualified. Continued development – continued qualification – is essential. Mr Colella suggested that more professionals should head to the boardroom to sceptically scrutinise and interrogate the detail.

An audience member suggested that the crisis was in part caused by the Government’s light-touch regulation of the banking sector. He asked whether appalling management and management standards were other causes. Dr Rice replied that there has been appalling, indifferent and good management. Unfortunately, the banks found themselves funding each other, so that when one institution finally failed, it was like dominos. Should the banking institutions have stood up and said ‘that’s a problem’? – Possibly. Should others, such as the regulators, have likewise stood up? Many people are guilty of not getting it right.