Opinion: can anything can be done to prevent this type of opportunistic conduct and misbehaviour in banking and finance?
The news that the Central Bank of Ireland had reprimanded and fined the Davy Group for regulatory breaches will not come as a surprise to many. The Central Bank found issues with conflict of interest identification and management, personal account dealing framework and the firm's compliance function. The Central Bank's observation that the compliance function was circumvented by a consortium of 16 senior figures in Davy is a far more challenging problem, soemthing which highlights insufficient levels of governance and a climate that tacitly condones opportunistic behaviour.
The reputational damage that has resulted from the Davy scandal has been swift and far reaching. The National Treasury Management Agency (NTMA) has removed Davy as a Government bond dealer, and the bond desk has been closed with four redundancies, a high price indeed for those who may not have been involved in the scandal.
Actions have consequences, something Davy's leadership are now coming to terms with but will anyone learn from what has happened? We know the what, the how, and even the who of the Davy scandal. The why of the Davy scandal however, requires more than a prescriptive analysis beyond pointing the finger at legacy bank culture, which is a complex animal to understand at the best of times.
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From RTÉ Radio 1's Morning Ireland, RTÉ Business Editor Will Goodbody on the latest developments in the Davy scandal
The Director General of Financial Conduct at the Central Bank Derville Rowland has called for more robust enforcement of regulations to protect consumers and investors following the Davy scandal. But the serious regulatory breaches and lack of candour by Davy when first reporting the misconduct reflect the very real challenges facing financial regulators when attempting to regulate a sector that seems prone to circumventing rules meant to protect consumers, investors, and yes, the banking and financial institutions themselves. It is always a challenge for the firm when its employees find ways to 'game the system', but it's an entirely more challenging issue when those who circumvent the rules are the ones holding leadership positions.
The inability of the banking sector to self-regulate is something many would wish was not a reality. If the sector could self-regulate, it would have a degree of autonomy to maximise the return for its shareholders without breaking the law or breaching public trust. It could remain a viable business entity and benefit from increased levels of public and regulatory trust. Society would even likely benefit by way of jobs and investment in the local community.
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From RTÉ Radio 1's Drivetime, Tom Lyons from The Currency on the news that the National Treasury Management Agency has removed Davy as a government bond dealer
Instead, we appear to be stuck in a financial sector equivalent of Groundhog Day. This is a sector that is no stranger to breaches of public trust, reputational damage and reprimands. One would be forgiven for thinking only somebody with nothing to lose would engage in behaviour likely to draw the attention of regulators.
Much has been written by academics and business journalists about the tendency of banking and financial institutions to engage in repeat transgressive behaviour. There is much evidence that regulatory activity has a reactive component. Banks and financial institutions typically know more than the regulators and tend to react to rather than prevent breaches of regulations and corporate misconduct.
Yet again, the Davy story raises the question if anything can be done to prevent this type of conduct or behaviour. Unfortunately, it isn't a question that can be easily answered. The solution might not necessarily lie with the regulators or even bodies set up to change bank culture (such as the Irish Banking Culture Board). The solution might be to go back to the well and see if we can embed ethics and integrity in our business graduates before they get to the corporate world, especially those thinking of working in banking and finance sector.
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From RTÉ Radio 1's Today show in 2019, an interview with Mr. Justice John Hedigan, Chairman of the Irish Banking Culture Board
An academic paper found that both regulations and corporate scandals were highly persistent and that regulatory activity has a strong reactive component when corporate misconduct becomes public knowledge. Perhaps more importantly, regulations do not curb corporate misconduct.
These findings are stark as the authors argue that today’s regulations will mean an increase rather than decrease in future corporate scandals. In an analysis of over 200 years of historical regulatory data, the paper found a strong positive correlation between past regulation and future corporate scandals and that regulations do not always achieve their intended objective.
Ongoing research in UCC and UL has found similar evidence from a data set of US banking and financial institutions. The top 10 financial services firms in the US have been fined more than $252 billion between them for almost 940 violations of regulatory frameworks over a 20 year period. A higher frequency of corporate misconduct incidents (and greater financial penalties) occurred after the 2009 global financial crisis. The increase in corporate misconduct has increased, rather than decreased since the introduction of more intrusive regulatory enforcement.
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Ó RTÉ Raidió na Gaeltachta's Adhmhaidin, le Piaras Ó Dochartaigh, T.D. Ball de Choiste Airgeadais an Oireachtais
We have also found that the number of violations such as investor protection violations and banking violations increase rather than decrease following changes in regulations to relax or enhance provisions. Furthermore, regulatory fines tend to be less where violations don’t adversely impact on investor wealth. Whilst many banking and financial institutions continue to engage in repeat misconduct despite more robust regulatory enforcement, some institutions do not.
Some US banking and financial institutions appear to have learned lessons from past instances of corporate misconduct. These institutions are considered to be ethical banks, where ethics, integrity, trust and compliance are fundamental values in their firms. Additionally, these banks also provide whistleblower protection should any employees witnesses conduct or behaviour that violates the company’s core values. They also place a moral and ethical duty on their employees to report these instances, even if it is misconduct is only suspected.
So why are some banking and financial institutions more prone to engage in repeated corporate misconduct? Do larger banks provide greater opacity for conduct or behaviour that may contravene regulations so misconduct is easier to cover up? Not necessarily. We found that not all large banks engaged in recidivistic corporate misconduct to the same level of others of similar size or reputation. Can larger banks absorb financial penalties much easier than smaller banks? Perhaps, but the data doesn’t fully support this position either.
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From RTÉ Radio 1's This Week, The Currency's Tom Lyons, John McGuinness, Chairman of the Oireachtas Finance Committee, and Seán Fleming, Minister of State at the Department of Finance with Responsibility discuss the resignations at Davy.
Anecdotal evidence suggests that prestigious banking and financial institutions are attractive destinations for graduates from elite business schools and what they are taught in business schools influences their conduct and behaviours when they join these firms. Do business schools have an opportunity to send out business graduates who can be the ethical leaders banking and financial institutions need? Absolutely. There is no question that business schools can play a more significant role in the education and development of business graduates likely to be attracted to careers in banking and finance.
While the Irish Banking Culture Board has the potential to positively affect change in Irish bank culture, it will take time and patience and will be a long and drawn out process. In the meantime, business schools in Irish universities and across the globe have an opportunity to integrate ethics and integrity into the delivery of all business related subjects. This will ensure that our graduates consider the consequences of their decision-making when faced with ethical dilemmas.
Unethical leadership is not the absence of ethical leaders, but the presence of leaders who harness and embed unethical behaviour in employee
Business schools need to provide real-life examples of the challenges that current and future graduates face when presented with ethical and moral decisions in the corporate world. While tone is set at the top, there is ample evidence to suggest that those with the least amount of legitimate or position power, can influence the conduct and behaviour of the masses (thank you Greta Thunberg).
It is likely that the next cohort of business graduates will be the future leaders of banking and financial institutions. It is therefore the moral and ethical responsibility of business schools to ensure we provide a more ethical focused and sustainable education for our graduates. As most behaviour is learned, there is an opportunity for business schools to instil the appropriate learned behaviours in our graduates before they set foot in the corporate world. Unethical leadership is not the absence of ethical leaders, but the presence of leaders who harness and embed unethical behaviour in employees and promote, reward and condone such behaviour.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
