15 janvier 2020 Sumit Indwar  - Clara Hackney Financial Regulation

Hong Kong SAR – HKMA speech promises conduct deep-dives

Alan Au, the Executive Director (Banking Conduct) at the HKMA has given a speech reflecting on progress made in improving bank culture. In the speech, Mr. Au mentioned that this year the HKMA will be starting focused reviews on key areas of bank culture, such as incentive systems of front offices in specific business streams of retail banks. He also shared some interesting initial observations on the self-assessments banks have carried out as part of the HKMA review of bank culture.

Self-Assessment Findings

The self-assessment exercise for banks was announced in December 2018 (see this circular), and requires 30 banks (including all major retail banks in Hong Kong SAR as well as selected foreign bank branches with substantive operations in Hong Kong) to reflect on their own culture efforts, and benchmark themselves against the findings of major conduct incidents outside Hong Kong. The HKMA will use observations from the self-assessment submissions to inform further culture enhancement work. Mr. Au commented on the findings by grouping them into the three pillars of governance, incentive systems, and assessment and feedback mechanisms.

Governance: Mr. Au was positive about the governance findings for the banks invited to complete the exercise. He notes that all locally incorporated banks have a board-level committee, chaired by an independent non-executive director, to oversee culture-related matters. Overseas incorporated banks in general also have board-level oversight at either global or regional level on culture-related matters. He encourages banks to consider non-traditional methods in order to communicate culture expectations in a language that can be easily understood by their staff, for example videos and summary sheets using day-to-day examples.

Incentive systems: Incentive systems are highlighted as particularly effective drivers for positive behaviours, for example a dedicated online platform that provides peer recognition systems for employees to recognise each other for positive behaviours.

Assessment and feedback mechanisms: In general, these mechanisms are still at an early stage, and therefore assessment as to their effectiveness is important. Mr. Au highlights the good practice in one bank that has developed a dashboard which incorporates feedback on the employees from multiple data sources. He also underlines the importance of fostering a “speak up” culture, and praises whistle-blowing mechanisms which protect employees such as a policy which explicitly states that retaliation against whistle-blowers is subject to disciplinary action including termination of employment.

Trends observed

Four points are highlighted by Mr. Au in the speech:

  • Cascading culture in global operations – This remains a challenge for many banks. The HKMA notes that for overseas incorporated banks, cultural enhancements are often driven by the headquarters of banks, however sometimes the links of the Hong Kong located entities to the culture efforts of their upstream group entities are weak. Equally, where Hong Kong is the regional headquarters, the links to downstream overseas operations can be weak or even non-existent.
  • Limited development of incentives systems – The HKMA believes that incentives systems can play a crucial role in improving behaviours, but notes that the self-assessments focused more on governance and assessment and feedback.
  • Inadequate benchmarking against major overseas incidents – In the December 2018 circular on Bank Culture, the HKMA highlighted the expectation that banks analyse major misconduct issues from other jurisdictions in order to understand the causes, and look at whether such incidents could occur in their operations in Hong Kong as part of their self-assessment. Not enough has been done by the banks to meet this expectation.
  • Assessing culture remains a key challenge to banks – As culture is not a “one-size-fits-all” issue, the HKMA recognises there is no single approach to take when assessing culture. However, banks should be forward looking as well as considering backward looking indicators in their assessments, and should combine “quantitative and qualitative data from multiple sources to allow for the different culture indicators to be triangulated”.

 
Coming Soon
We can expect the HKMA to share more information from the self-assessments in the coming months. In addition to the promised deep dives on particular conduct issues, in 2020 the HKMA will continue with the culture dialogues with banks.
We can also expect more cross jurisdictional conversations between the HKMA and other regulators as the HKMA highlights the importance of looking at overseas experience.