An age of enlightenment: the future of conduct risk management
In the wake of the financial crisis, the industry has been hit hard by an almost continuous stream of conduct related issues and fines; including PPI, Libor, and more recently, Forex fixing. With high levels of media and political exposure, the industry has seen its reputation suffer, write Laura Jones and William Marle
In an effort to adapt to the modern regulatory environment, rebuild trust and long term sustainable relationships with the customer, senior bankers are or already have, mobilised a fundamental review of the underlying culture and the resultant behaviours of its employees.
To drive this cultural shift and rebuild trust, banks have established large scale cultural transformation programmes, updating their mission statements, re-emphasising their values and re-structuring their reward programmes to move client outcomes to the centre of their business. As stated in the annual reports and media statements from the major UK banks there is an ongoing focus on cultural change. For example, António Horta-Osório (chief executive, Lloyds Banking Group) stated in his message that “Rebuilding customer trust remains a key imperative for the business. In support of this, we have continued to transform the corporate culture and have completely overhauled the performance and reward framework for our customer-facing colleagues, with performance now predominantly assessed on the basis of customer feedback”.
Banks certainly seem to be doing the right thing, in the right way, but there is a marked difference between perception and reality which leads to some unanswered questions:
- Have banks really effected cultural change?
- Do employees truly understand the need for change and empathise with the conduct risk management aims, or are they seen as another tick-box exercise?
- Has the reward structure been changed enough to sufficiently influence an employee’s behaviour?
- And, ultimately, has the banking industry completed its cultural journey?
The cultural journey
The journey to achieving and embedding sustainable, top to bottom cultural change is difficult and may take years to accomplish. This timeframe is evidently too long not just for clients looking for a Bank they can trust, but also for the banks and their shareholders. Shrinking margins are already placing huge pressures on balance sheets and with cost management at the fore of near term strategy, banks can ill-afford to be hit by further regulatory fines and the subsequent high cost of remediation. Additionally, in expectation of conduct related fines, Banks are putting aside capital that could be used to return value to shareholders or offer more innovative and competitive products to clients.
Capco believes those financial institutions that are successful in accelerating cultural change will develop the ability to effectively manage people’s behaviour, inspiring ‘new’ acceptable behaviours and discouraging ‘outdated’ unacceptable behaviours. We believe this can be achieved through a number of different practices which should be complementary of each other. The focus in this article is through the effective use and management of technology and data to understand employee profiles and cohorts and identify culture drivers and issues and future risk areas.
Technological advances and the flexibility they can provide must be embraced and harnessed to innovate and drive better people, process and risk management in order to affect improved customer outcomes. The capability to analyse vast quantities of disparate data at speed and deliver meaningful insight is key. The ability of technology to learn continually and adapt to new conditions and new external and internal environments makes the possibilities for use very powerful. If used correctly this could bring to an end the era of Banks looking over their shoulders, fearful of heavy fines and costly remediation programmes. It has the potential to usher in a new age of proactive risk management, heightened risk awareness amongst all employees and growing trust in banks, their management and their people. Furthermore, a proactive approach to risk management and analysis of early warning indicators (increasingly being shared across multiple risk areas) will ultimately reduce costs for the bank and help drive growth providing opportunity for significant capital investment in growth strategies contributing to increasing RoE and diminishing C/I ratios.
Technology and data: the partnership to accelerate culture change
Resulting from internal and external demands, banks currently process and collect vast amounts of data every second, ranging from the products sold to the number of website clicks. Yet this data is often analysed in isolation given their differing and seemingly unrelated nature. However, by using modern, innovative technology, we can move beyond traditional quantitative risk management and analysis. We can begin to analyse these large, evolving and complex data sets to identify behavioural patterns and trends, providing us not only with a view of what is happening now but also what we can expect going forward.
The development of such metrics and data insight tools to provide senior executives and management with near-real time information will accelerate and improve the quality of decision making. No longer will major decisions be taken on historic data and ‘gut feel’, setting a precedence for behaviour amongst all staff that actions, be they internal, strategic or concerning clients, should be made based on extensive data analysis to ensure the best and most appropriate outcome is achieved. The data lakes created can also be shared across compliance and other risk functions to understand the design and operating effectiveness of their control framework.
The size of global banking institutions makes them unwieldy and difficult to manage. The application and use of a data insight tool will improve supervision and governance across the bank’s core functions as senior management is provided with an enhanced ability to engage and communicate with their teams, providing effective leadership and direction from the top. For example, by comparing training completion records with compliance ‘red flags’, it is possible to understand at a high level why a control failure occurred. However, by comparing across data sets, banks can dive deeper to pinpoint cultural failings. For instance, a further comparison against supervisory structures may highlight a remote supervisor unable to exercise appropriate supervisory oversight and control within the existing framework.
Using data analytics to create cohorts of employees, management would be able to understand more clearly what drives specific groups of employees, as well as identify trends for comparison and monitoring to identify proactively where employees are behaving outside of the norm. The collation of disparate data with regard to trader behaviours can be used to build a profile and understanding of behavioural norms. In order to proactively manage against unauthorised trading, employees can be split into cohorts based on similarities across markets and products traded. By comparing disparate data such as weekend logins, the number of compliance ‘red flags’, the attributes and timing of trade cancels and amends (e.g. traders who always cancel trades with a specific counterparty or before the overnight batch reconciliations) it is possible to create a profile of normal and irregular behaviour. Compliance and front office risk and control can use this analysis to prompt further investigation, reducing the likelihood of major conduct and regulatory breaches.
Finally, by using technology and data to promote and reward good culture, employees may feel a greater sense of accountability and empowerment. Communication barriers between management layers will be eroded and individuals will have a greater sense of responsibility for the actions they take.
The technology requirements to achieve all this are not extensive: the greatest need is for banks to embrace this change and embark upon their cultural journey. Banks that move quickly and outlay sufficient energy early in the process to design tools that best fit their vision will be rewarded with a highly motivated workforce who have a greater understanding and awareness of what is and is not acceptable. Ultimately, those who pioneer the use of technology and big data with regard to conduct risk management may find they have a competitive advantage as their culture evolves at pace, enabling them to realise their goals in a more efficient way.