Regulators have just received a reality check on reputational risks lurking inside financial institutions.
Barclays PLC’s executive shakeup – triggered by Jes Staley’s abrupt resignation as CEO of the multinational UK bank – is a cautionary tale about how a scandal can engulf an institution when its directors overlook non-financial risks.
Mr. Staley, of course, left Barclays after clashing with British financial authorities over whether he had mischaracterized the nature of his relationship with Jeffrey Epstein, a wealthy convicted sex offender who died of suicide in prison in 2019.
Although it was known that the men had previous professional business – Mr Epstein was a client of JPMorgan when Mr Staley worked at the US Bank – regulators are investigating the extent of any personal ties between the two men.
Mr. Staley has previously said their relationship “slowed down markedly” after he left JPMorgan in 2013, and he never saw Mr Epstein after becoming Barclays’ CEO in 2015.
Bloomberg and the Financial Times have reported that Mr Staley visited Mr Epstein’s private island in Caribbean in 2015, before taking over the helm of Barclays. The Financial Times has also reported that the two men exchanged 1,200 emails between 2008 and 2012, which indicates a certain level of confidentiality.
Barclays originally stood by Mr Staley following Mr Epstein’s arrest on charges of sex trafficking two years ago, but was in an untenable position late last month after being briefed by the UK Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). about their investigation of Mr. Staley.
Though The FCA and PRA have confirmed that they are investigating the matter, their results on the extent of men’s affiliation have not been published. Barclays, for its part, has stressed that there was nothing to suggest that “Mr. Staley saw or was aware of any of Mr. Epstein’s alleged crimes,” according to published reports. Still, Mr. Staley had to step down as CEO even though he plans to contest these legislative findings.
Mr. Staley’s unpretentious departure is just the latest scandal shaking the Bank of England, and it comes at a time when regulators are sharpening their focus on how non-financial risks damage the reputation of financial institutions.
Although there has been discussion on topics such as climate change and new technological risks, regulators must also take a tougher line on fraud, especially in the wake of the #MeToo movement.
Banking is about relationships, and scandals like the one affecting Barclays undermine investor and public confidence in financial institutions.
Now for some good news. Canada’s chief banking supervisor, the Office of the Superintendent of Financial Institutions (OSFI), is already investigating culture and behavioral risks, including those stemming from human behavior and social customs, and will publish a consultation paper in early 2022.
OSFI already expects financial institutions to have procedures in place to monitor the effectiveness of their reputational risk management practices and to take remedial action when warranted. Still, it is reassuring that its new boss is open to setting an even higher bar for our banks and insurance companies.
“Perhaps we could be a little more instructive about what we do on that topic,” Inspector Peter Routledge told reporters recently when asked about OSFI’s legislative guidance on dealing with incidents of fraud.
“But you can be sure that reputation risk is a big factor in what we consider sound risk management. And having an environment where Canadians happen to be working on a particular [federally regulated financial institution] not facing that kind of treatment is pretty crucial for a healthy institution. ”
Routledge, which began its role in June, has already promised to “transform” OSFI’s overall approach to oversight over its seven-year term and renew the regulator’s own culture.
“We have a team of analysts who spend a lot of time thinking about non-financials risks, and one of them is reputation risk, ”he explained.
These analysts are already assessing the readiness of financial institutions to deal with potential fraud and other reputational risks. OSFI is also considering diversity and inclusion in its overall oversight approach in terms of sound decision-making, risk management and assessing the effectiveness of the board, the regulator said in an email statement.
“We also continue to advance our oversight approach in such areas of non-financial risk with ongoing consideration of potential improvements to existing regulatory expectations,” wrote OSFI spokeswoman Carole Saindon.
OSFI deserves praise for its proactive stance on an issue that has been exposed for a short time far too long. Regulators overseeing other major industries should follow suit.
There is no doubt that sexual harassment is endemic in Canadian society.
In 2020, every fourth woman (25 percent) and every sixth man (17 percent) reported having personally experienced inappropriate sexualized behavior at work – including comments, gestures, sexually explicit material, unwanted touch, or suggested sexual relationships – in previous years, according to a recent study published by Statistics Canada.
Although Mr Staley is not being accused of such inappropriate actions, his surprising departure from Barclays underscores the importance of reputational risk management.
Ironically, Mr Staley was hired to restore Barclays’ public image after other scandals, including the LIBOR rigging case.
Still, it looks like Barclays has been caught flat-footed by the results of the FCA and PRA survey. It should serve as a warning to regulators that curiosity can sometimes kill the cat, too.
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