Culture, acquisitions and regulation at Scotiabank

In a year of scandals involving Libor, mis-selling and money-laundering in acquired institutions, the banking sector remains under the spotlight. Luc Vanneste of Scotiabank talks to Jessica Meek about the importance of maintaining a strong internal culture both at home and away, and also expresses his concern over banks' mounting regulatory commitments

Luc Vanneste

Since the financial crisis, the global banking world has been taking a long, hard look at its internal culture. Recent events have done nothing to improve the public's perception of what goes on inside our financial institutions. This year alone has seen Barclays lose its chief executive Bob Diamond, chairman Marcus Agius and chief operating officer Jerry del Missier in the wake of the Libor-rigging scandal.

And the UK Financial Services Authority (FSA) has confirmed that Barclays was not alone in manipulating this key banking benchmark. When presenting his review into the Libor scandal at the Mansion House in the City of London in September, Martin Wheatley, the managing director of the UK Financial Services Authority (FSA), said more banks will be "paying the price" for fixing Libor – a price that could include criminal charges as well as heavy fines.

This summer also saw the resignation of HSBC's chief compliance officer David Bagley after a scathing report from the US Senate called into question the bank's anti-money laundering procedures. The affair led to questions being raised about HSBC's internal culture.

"You can put all the check-boxes in place and all the policies and procedures you like, but what this ultimately comes down to is a question of culture," Ed Shorrock, director of regulatory services at Jersey-based law firm Baker & Partners, told Operational Risk & Regulation magazine at the time. "If you're the chief executive of HSBC or any large organisation and something happens within your organisation, ultimately you are responsible for it. We've seen from the Barclays episode that the FSA was very concerned about the tone from the top."

Luc Vanneste, head of enterprise effectiveness at Scotiabank, agrees that internal culture is vital to operational success, now more than ever – and adds that the bank's history is as important as senior leadership. "If you put that into context you've got this huge international organisation – in 55 countries – and yet the risk culture that's been there for 180 years continues to live very strongly and is very much alive, in spite of the fact that we have grown significantly over a period of time."

Vanneste explains how Scotiabank keeps culture at the top of its agenda at all times. He says the bank has a five-point strategy, one of which deals with risk – risk management, risk appetite and so on. The most senior credit committee, the risk policy committee, is chaired by the chief executive and meets twice a week. He cites the active involvement of the chief executive, the chief risk officer and the business line group heads as key to maintaining the bank's culture.

"It's part of our DNA," he says. "Everybody knows that we have to manage our risk appropriately."

The other support for a strong risk culture, Vanneste believes, has to be accountability. In particular, this needs to be put in place early on during a merger, takeover or joint venture, but transporting a bank's culture into another institution is not always straightforward – the lack of accountability between HSBC and its Mexican affiliate was described as key to the money laundering discovered earlier this year.

Future incidents along these lines could be crippling – as the Senate released its report in July, US senator Carl Levin commented: "If an international bank won't police its own affiliates to stop illicit money, the regulatory agencies should consider whether to revoke the charter of the US bank being used to aid and abet that illicit money."

For Vanneste, inculcating the Scotiabank culture into acquired institutions is vital for the success of an acquisition. And one of the ways in which the bank does this is to put Scotiabank-trained executives into its new acquisitions. They then bring people from the acquired institutions into the bank's core risk units in Toronto for training.

"You've got the Scotiabankers training people on the ground in the Mexicos, Perus, Chiles of this world or in Asia-Pacific, and you bring people in here to get inculcated in the Scotiabank culture – ow we do things, why we do things and so on," Vanneste explains. "So we are constantly moving people around the globe."

The bank also aims to take over one of the two top positions in the target institution while the acquisition is going ahead. Even if the bank doesn't have a control position at the acquired institution it will aim for this – while it's not always possible to get the chief executive position, Scotiabank generally manages to get the chief operating officer position, Vanneste says.

A further aim is to have Scotiabank staff working as chief risk officer and chief financial officer in the acquired institutions, and also in other control positions. Vanneste explains how this is done.

"There are people within the Scotiabank world who will move after they've done three or four years in one relatively new acquisition. They will move to another acquisition that we've done and do the same thing. So when you take a look at it we've got a lot of Canadian-trained people in international. But if I also look down the hall here I could show you that we've got a number of different people from international who have come up to Toronto for training on risk."

The bank is experienced when it comes to foreign acquisitions – it has been acquiring institutions in Latin America for the last 25 years, and has learnt along the way, Vanneste explains.

"If we go back 25 years, we didn't initially go in in control positions," he says. "In Latin America, for example, we would probably go in with a 10% interest. As our former chief risk officer who now runs international banking used to say, we go in, we dip our toe in the water, if it feels good we'll go up to our ankles; if it still feels good after doing that for a while we go up to our knees and then say okay, now we can go swimming. So if you take a look at any of our acquisitions in Latin America – that includes Mexico, Peru and Chile – they have been stepped acquisitions."

Culture clash

He is also mindful that challenges can arise once the acquisition has taken place in particular relation to "the human component", as he calls it. Taking Latin America as an example he says it's important to take on board the cultural differences you can encounter during an acquisition. It is key for Scotiabank to ensure that its internal culture is incorporated in its acquired institutions. "Sometimes you end up having to make some changes to deal with the different cultures," he explains. "We have a strong culture at Scotiabank and that particular culture does prevail."

On the ground this means that it's important to have the control functions covered, he says. In particular that means finance, treasury and operations. Vanneste explains that for each of these it is likely that each unit would have a senior Scotiabank employee in charge who has filled the same role in previous acquisitions. This person would also be responsible, after the completion of the acquisition, for deciding whether or not certain players are going to stay with the newly acquired institution. "So not everybody ends up staying with the organisation," he says. "We like to certainly have the vast majority, but at the end of the day, we come to work every day for our shareholder, we've got to make the right decision that we get the right people in the right place at the right time."

Once the bank reaches a critical size in a given jurisdiction through acquisitions and organic expansion, Vanneste says, it has a much better feel of what neighbouring countries are like. Scotiabank's most recent acquisition was Colombian bank Colpatria in January this year. Vanneste says the integration into the Scotiabank family wasn't particularly difficult because they've done it so many times. "We've written the book on doing acquisitions in Latin America," he says. "And that means we can take that to other parts of the world."

Vanneste cites Asia-Pacific as one example. The bank currently has a 49% interest in Thai bank Thanachart. But, he says, the rules are different in east Asia – in particular with regard to foreign direct investment. "The southern hemisphere was much more open to that direct investment earlier than Asia-Pacific," he explains. "So when we first started out with Thanachart, I think we went in at 25% and now we are at 49%."

A key area of concern during an acquisition is corporate governance in the target bank. Vanneste explains that Scotiabank puts people on the ground in the acquired institution for a considerable amount of time working with the corporate governance model. "The business line cannot do an acquisition in and of themselves," he explains. "It ties into our whole risk governance structure so we have strong oversight involvement in terms of what the challenges are."

He says Scotiabank staff are usually on the ground in the acquired company for between three and six months – roughly the time between an acquisition opportunity first arising and the point at which the deal is announced. Though he says the bank doesn't necessarily have people there for the entire six months, it will have enough people there for long enough for the bank to be able to make a decision. "It's a strenuous process to get through the governance model to do an acquisition," he says. "People have to have done their homework."

Scotiabank's executive committee – the chief executive, chief operating officer, chief financial officer, the group treasurer and Vanneste himself – is responsible for overseeing acquisitions. This committee isn't part of the due diligence process, Vanneste explains, but part of the governance process going through whether the appropriate due diligence has been carried out and also identifying any issues that may have arisen – as well as deciding whether the acquisition should go ahead.

Typically the bank would have extensive paperwork on due diligence for an acquisition, consisting of a summary page for each subject, including areas such as IT and human resources. This process has developed from years of acquisition experience, he says.

"Behind that we would have a lot more work. And you often learn the hard way. If we go back 30 years, we can see with the benefit of hindsight that sometimes we perhaps went in a little bit more quickly than we should have. But with the experience we've gathered, the integrations are not the challenge that they were in the past because we know much better what it is that we're looking for and how to deal with it."

One of the key legacies of the financial crisis is the swathe of regulation that has been written since September 2008. Financial institutions the world over have found themselves in compliance overload trying to deal with the various pieces of regulation they face from Dodd-Frank in the US to the European Market Infrastructure Regulation in Europe to the worldwide reach of the Foreign Account Tax Compliance Act (Fatca).

Shock resistant

Canada fared better than most in the crisis and this is often attributed to its already stricter regulatory controls than other jurisdictions – as one Bank of Canada staff member told Operational Risk & Regulation in June 2011: "Canada came through the crisis so well because of the rules that set out what banks can and can't do. All four sister agencies [Bank of Canada, Office of the Superintendent of Financial Institutions, Canada Deposit Insurance Corporation and Canadian Securities Administrators] were looking at the breadth of what could happen. In other western countries, no one was looking at the broader add-up," he commented.

Scotiabank is therefore no stranger to a tight regulatory environment. However, this doesn't mean that new regulation doesn't come with challenges. An example that Vanneste gives is recovery and resolution plans, also known as living wills.

Since the crisis, which saw auditors and bankruptcy trustees struggling to unravel the industry-wide tangles left by the collapse of Lehman Brothers, regulators have been pushing institutions to have recovery and resolution plans in place in order to make a rescue operation easier – or a bankruptcy wind-up more straightforward. For an institution like Scotiabank with such a global reach owing to its various acquisitions, this can be a challenge.

Vanneste says the bank has spent a lot of time on this over the last several years. "We have to do a living will effectively on a consolidated basis here for the Office of the Superintendent for Financial Institutions (Osfi). But the document itself is on a global basis so we really have to reach into every part of the organisation to produce it."

Another area of regulation that Vanneste cites as having global reach is the corporate governance model that Osfi has developed. He says he was involved heavily with this when working as the bank's chief financial officer (CFO).

"Osfi are very, very strong in making sure that control functions are unfettered in terms of their ability to call the shots as they see it, so I had to have a solid line not only to the business line CFOs that are resident here in Toronto but to our major units in international banking. And those would be largely in Latin America and that's very much a different sort of model that Osfi would have had a couple of years back."

He explains that in his role he gets involved with the broader aspect of this. "Not just the financial side," he explains. "But making sure that we've got the right governance structure for the control units and indeed for the business lines."

The cumulative effect of the regulatory reforms in Canada and elsewhere, Vanneste warns, could be counterproductive: "I think that the more information you give to anybody, the more inherent risk there is that they will miss some of the most critical aspects of whatever the subject matter is," he says. "So the key thing is that the critical aspects that they need to know to make the right decisions are clearly articulated and brought forward."

He cites the quarterly report that has to be sent to the bank's audit and conduct review committee as an example. "We're now reaching almost 100 pages for a quarterly report. Add to that things like the Basel capital changes, liquidity changes and the resulting requirement for more information and it becomes a real challenge."

Vanneste accepts that there is some advantage to implementing regulation early and that sometimes it can give you competitive advantage, but he argues that banks at present are facing the opposite situation. Fatca is an example of regulation that banks are struggling to implement early, Vanneste says. "The rules aren't finalised, the deadlines haven't been changed as such, but will they be changed? How do you deal with all of that? When things are still up in the air it creates a challenge for us. Yesterday I was in a Fatca meeting and today one on Dodd-Frank; it's never ending and it's a challenge keeping up."

Biography

Luc Vanneste has been head of enterprise effectiveness for Scotiabank since January 2012.He joined Scotiabank in 1999 as senior vice-president and chief auditor, and was appointed executive vice-president in October 2003 and chief financial officer in 2005.

Before joining Scotiabank, Vanneste spent 24 years with KPMG, where he served as a partner, focussing on banking and finance.

Vanneste holds a Bachelor of Arts degree from the University of Toronto, and a Master of Business Administration degree from the Richard Ivey School of Business, University of Western Ontario.