Investment Bank Culture: A few 'Bad Apples' or a 'Bad Apple Machine' ?

Bloomberg reported this week that a number of banks are having difficulties hiring managers for senior roles in banks as new rules, such as the Senior Manages Regime, come into force. These new rules mean that bankers in job functions with senior level responsibility face potential personal liability for wrongdoings and conduct failures under their watch. Not surprisingly the thought of being led away in handcuffs, or paying personal fines, based on the action of a few rogue traders or salespeople somewhere in your department has a way of focusing the mind.

Naturally senior bankers are nervous. Already charged with the difficult job of navigating the complex and chaotic waters of financial markets, they now potentially face personal liability for the wrongdoing of others. The risk does not end there either; the liability remains for a further 6 years after they leave the role. Our own private conversations with banks reveal that the problems of hiring people for senior roles is actually a much bigger issue than the headlines suggest. Many of these roles are being treated like a 'hot potato', with fast turnover and people imposing their own glass ceilings for fear of becoming someone with 'Senior Manager Functionality'. Hiring people with suitable credentials and knowledge is a tough enough challenge, this is making it significantly tougher. However, there is another less obvious point arising from this which is getting less attention: People from inside banks are avoiding these roles and that reveals something about the banking industry which should be taken notice of. The current system and culture in most banks potentially still cultivates and fosters the very ‘conduct risks’ which banks need to avoid. Despite all the billions spent on mandatory training, monitoring and surveillance, the root of the problems has not yet been adequately tackled. People inside banks know that the problems of recent years were not so much about a few ‘bad apples’, but rather about a ‘system’ which creates ‘bad apples’, and allows ‘bad apples’ to thrive. 

What about current regulatory efforts, shouldn't that provide the confidence that Senior Managers are protected?

Banks have committed vast sums to increased compliance and regulation. The FT last year suggested some bank are committed to an ‘additional’ expenditure of up to $4 billion per year. It is believed around 30% of investment banking revenue is now absorbed by regulatory spend. And yet still the Senior Managers remain nervous. As behavioural consultants working with banks, we have held numerous conversations with people in the industry, and what we are hearing is that there still remains a high level of uncertainty as to how much safer banks are when it comes to 'conduct risk'. - In reality a repeat of further fixing scandals is incredibly low, that door is firmly bolted shut now. In addition, some banks have built excellent monitoring and surveillance systems, I am of no doubt these will help to a degree. However, financial markets are complex, volatile, uncertain, and by their nature are reinventing themselves all the time. It is possible the problems and scandals of the future may already be taking root somewhere. When these future scandals do reveal themselves, initially banks will probably dismiss them as 'unforeseen circumstances' or 'aberrations'. However, use of these terms of defence has now worn thin. The problem is that in all previous scandals and failing, usually the signs have been there all along, just they were ignored due to the revenue being generated. In all these cases, people inside had a strong sense that something wasn't right, even if they could not put their finger on exactly where it was.

How do you change the system that is so well established?

Behavioural change and cultural change in bank’s trading and investment banking businesses require the breaking of deeply ingrained habitual responses, entrenched organizational attitudes, and long held processes and practices. The path to success in these businesses is a well-trodden path which gets passed down from managers to traders and salespeople who become the next set of managers. This creates series of self-reinforcing loops which becomes the system and defines the culture. It is this which creates the ‘bad apples’. At this juncture, I want to make it clear that not all is damned, there are many bright-spots and areas of good culture too. Every bank will have a patchwork of cultures, some bad, some good, and many in between that could be better. It is noteworthy that not all banks were guilty of the Libor or FX fixing scandals, even if all banks had troubled areas. As an example, Credit Suisse, like many tier 1 investment banks was engaged in a host of activities which were hit with huge fines. However, when it came to Libor, and despite being one of the main Libor rate setting banks, their London Libor team were found to have behaved without a single indiscretion. A thorough investigation found not a signal shred of evidence that they were ever involved in any Libor fixing manipulation. This did not come as a surprising to me. I use to work as part of that team in the early 1990s, though not directly in Libor fixings. This team then was highly ethical and conscientious. They were productive and very successful too, but it mattered to them to do the job well and fairly. Anyone engaged in activities that crossed boundaries of impropriety would immediately have been pulled up, and if they continued they would have been asked to leave. Crucially this team largely remained unchanged: There was continuity, consistency and strong management, as well as enterprise, innovation and endeavor.

It would be unfair to say they that the banking system is bad or even rotten, even if does look that way at times. Rather it needs a serious overhaul to improve it. External measures, such as mandatory training, monitoring and surveillance, new 'codes of conduct', only have a limited effect and provide very little 'bang for the buck'. The Senior Managers Regime, and other measures aimed at conduct and behaviour, are getting people's attention. If banks want to really respond to these and the bigger picture, then they need to address the system. This will require real transformation, not short-term measures which are transitory at best. This may not sound easy, but the stakes are high, if banks cannot find senior managers, then they really do have problems.

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Steven Goldstein is a leading risk performance consultant and executive coach working with banks and financial market businesses to help them transform their risk culture, to be more productive whilst reducing the risk of future 'Conduct risk' failures. Steven has over 30 years’ experience working in and around financial market FICC businesses. For 23 years Steve worked as a senior trader in rates and FX at leading investment banks, including Credit Suisse, Commerzbank and Standard Chartered. Since 2009 Steven has worked with banks, hedge funds and energy trading firms, helping risk takers, teams and managers transform their performance and behaviours. He has achieved considerable success in his work has led to significant performance improvements and behavioural enhancements. Steven draws on his own experiences, high powered coaching and consulting techniques, and tenets of behavioural finance in his work. Image 'Rotten Apple Fruit' by samuiblue courtesy of FreeDigitalPhotos.net

How a few poorly chosen words by a salesperson could cost Senior Managers their freedom under the Senior Managers Regime.

      

Whilst at Heathrow yesterday I went to a foreign exchange counter to buy £150 of Kroner for a short trip to Sweden. The cashier told me that there would be a £3 commission charge, however if I buy £200 it will be commission free. – Thus I decided to buy the full £200. However as he counted the money, he mentioned the total amount less commission. – Whoa, ‘what about the free commission’ I asked?  He said no it was £3 for up to £200, 1.5% for £200 and above, and £300 and above free. –  I must have had ‘Mug’ written large across my forehead. - I said ‘that is not what you told me, you gave me the impression I was getting a better deal buying £200 worth’. He then changed his tune and backtracked. I won’t continue with describing our conversation further, I am sure you can see where it was heading.  

‘Old habits die hard’

Now, the actual money was not relevant here, but what was occurring clearly was, and it is something which should scare every senior manager in financial markets firms, because ‘old habits die hard’. The cashier/salesperson was misrepresenting the commission structure to get their daily sales figure up. Either that or I was mistaken, but being an ex-FX trader, who now helps banks with conduct risk issues, and also lectures in behavioural finance, I am particularly in tune to these matters and how sales are framed by salespeople.  

Now, the matter may be relatively minor, however if this is a repetitive and consistent behaviour for this individual, and among the firm’s people more broadly, then there is a real danger that this firm’s senior managers could face serious consequences. Under the recently brought in Senior Managers Regime, they could find themselves facing personal fines, or even criminal prosecution. And leaving the business would not free them of this risk; liability under the Senior Managers Regime continues for a further 6-years after they leave the firm.  

Going back to this incident: In the common parlance of selling, this individual at the foreign exchange counter was upselling: A few extra pound’s volume or commission on every sale, inflates his performance figures. I am sure a placement at this firm’s currency exchange desk at Heathrow’s busiest terminal is a prized spot given to only the best salespeople. The problem for the company is that this type of misselling and misrepresentation are exactly what the Senior Manager’s Regime is meant to stamp out, no matter how small or large.

In this case, the misrepresentation was prevalent in two ways. The salesperson framed the question in such a way as to mislead me. Secondly, they are aware that most people in airports are in a hurry and have limited choices. It is worth pointing out that the individual in front of me was exchanging Canadian Dollars for Euros. The cashier/salesperson charged him two ‘wide’ spreads for this,  CADGBP and GBPEUR, rather than a tighter CADEUR spread. To me this was almost criminal, more worrying however, two incidents in two transactions. - I really hope that this firms Senior Managers have a good law firm at their disposal.  

Why should this incident worry Senior Managers at other financial market firms?

Given the amount of publicity within the industry and the scale of fines dished out, it is highly likely that the cashier would have received extensive training around the new regulations. So how come he, and the firm, were still breaching ‘Conduct rules’?

Note to all those who believe they can change their people’s behaviours with a few ‘awareness building and training sessions’. People are limited in their ability think and behave rationally. - Most financial firms have put significant energy and effort into training programmes ahead of the new ‘Conduct Risk’ rules. However, as in this case, as well as in other examples not highlight here, I fear that they may only have a limited impact. Changing deeply ingrained behaviours and attitudes, acquired and habitualised over many years, requires a huge effort. - Recall the myriad of drink/drive and smoking campaigns. These campaigns only had relatively little success, and it was often changes in laws and tougher enforcement which had the biggest effect on these issues.   

We are not Spock.

The rational argument for behavioural change amongst employees follows a certain line and logic: Provide awareness of the new regulations, run internal campaigns, make it clear of how important it is to the company and their senior managers, ingrain it in ‘Codes of Conduct’, make it clear that failures will affect people’s career and future employability. Back this up with seminars and training days. Hey presto, all should be good in a perfect world! – But the world is not perfect , and nor are we. - The human mind does not work the way we think it does. It does not recall all relevant information and weigh up all facts every time it makes a decision. Instead our minds are heavily influenced by natural biases, emotional urges, and deeply ingrained habitual frames of reference. Our perspectives are warped and do not always see things as they truly are (think of any optimal illusions). We are not ‘Mr Spock’. – At a one-day presentation skills course I attended I was told that within a few days I will have forgotten most of what I had learned that day. Within a few weeks I will have forgotten almost 99% of what I had learned. It would take constant reviewing, repetition, practice, and reminders to embed what I learn.

Serious wealth warning: 'Senior Managers Beware'.

‘Senior Managers’ in banks and finance companies should be worried. – Efforts to change people’s behaviours will need to be far deeper, far stronger and will have to take account of human behaviour. Unless that happens, then the possibility or facing future personal liability claims under the Senior Managers Regime, is a very real possibility.

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Steven Goldstein is a leading risk performance consultant and executive coach with over 30 years’ experience working in and around financial market FICC businesses. For 23 years Steve worked as a senior trader in rates and FX at leading investment banks, including Credit Suisse, Commerzbank and Standard Chartered. Since 2009 Steven has worked with banks, hedge funds and energy trading firms, helping risk takers, teams and managers transform their performance and behaviours. He has achieved considerable success in his work has led to significant performance improvements and behavioural enhancements. Steven draws on his own experiences, high powered coaching and consulting techniques, and tenets of behavioural finance in his work.