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Shattered trust in banks was self-inflicted, says AIB chief
Finance minister Paschal Donohue

10 Mar 2022 / regulation Print

Shattered trust in banks largely self-inflicted – AIB chief

Shattered trust in banks was largely self-inflicted in this country, AIB chief executive Colin Hunt has admitted.

“A number of very, very damaging issues, including tracker mortgages, inflicted a huge blow to the trust of the Irish people in the banking system, and we are still grappling with the consequences of that today,” he said.

Speaking at the launch of a new book on accountability in financial services, Hunt said that financial institutions had gone through “substantial transformation” with massive recapitalisation associated with austerity measures. 

Colin Hunt (small picture) added that banks needed to be staffed by people of competence and integrity, underpinned by trust.

Symbiotic relationship

The chief executive added that there was a positive symbiotic relationship between banking and societal wellbeing, and that a strong system could be a force for great economic and social good.

However, trust could only be earned over multiple years, he said, and the sector was now working on building a positive customer-focused culture.

“We still have loads more to do,” he said, adding that he welcomed the proposed ‘individual accountability framework’ (IAF) for the banking sector.

He said that he supported conduct standards that insist that all bank staff should act with honesty and integrity.

Co-authors Dr Joe McGrath (UCD Sutherland School of Law) and Ciaran Walker (Eversheds Sutherland) were also joined at yesterday's launch (9 March) of New Accountability in Financial Services: Changing Individual Behaviour and Culture by finance minister Paschal Donohue.

Cultural transformation

The minister said that the aim of the IAF legislation was to deliver greater levels of accountability, and clarity regarding responsibility, which would lead to better outcomes across the sector.

A cultural transformation was to everyone’s benefit, he said, adding that there must be an ethos that recognised the legitimate interests of customers.

Honesty and integrity are at the heart of any successful company, he said, especially given the vast importance of the financial-services sector to the Irish economy.

Clarity about where accountability lay was vitally important if a matter such as the tracker-mortgage scandal should arise again, the finance minister added.

The aim of the IAF regime was to allocate responsibility to prevent misdemeanour, rather than being punitive, he said.

Improved governance was the goal, and success would not be measured simply by additional enforcement, he said. 

The responsibility for fostering this improved culture falls primarily on those who lead the banks, with the support and encouragement of their boards, he stated.

Individual accountability

Individual accountability at all levels would make bank workers stop and consider the consequences to themselves of their actions, he said.

A new culture of personal accountability must also safeguard against scapegoating if something went wrong, the finance minister continued. And there would be binding obligations for conduct standards on those in senior roles.

‘New Accountability in Financial Services: Changing Individual Behaviour and Culture’ points towards the need for continuing professionalisation of the financial sector in a way that promotes ethical norms, Minister Donohue said.

This will serve to strengthen the existing obligation on firms to focus on the fitness and probity of key personnel.

But a careful balance had now been struck between regulatory power and the protection of individual constitutional rights, the minister said, adding that it was necessary to consult the Attorney General's office in preparing the legislation.

“I take the issue of trust in this sector really seriously,” he said, adding that the new regime would be a key driver in continuing to restore trust and achieving cultural change.

Reputational issues

Derville Rowland (the Central Bank’s Director General – Financial Conduct) said that most firms aspired to high standards, but those that didn’t caused reputational issues for the whole sector, and posed a risk to consumers, investors and wider society.  

The Central Bank proposed the introduction of the enhanced individual accountability framework to address serious issues it identified in the regulated financial-services sector, Rowland added.

The IAF assists the Central Bank in its mission as regulator, but also in achieving a more trusted financial-services sector, which is in everybody’s interest, she said.

Rowland quoted ex-Governor of the Bank of England, Mark Carney, who said that markets were not ends in themselves, but must serve the interests of end-users.

Good organisational culture is about more than avoiding good people doing bad things – it’s about equipping and enabling good people to do ever better things, Rowland said.

This is why the Central Bank recommended that the enhanced IAF should consist of:

  • Conduct standards,
  • A ‘Senior Executive Accountability Regime’ (SEAR),
  • Enhancements to current Fitness and Probity (F&P) Regime, and
  • A strengthened enforcement process.

Quoting moral philosopher Professor Onora O’Neill, Rowland said that firms often speak about the need to increase trust, when what they should actually focus on is increasing trustworthiness, which has three key elements – competence, honesty and reliability.

However, regulators cannot prescribe culture for individual firms – that is the role of the boards and senior-leadership teams, Rowland said.

All participants in the financial-services industry, including key legal and accountancy advisors, must play their part in the cultural transformation, she added.

To safeguard stability and protect consumers, the Central Bank expects the conscientious professional to advise firms to comply, not only with the letter of the rules, but also with the spirit, she said.

The IAF will be extremely valuable in an increasingly fast-paced, complex and technological world and, as such, is an opportunity to be seized, the regulator said.

Shared culture is a “powerful engine of coordination, and can also be faster, cheaper and more pleasant than a reliance on law, regulation and accountability”, she concluded.

Author Dr Joe McGrath spoke about bankers developing an independent professional identity, separate and distinct from the hierarchies of their own firms.

“We see a greater role for industry itself to promote positive banking cultures and higher standards, above and beyond those that are already required by the Central Bank,” he told the launch.

An educational emphasis on the pro-social role that banking plays could involve a professional association that internally steers behaviours, he said.

“We see great benefits in a plurality of regulatory approaches in improving banking culture,” Dr McGrath concluded.

Gazette Desk
Gazette.ie is the daily legal news site of the Law Society of Ireland