One of the most important elements of the regulatory changes since the crisis is that we have adopted an approach of seeking to align those incentives with our public interest objectives as well as the private interest of the firm. You can also see this in our approach to the too big or too difficult to fail problem where the actions we have taken on loss absorbency are designed to create the right oversight incentives for shareholders and bondholders by literally putting them at risk of loss. This will without doubt have an effect on culture. I want to end with a few broader reflections on the role of culture. The basic difference between the role of the regulator and management of firms is that our objective is framed exclusively in terms of the public interest. For firms, it is important to recognise that a sustainable and viable business model is one that provides an acceptable rate of return to those who take the risk of providing the necessary loss absorbing capacity, typically its risk capital. Firms exist to service customers who make up the public interest, which of course means that service includes the notion of not exploiting customers, a value one might expect to be given in an organisation’s culture. Today, the public perception of banking, and some other areas of finance, remains too much towards the exploitative “Greed is good” end of the spectrum.
These two notions are different. I have said many times, but will keep doing so, that senior managers cannot delegate responsibility. To be fair, many have said to me over the last few years that this change does not make a difference for them as they always thought they were responsible. Good. But, set this against other conversations I have had which have doubted the enforceability of this notion of responsibility. This has concerned, but not distracted me. So, to be clear, responsibility is the central plank of the new Senior Managers Regime. We do want senior managers to feel this responsibility in all that they do and that includes a responsibility for forming and implementing a positive culture throughout the organisation. In this respect culture is no different to strategy; where are we today, where do we aspire to be tomorrow, how will we get there and what risks must we mitigate along the way. Responsibility, as embedded in the Senior Managers Regime, is therefore an important hook to assist in firms’ shaping their own culture, and also to provide regulators with the powers to conduct supervisory oversight and to act when needed. But, let me reiterate that it is not the job of regulators to enforce culture and to change culture. If we have to step in, and occasionally we do, the overriding conclusion is that management has failed. The common theme there is that the incentives facing a firm will determine its culture and will determine its success in terms of outcomes.