Alan Au, Executive Director (Banking Conduct), Hong Kong Monetary Authority
Why sound bank culture matters in the new normal?
Ladies and Gentlemen,
My sincere thanks to 1LoD for inviting me to address the Asia Pacific Stream of the virtual conference “XLoD Global”. It is great to see that 1LoD is continuing to organise virtual conferences these days, and I hope you and your families are all safe and well.
COVID-19 has fundamentally changed the way we live and work. As the spread of the virus disrupted essentially all social and economic activities, working from home and more flexible working arrangements have become what some may describe as “the new normal”. Indeed, the virtual conference today is an example of how organisations adapt to “the new normal” – striking a balance between having a platform for exchanges of ideas while safeguarding the well-being of today’s speakers and participants alike; and in the broader context of banking in general, maintaining normal operation whilst safeguarding the well-being of staff and customers.
While banks must continue to stay resilient amid the challenges in times of COVID-19, they also need to keep the momentum in promoting sound bank culture as they adapt to the new normal. Why culture matters in the new normal? COVID-19 has changed the way banks interact with their customers, especially for those customers who once preferred face-to-face channels rather than going online and other non-face-to-face means, and the use of technology poses new challenges to banks such as difficulties in obtaining wet signature and potential intermittent interruption during the sales process which do not exist in a face-to-face environment. On the one hand, there is a lack of physical oversight of staff activities, and on the other hand, there may also be increased pressure on bank staff to perform financially amid the pandemic situation, and these may increase the risk of poor customer outcomes. All of the above are reasons why we believe that sound bank culture matters more than ever in the new normal.
So, what are some of the themes that banks need to keep an eye on as they continue their culture journey amid this period of uncertainty. In the time I have today, I want to share with you some insights drawn from the self-assessment on bank culture covering 30 banks in Hong Kong on which the Hong Kong Monetary Authority has issued a report in May this year. I will also talk about a number of investor and consumer protection measures, particularly those related to the trend of conducting banking business through online and other non-face-to-face channels in view of COVID-19.
Common themes from the self-assessment on bank culture
Those of you who attended the 1LoD Summit in Hong Kong in January this year will recall that I shared examples of how banks approach their culture reform along the three pillars of governance, incentive systems, and assessment and feedback mechanisms. Today, I want to focus on the seven common themes that we have identified from the self-assessment exercise, as we believe that these themes are just as important now as ever.
First, I think you would all agree that incentive systems play a crucial role in driving sound behaviours and affecting customer outcomes. We see that banks’ culture efforts in this area remain a “work-in-progress” and further work is needed to ensure that incentive systems are designed to promote sound culture and prevent incidents of misconduct.
While we observed an increasing trend towards a greater use of balanced scorecards, there remains questions as to: whether there is an appropriate balance of “what” (financial factors) and “how” (non-financial factors) with a greater focus on customer outcomes; whether the right non-financial factors (including behaviorial factors) are embedded with a greater focus on customer outcomes; and whether there is consistent application of consequences regardless of staff financial performance.
We expect to see more initiatives that will ensure appropriate incentive systems across the entire bank at all levels to induce proper behaviour and promote accountability, and align the interest between banks and their customers. For example, banks need to make regular reviews including the effectiveness of remuneration structures and practices.
Second, we observed that stronger links are required to connect banks’ Hong Kong operations with the culture efforts of their headquarters or upstream entities as well as their downstream operations. While culture enhancements are often driven by the headquarters of those banks which are part of a global banking group, the links of these banks to the culture efforts of their headquarters or upstream entities vary, with some of these links being weak. There was, in general, limited coverage in the self-assessments on how adjustments are made with regard to local circumstances, and how the headquarters are providing support for implementing culture enhancement initiatives in Hong Kong.
Similarly, the links to downstream overseas operations from the regional headquarters here in Hong Kong seem generally weak or non-existent. We expect banks to cascade down their desired culture to their downstream operations outside Hong Kong, taking into account local circumstances. This is particularly important for large banks that span numerous geographies and business lines, and can have a large number of different sub-cultures developed over time.
The third common theme is that deeper analysis is expected to benchmark themselves against the findings from the reviews of the major overseas misconduct incidents. We observed that most banks did not go beyond simple sharing of the factual happenings of those major overseas misconduct cases with their staff. We expect banks to understand the underlying root causes of these incidents, try to identify whether similar incidents could actually arise, even if they were not operating in exactly the same way or offering exactly the same products or services, and take appropriate actions to prevent similar issues from happening.
While we do not expect all banks to monitor each and every misconduct incident in all jurisdictions, we encourage banks to keep track of key international developments and draw lessons from major overseas misconduct incidents as far as possible.
Moving on to the fourth common theme, we see that more focus is needed to facilitate the continuous professional development of staff to complement the effort of promoting sound culture. We encourage banks to set out goals and concrete targets in respect of the continuous professional development, including those under the Enhanced Competency Framework (or those offered by other professional bodies), with a view to supporting the strategy of promoting sound culture within their organisations.
The fifth common theme is that more effort is needed to tackle the key challenge of culture assessment to identify gaps between the current progress and the desired culture. Assessing culture remains a key challenge for many banks. Nonetheless, only by assessing the culture will banks be in a better position to understand the cultural drivers and the enhancements needed for effective cultural change.
Next, we note that more work is needed in promoting an environment which provides “psychological safety” to encourage staff to speak up without fear of adverse consequences. We observed that not many banks have identified the need to address the fear of speaking up. Effective “speak up” mechanisms must put a great focus on protecting those staff who choose to speak up against bullying or even retaliation. The importance of responsiveness should also be recognised as staff will only feel safe to speak up if their voices will be heard.
Last but not least, sustained effort is required in driving cultural changes and banks should be mindful of “culture fatigue” if they implement a large variety of culture initiatives in a “form over substance” approach that overwhelms their staff. Some banks indicated that continuous reinforcement through effective communication and promotion at all levels is important to have a lasting impact. As such, it is important for banks to sustain their current efforts, by embedding sound culture awareness at all levels over time as they continue their journey of Bank Culture Reform.
Responding to the new normal
Ladies and Gentlemen, COVID-19 has not only significantly changed the way we work, but also the way banks interact with their customers, especially for those customers who once preferred face-to-face channels and brick-and-mortar banks rather than going online and other non-face-to-face means. In view of the operational challenges brought about by COVID-19, the HKMA has introduced facilitative measures such that banks can continue to provide services to their customers under such special circumstances while ensuring customer protection.
For example, we have provided guidance to facilitate banks on provision of investment services through non-face-to-face channels such as video or tele-conferences. Besides, we worked with our fellow regulator to facilitate electronic provision of product documents and trade documents for investment services. In addition, we introduced temporary facilitative measures to allow customers to acquire certain insurance products with greater ease via non-face-to-face means to minimise the risk of cross-infection while according protection to customers.
Going forward, we will continue to work with banks and fellow regulators to ensure customer protection while facilitating bank’s provision of services through non-face-to-face means. For instance, we are considering feedback from banks on their remote selling of investment and insurance products based on the non-face-to-face experience during COVID-19, and will consider providing further guidance as necessary.
The use of technology and new ways of working could bring opportunities to banks amid the pandemic situation, but they could also pose new challenges which do not exist in the traditional face-to-face environment. As such, banks should be mindful that conduct and culture remains important when their staff interact with their customers through non-face-to-face channels. In view of the COVID-19 situation, we would also like to remind banks to remain vigilant, and continue treating customers fairly.
Ladies and gentlemen, COVID-19 is an unprecedented challenge to us all, and it is particularly important for banks to keep the momentum in promoting sound bank culture that leads to good customer outcomes. We encourage banks to pay more attention to the seven common themes identified as they adapt to the new normal. Banks need to be vigilant as conduct and culture remains important when their staff interact with their customers through non-face-to-face channels.
Last but not least, I would like to thank 1LoD again for inviting me to address the conference today. I hope that my sharing, as well as the rest of the programme of “XLoD Global”, would provide insights for the industry as we continue the culture journey and adapt to the new normal.
Thank you very much.