April 23, 2018 / 1:02 PM / 2 years ago

BANK CULTURE FORUM: Behavioral science gains role as banks address culture, conduct

NEW YORK (Thomson Reuters Regulatory Intelligence) - Banks are using the tools of behavioral science to combat misconduct and better understand the internal workings of their cultures, and current and former regulators at a Thomson Reuters forum welcomed what they see as an innovative effort that gives managers more influence and insight regarding their employees’ motivations.

(left to right) Bonnie Jonas, Co-CEO, ‎Pallas Global Group LLC; Michael Held, General Counsel, Federal Reserve Bank of New York; Mirea Raaijmakers, Senior Program Manager Culture Risk Assessment, ING; Martin Wheatley, former CEO, UK Financial Conduct Authority.

Tools and methods common to behavioral sciences are being used to detect patterns of group and individual behavior, which experts believe can influence an organization’s culture, and ultimately, performance. Some of these tools borrow from organizational psychology, for example, and apply new technologies that can analyze conversations, decisions, and other observable forms of behavior.

At a Thomson Reuters forum in New York on culture and behavioral science in the banking industry, participants found that while the industry has made progress towards combating misconduct, more work was needed to bridge some of the informational gaps for management in monitoring and assessing employee behavior. To that end, behavioral science had a role to play.

“Over the course of the last four years I think we’ve seen notable progress and attention to the culture issue . . . That said, there is clearly more to be done,” said Michael Held, general counsel of the Federal Reserve Bank of New York. The New York Fed has been a leader since the financial crisis in seeking to fight Wall Street risk and misconduct through improving bank cultures.

“I’m really excited to see more of a focus on the application of behavioral science (at financial firms). . . It’s a really valuable and critical component of the conversation and to be able to move the ball forward in the U.S.,” Held said at last week’s forum.

Behavioral science encompass multiple disciplines for studying human behavior. It can include psychology, economics, sociology, cultural anthropology and biology.

“Behavior is usually something you can see, or you can hear, or it is written down, or this is something you can grasp. I think this is the very important starting point if you zoom in and talk about culture. But that’s not the only part. You also have to understand where the behavior is coming from and how it is perceived,” said Mirea Raaijmakers, senior program manager for culture risk assessment at ING in the Netherlands. Raaijmakers, in her previous position at the Dutch National Bank was part of a pioneering team of behavioral psychologists who have worked on incorporating behavioral tools into bank supervision.


Past episodes of bad behavior have revealed that large, complex financial institutions have numerous sub-cultures which act and behave in unique ways. This recognition can make it more difficult for senior management to translate their “tone at top” missives into a single coherent culture that resonates across the organization.

“For complex banks, the thing I would say is true for any U.S. bank, as with global banks, is that there is no single culture. There are different cultures,” said Martin Wheatley, former head of the UK’s Financial Conduct Authority. “You will see that the retail division will have a different view from the investment bank. On the trading floor you will find there is a different culture in commodities trading to fixed income and equities. And all of these sub-cultures will influence how people who are brought into these different areas will think what normal behavior is and what acceptable behavior is.”

Wheatley said a major challenge for regulators is being able to identify those various sub-cultures during the course of their supervisory activities, and relate their findings to senior management.

“I think the real challenge for supervisors is not if you can detect ‘the culture’ of the bank but understanding the different subcultures and being able to engage with the firm about whether those subculture are leading to poor outcomes against broader principles,” he said. Wheatley now advises several firms including Starling, an applied behavioral science tech company that co-hosted the New York forum.


There are multiple ways in which managers can gather information about their employee attitudes and behaviors. Traditionally, surveys have been a key part of the toolkit. But surveys can mask what employees really think, and employees can say what they anticipate the bank wants to hear. In addition, employees may be reluctant to be candid with their concerns for fear of reprisal.

“If people try to work out what you want to hear and they give you that answer, then when you look at what people genuinely do, and you dive into that analysis, you get a very different picture,” said Wheatley.

Surveys should be just a first step in addressing conduct issues, said Bonnie Jonas, a former federal prosecutor for the Southern District of New York, and now co-founder of Pallas Global, a New York consultancy that helps firms with legal, conduct and cultural issues. How surveys are organized and what happens after the fact are just as important.

“How you set up that survey is really critical with regard to what your people are going to say. The survey is just the first step,” Jonas told the panel.

An important part of surveys is ensuring anonymity as well as making clear that an employee’s concerns will be followed up on. Having a third-party perform surveys can help alleviate concerns. In addition, employees need to believe that they will not face retaliation if they come forward in a truthful manner.

“If there’s buy-in by management and the general staff, I think you can get a much better birds-eye view for the board and C-suite about what people really think about your culture,” she added. “I’ve been very encouraged by what we’ve been seeing and what the institutions are doing with that information. If it just dies, and people feel they have spoken up and nobody did anything, you’ve really sunk your culture.”

For many organizations, employee surveillance has become an integral function. Everything from an employee’s communications to the length of time spent at the desk and to patterns of entering and leaving the building are now under a company’s watchful eye. Monitoring tools have proliferated, and sophisticated artificial and machine-learning software are being used to detect patterns of behavior and understand internal communication networks.

While surveillance and monitoring may be a useful form of employee risk management — it can also hinder efforts to establish trust and promote more ethical behavior. If employees feel that constant monitoring limits raises the consequences of mistakes – a natural part of any workplace – then excessive surveillance can have a detrimental impact on behavior.

“If the instinct in a culture is that a mistake is catastrophic, then at that inflection point what are we saying to employees, when they reach a fork in the road?” Jonas asked. Many bad decisions are often made in a split-second, where the employee is confronted with choices that can harm both the individual and firm. One needs to find a balance between surveillance and fostering an environment where employees feel they can talk to managers when they are confronted with decisions where a mistake might be made.

“How do you strike the right balance for an organization in surveillance and getting to know your employees in speaking to them and making sure that every time they make a mistake it’s not a catastrophic risk. That’s hard,” Jonas added.


The information gathered through surveys and surveillance is, however, only one step of the process of digging into the sub-groups and cultures of an organization and understanding what kinds of behavior might be causing risk. An important part of the process is using the information gleaned from such tools and then going to the next step of understanding the motivations behind the behavior.

ING’s Raaijmakers said it is necessary to develop a narrative around the group or individuals one is studying.

“You have to talk to people and you have to ask them: what does this mean?” she said. “I would say to my team I want data, I want numbers and I want stories, and this is what I want to combine. I then get a feel, a picture of patterns around behaviors and I can pin down the most important patterns, and also pin down the impact of these patterns. And then I try to understand something about the risk.”


The use of behavioral science is also an attempt to steer away from simply a rules-based approach to conduct and culture issues, which at many firms takes a legalistic approach to bad behavior. While the threat of legal action against an employee who crosses the line is always present, there now seems to be a growing awareness that an organization needs to help employees make better decisions.

“I think institutions have to focus on how do you get people to make the right choice. That doesn’t mean if you are talking about carrots and sticks that there aren’t times when you want to make sure that misconduct is appropriately penalized,” said Held of the New York Fed.

“What I see is that firms are making a different risk calculus now. They are more willing to consider running up a little more near-term legal risk and being more visible in implementing surveys or penalizing individuals . . . and communicating about when mistakes were made and why, and how we can learn from them” he added. “Firms are often saying that doing that is often worth a bit more than the legal risk involved.”

“Framing legal risk in a context of a broader set of risks around institution I think is a good thing,” said Held.

From an enforcement or prosecution perspective, it has become imperative that firms are perceived as having gone that extra mile in their conduct and culture programs. That perception can have a significant effect in how an agency penalizes an organization where wrongdoing has been found.

“It has become more risky not to take some short-term steps to really assess culture,” added Jonas of Pallas Global. She cited guidance from the Department of Justice in 2017(here) which called for “root cause analysis” in compliance programs. “These principles go much deeper, and the expectation is that you are doing this homework before a problem exists,” said Jonas.


The responsibility for identifying and curbing bad behavior should not rest with the compliance function alone, participants agreed. Indeed, if it does, that sends a worrying message to regulators and law enforcement agencies.

“Having compliance driving culture change is a red flag, because I think the CEO and CRO (chief risk officer) should be involved,” said Raaijmakers of ING, noting her prior work at the Dutch National Bank.

“This is definitely that we did as a regulator. We didn’t say this is what a good culture should look like. But we said to several large banks ‘you have a culture program going on that is being driven by compliance or HR. That has to stop. You own this. We want you own this – the CEO and CRO. And you decide what it looks like, what are key behaviors, where do you want to go.’”

Held of the New York Fed sounded similar sentiments.

“If compliance is driving it, that is a sign of more of a rules-based culture,” he told the audience. “You want to focus on principles and that has to be generated from the individuals who are actually engaged in the business.”

(Henry Engler is a North American Regulatory Intelligence Editor for Thomson Reuters Regulatory Intelligence.)

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Apr. 17. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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