Regulators just got a reality check about reputation risks that lurk inside financial institutions.
Barclays PLC’s executive shakeup – sparked by the abrupt departure of Jes Staley as chief executive of the multinational British bank – is a cautionary tale of 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 regulators over whether he had mischaracterized the nature of his relationship with Jeffrey Epstein, a wealthy convicted sex offender who died by suicide in jail in 2019.
Although it was known the men had past professional dealings – Mr. Epstein was a client of JPMorgan when Mr. Staley worked at the American bank – regulators are probing the extent of any personal ties between the two men.
Mr. Staley has previously said their relationship “tapered off significantly” 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 the Caribbean in 2015, before he took the helm at Barclays. The Financial Times has also reported the two men exchanged 1,200 e-mails between 2008 and 2012, suggesting a certain level of familiarity.
Barclays initially stood by Mr. Staley following Mr. Epstein’s arrest on sex trafficking charges two years ago, but found itself in an untenable position late last month after it was briefed by Britain’s Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) about their investigation into Mr. Staley.
Although the FCA and PRA have confirmed they are probing the matter, their findings about the extent of the men’s connection have not been made public. For its part, Barclays has stressed 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 go as CEO even though he plans to contest those regulatory findings.
Mr. Staley’s unceremonious departure is just the latest scandal to rock the British bank and it is occurring at a time when regulators are sharpening their focus on how non-financial risks harm the reputations of financial institutions.
Although there’s been discourse about issues such as climate change and emerging technological risks, regulators must also take a harder line on misconduct, especially in the wake of the #MeToo movement.
Banking is all about relationships, and scandals such as the one affecting Barclays undermines investor and public confidence in financial institutions.
Now for some good news. Canada’s top banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is already examining culture and conduct risks, including those stemming from human behaviour and social mores, and will publish a consultative document 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’s reassuring that its new boss is open to setting an even higher bar for our banks and insurers.
“Perhaps we could be a little more instructive about what we do on that particular issue,” Superintendent Peter Routledge told journalists recently when asked about OSFI’s regulatory guidance on dealing with incidents of misconduct.
“But you can rest assured that reputation risk is a huge factor in what we consider sound risk management. And having an environment where Canadians who happen to work at a particular [federally regulated financial institution] don’t face that kind of treatment is pretty paramount to a healthy institution.”
Mr. Routledge, who began his role in June, has already pledged to “transform” OSFI’s overall approach to supervision over his seven-year term and to revamp the regulator’s own culture.
“We have a team of analysts who do spend a lot of time thinking about non-financial risks and one of them is reputation risk,” he explained.
Those analysts already assess the preparedness of financial institutions to deal with potential misconduct and other reputation risks. OSFI also considers diversity and inclusion in its overall supervisory approach with respect to sound decision making, risk management and its assessment of board effectiveness, the regulator said in an e-mailed statement.
“We also continue to advance our supervisory approach in such areas of non-financial risk with ongoing consideration for potential enhancement to existing regulatory expectations,” OSFI spokeswoman Carole Saindon wrote.
OSFI deserves kudos for its pro-active position on an issue that has been given short shrift for far too long. Regulators who oversee other major industries should follow suit.
There’s no question that sexual harassment is endemic in Canadian society.
In 2020, one in four women (25 per cent) and one in six men (17 per cent) reported having personally experienced inappropriate sexualized behaviours at work – including comments, gestures, sexually explicit materials, unwanted touching or suggested sexual relations – during the previous year, according to a recent study published by Statistics Canada.
Although Mr. Staley isn’t being accused of such improprieties, his surprise departure from Barclays underscores the importance of reputation risk management.
Ironically, Mr. Staley was hired to restore Barclays’ public image after other scandals, including the LIBOR-rigging case.
Yet Barclays appears to have been caught flat-footed by the findings of the FCA and PRA investigation. That should serve as a warning to regulators that sometimes incuriosity can also kill the cat.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.