On 19 December 2018, the Hong Kong Monetary Authority (HKMA) issued a circular titled “Supervision for Bank Culture,” which supplements its original 2 March 2017 “Bank Culture Reform” guidance with further details. The new guidance introduced supervisory measures to Authorized Institutions (AIs), including self-assessments and site visits.
The HKMA commenced a self-assessment exercise under the new guidance in early 2019 by requiring 30 AIs (including all major retail banks and selected foreign bank branches with substantial operations in Hong Kong) to conduct self-assessments of their culture enhancement efforts. The AIs were also required to benchmark themselves against the findings of major conduct incidents outside Hong Kong.
The self-assessment exercise was intended not to be a check box exercise, but rather an opportunity for the AIs to reflect thoughtfully on any insights, lessons learned and issues encountered with their culture efforts. While a strong bank culture is not a paint-by-numbers exercise, several vital components must be carefully aligned – namely, ethical behavior, tone at the top, mood in the middle and attitude at the base.
In a circular released on 22 May 2020, “Report on Review of Self-Assessments on Bank Culture,” the HKMA shared key observations from its review of the self-assessments. While the HKMA noted that there were variations in the quality and depth of the self-assessments, it also identified a number of common themes. Overall, the selected AIs agree with the need to foster sound bank culture and are striving to introduce enhanced measures of introspection to understand better the correlation between culture and ethical failures involving fraud, corruption and misconduct. Key to this movement towards enhanced levels of organizational maturity are growing efforts to measure culture, flag warning signs, make control improvements, address gaps, build awareness of fraud and misconduct risk, and avoid becoming the next headline featuring organizational breakdowns that can derail brand, reputation and long-term viability.
The AIs that participated in the exercise have implemented a variety of initiatives and have made significant progress over the past two years in promoting sound bank culture. The HKMA identified a range of practices under three pillars in the self-assessment that would reflect a sound bank culture: (1) governance, (2) incentive systems and (3) assessment and feedback mechanisms.
Culture defines ethical values and desirable behavior within the AI which must be set and owned by the board and senior management and supported by a sound governance framework. The board should take the lead in establishing the bank’s desired culture, values and behavioral standards to promote prudent risk-taking and fair treatment of customers. Senior management should put into place effective processes for ensuring that the bank’s desired culture is understood and shared by all levels of staff. The following actions are key to establishing and maintaining a strong governance framework:
- The board and senior management are responsible for setting and taking ownership of the culture, values and behavioral standards of the AIs.
- The board-level committees have a regular process to review the effectiveness of the AIs’ overall culture efforts.
- AIs cascade “tone from the top” down to ensure desired culture through effective and continual communications and training.
- AIs develop and use an easily understood language around culture.
- AIs ensure their desired culture and expected behavioral standards are relevant to different level of staff.
- AIs establish clear ownership of risk and culture reform.
Ethical values and behaviors must be supported by an appropriate incentive system that encourages the desired behaviors at all levels. The pillar of an incentive system goes beyond remuneration. It also includes staff recruitment, performance assessment and a promotion system, together with consistent application of rewards and consequences. Incentive systems should:
- Focus on recruiting individuals who align with the bank’s desired culture, values and behavioral standards.
- Ensure that remuneration frameworks are designed and implemented to promote sound culture and prevent incidents of misconduct.
- Conduct regular reviews of the effectiveness of their remuneration structures and practices.
- Have a structured framework to assess staff performance against behavioral indicators.
- Strengthen linkage between remuneration outcomes and staff adherence to corporate values, regardless of financial performance.
- Promote culture of accountability.
Assessment and Feedback Mechanisms
An ongoing assessment and effective feedback loop on actual outcomes should be put in place by AIs to inform the culture journey and solicit responses from staff and customers. AIs should also implement effective escalation policies (including “whistle-blowing” mechanisms) to allow staff to timely report any illegal, unethical or questionable practices in a confidential setting so that there is no fear of reprisals. The outcome of these efforts is to foster a “speak up” culture that encourages all personnel to express their views and concerns without fear of adverse consequences.
AIs are encouraged to pay more attention to some common themes that have been identified from the self-assessments, including the following:
- Additional work is needed to ensure incentive systems are designed to promote sound culture and prevent incidents of misconduct.
- Stronger links are required to connect their Hong Kong operations with the culture efforts of their headquarters or upstream entities as well as their downstream operations, as appropriate.
- Deeper analysis should be performed to benchmark AIs against the findings from the reviews of the major overseas misconduct incidents.
- Greater focus is needed to facilitate the undertaking by relevant staff of the continuous professional development under the Enhanced Competency Framework or other similar schemes to complement the effort of promoting sound culture.
- Further effort is needed to identify the gaps between current progress and desired culture.
- Additional work is needed in promoting an environment which provides “psychological safety” to encourage staff to speak up without fear of adverse consequences; and
- A sustained effort is required in driving cultural changes, and AIs should be mindful of “culture fatigue.”
What Should AIs Do?
The key observations identified from the selected AIs covered in the first phase of the self-assessment exercise will be applicable to all. Therefore, all AIs should take note of the common themes and make reference to the range of practices, and consider whether such practices are effective in driving cultural changes based on their desired culture, values and behavioral standards.
The HKMA’s future work on bank culture supervision will include conducting deep-dive focused reviews into the incentive systems of front offices functions. It will continue to work closely with the industry in promoting sound bank culture and continue to evaluate the progress of bank culture reform in Hong Kong, share industry-wide insights and practices on culture with the industry as and when appropriate, and continue to explore other culture initiatives while considering overseas experience and emerging themes that may occur.
Tracie Gomez-Haberstock, Manager with Protiviti’s Risk and Compliance practice in Hong Kong, contributed to this content.