2 Culture

I have said more than once in this chapter that an entity’s remuneration and incentive arrangements show what the entity values. Hence, consideration of those arrangements may provide a useful starting point for an examination of the entity’s culture. But an entity’s remuneration and incentive arrangements are not the same as its culture. Culture is a broader concept that is also influenced by other matters.

As I have said, the culture of an entity can be described as ‘the shared values and norms that shape behaviours and mindsets’ within the entity.[1] It is ‘what people do when noone is watching’.[2] Culture can drive or discourage misconduct.[3]

Three general points should be made:

  • First, the culture of each entity is unique, and may vary widely within different parts of the entity.
  • Second, there is no single ‘best practice’ for creating or maintaining a desirable culture, but one necessary aspect of a desirable culture is adherence to the basic norms of behaviour that I have described elsewhere in this Report:
  • obey the law;
  • do not mislead or deceive;
  • act fairly;
  • provide services that are fit for purpose;
  • deliver services with reasonable care and skill; and
  • when acting for another, act in the best interests of that other.
  • Third, culture cannot be prescribed or legislated. Proper governance, a healthy culture, and accountability are desired outcomes, but they cannot be imposed by rules that say, ‘You must …’ or ‘You may not …’. ‘Culture is about behaviors. Behaviors in general are not amenable to legislation or regulation. … Sustainable cultures need to arise from, and be embedded in banks’ [and other entities’] DNA’.[4]

Although culture cannot be prescribed or legislated, it can be assessed. As the report of the Prudential Inquiry into CBA shows, a careful and detailed assessment of the culture of an entity can be of great value. It can show how issues relating to culture are at the root of misconduct. And if those issues can be identified early, then steps can be taken to address them before the misconduct eventuates.

Culture can – and must – be assessed by financial services entities themselves. As I will explain, that is a requirement of APRA’s prudential standards (at least in relation to ‘risk culture’). It is also common sense. Given the potential for aspects of an entity’s culture to drive misconduct, an entity must form a view of its own culture, identify problematic aspects of that culture, develop and implement a plan to change them, and then re-assess to determine whether it has succeeded. Each financial services entity has primary responsibility for its own culture.

Of course, there are dangers in leaving questions of culture to financial services entities. Everyone can be blind to their own faults, and the same is true for financial institutions. This will often be so with those institutions that have the most problematic culture. It is these entities that will be unwilling to acknowledge problems and deal with them. Unwillingness of this kind is a feature of organisational culture that is highly likely to allow, even drive, misconduct. There is, therefore, an important role for regulators to supervise culture – that is, to:

  • assess the entity’s culture;
  • identify what is wrong with the culture;
  • ‘hold up a mirror’ to the entity,[5] and educate the entity about its own culture;
  • agree what the entity will do to change its culture; and
  • supervise the implementation of those steps.

In this section of the chapter, I say something further about the assessment of culture by financial services entities, and by supervisors. I will begin with supervisors, before returning to consider what entities themselves have done, and must do.

[1]Cf CBA Prudential Inquiry, Final Report, 81. I deliberately omit reference to a ‘system’ of shared values and norms if only to emphasise that culture is observed and described, not created apart from, or imposed on, the entity.

[2]G30, Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform, July 2015, 17.

[3]See generally FSB, Toolkit.

[4]G30, Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform, July 2015, 55.

[5]Exhibit 7.152, April 2018, Refocusing Risk Culture Pilot Reviews, 3.