“Our culture assessments will analyse the leadership behaviour of management in banks” – Director General Derville Rowland

• Behaviour and culture assessments currently underway in each of the five main lenders in Ireland, supported by the Dutch Central Bank
• Depending on assessment findings, Central Bank may consider requiring lenders to take a range of actions.
• Central Bank using insights from behavioural economics to prevent “evil  nudges’’ that push consumers to make poor choices

The Central Bank of Ireland’s Director General, Financial Conduct, Derville Rowland, today set out mitigating actions the Central Bank could require lenders to take depending on the outcome of behaviour and culture assessments which are currently underway.

Speaking at the European Consumer Protection Conference in Prague, she spoke of how the Tracker Mortgage Scandal had raised serious questions about the culture in our lending institutions and the extent to which the boards and senior management of those institutions are really living up to their promises of putting the customer at the heart of their business.

She said: “It is often said that culture eats strategy for breakfast. In the years since the financial crisis there have been significant misconduct issues identified at financial institutions both at home and abroad. Global banks’ misconduct costs have now reached over $320 billion – capital that could otherwise have supported up to $5 trillion of lending to households and businesses. Amid concern that such misconduct can threaten to undermine the safety of financial institutions, there is an emerging trend towards more intensive regulatory focus on governance, conduct and culture issues.”

She outlined the measures the Central Bank is considering: “We are currently undertaking behaviour and culture assessments of each of the five main lenders. We are supported in this work by the Dutch Central Bank, recognised leaders in the supervision of behaviour and culture. These assessments will identify behavioural and structural patterns that affect the way consumer needs are considered and protected. The assessments will analyse the leadership behaviour of the management board and any potential risks related to the behaviour and culture of management boards that might impact the stability of the banks and, in particular, cause further detriment to consumers. This review will shape our future supervisory and engagement strategy. Depending on what we uncover, we may require certain mitigating actions at our lending institutions. These could include, for example, requiring the lenders to conduct an annual internal audit of culture; requiring the boards of the lenders to set up ethics sub-committees; and linking incentivisation to appropriate behaviours.

In relation to regimes operating in other countries which the Central Bank was considering introducing in Ireland, she said: “We are also considering the merits of a Senior Managers Regime similar to the one in the United Kingdom. Such a regime would permit the Central Bank to require senior managers to submit a statement of responsibilities that clearly states the matters for which they are responsible and accountable. These requirements would assist in assigning responsibility to individuals in a regulatory context and decrease the ability of individuals to claim that the blame for wrongdoing lay elsewhere.”

She also spoke about how the Central Bank is increasingly using insights from behavioural economics to prevent firms taking unfair advantage of consumers. “Conscious of the information asymmetry between consumers and financial services providers, the Central Bank is increasingly using insights from behavioural economics to help us identify how we can strengthen regulatory requirements to ensure firms help consumers make better choices. We want to prevent so-called “evil nudges’’ that push consumers to make poor choices.”

Speaking on the outlook for the work of the Central Bank, she said: “The supervisory and inspection approach is currently predicated on sectoral assessments supported by reactive work when issues are detected. But the framework for consumer protection should continually evolve in order to deliver maximum effectiveness for consumers. In that regard, we are considering supplementing our supervisory approach with firm level engagements for high impact firms or products in order to better protect consumers.”

She concluded: “The Central Bank of Ireland has learned a lot in the ten years since the markets crashed in 2008. We are now increasingly insisting that firms comply not only with our regulations and codes, but also that the people who lead those firms set about building a culture that serves their customers, their shareholders and the wider economy in in which we license them to operate.”