Bank Culture Reform in Hong Kong

By Jeffery Naquin, Protiviti Director, and Carol Beaumier, Protiviti Senior

Managing Director

On December 19, 2018, the Hong Kong Monetary Authority (HKMA) issued a circular titled “Supervision
for Bank Culture,” which supplements its original March 2, 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.

Leading Practices

In a circular released on May 22, 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 several 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. The key to this movement toward enhanced levels of
organizational maturity is 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.

Governance

Culture defines ethical values and desirable behavior within the AI that 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:

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 • 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 that their desired culture and expected behavioral standards are relevant to different
levels of staff.
• AIs establish clear ownership of risk and culture reform.

Incentive Systems

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 a 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 “whistleblowing” 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.

Enhancement Opportunities

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 that 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.

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 • Further effort is needed to identify the gaps between current progress and desired culture.
• Additional work is needed in promoting an environment that provides “psychological safety” to
encourage staff to speak up without fear of adverse consequences.
• 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 apply to all. Therefore, all AIs should take note of the common themes and refer 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-office 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 industrywide insights and practices on culture with the industry as and when appropriate, and
continue to explore other culture initiatives while considering overseas experiences and emerging themes
that may occur.

This article was originally published on The Protiviti View.

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