Conduct Risk - is it all in the culture?

Written by EO Executives on Jun 20, 2014

Are organisations today looking too much at the rule book and not enough at day to day behaviours and their working culture? The latest “Risk Outlook” published by the Financial Conduct Authority urges Boards to make sure that their sales staff behave well and care for long term customers, placing consumer interests at the heart of the business.  These are good intentions, but how should we define good behaviour in practice, so we can report and measure it?

In addition to our search services at EO Executives we maintain a very well qualified “black book” of specific Risk subject matter experts who we deploy to the benefit of our clients for Interim assignments. One such Consultant is Roger Miles who is an authority and thought leader in the area of behavioural risk within financial services.

We asked Roger for his Top 3 Tips for CRO’s on how to embed good behaviour as a risk cultural norm:

“The new financial regulator is taking a big conceptual step forward, though he hasn’t yet given us a practical guide to reporting on behavioural risk.  Until that arrives, we can at least grasp behavioural risk at a headline level in three ways:

Tip 1:- Customer information, risk and incentives:

From now on, the conduct regulator is going to judge companies according to how clearly they see themselves through their customers’ eyes.  We must now make and market products which customers see as clearly fair and useful (although this surely should come as a no surprise).  So, research customers’ point of view externally, not just by asking your own staff.   Link this to incentives: base staff rewards on the customer’s experience, paying sales people for keeping customers happy in the long term, not just bonuses against short-term targets.

Tip 2:- Respect your staff’s intuition:

Get away from the idea that compliance is an “all or nothing”, binary choice.  Actually, as we found out in 2008, old-style econometric risk analyses had made many people feel that full compliance rendered their company crash-proof.   This assumption was untrue, and unhelpful in practice, as it led people to ignore their personal intuition, which helpfully often prompts us when a problem is lurking.  It’s important to allow anyone in your business to put a hand up and ask or say when something doesn’t look right to them.  Behavioural regulation respects this and takes a new approach, using qualitative assessments to restore human judgement to its rightful place at the head of the risk process, ahead of box-ticking.

Tip 3:- Allow for minor failures, and learn from them:

Where the old regulatory system promoted that tick-box response to compliance questions, the new regime looks for signs that your company is making measured, continual progress along a scale of improving behaviour (and of course products, information and processes too).  From now on, how you respond to setbacks will be seen as a significant indicator of your attitude to risk, of your organisation’s “risk culture”.  Perhaps the strongest behavioural indicator that the regulator will look for is how responsive you are to a challenge.  Offer evidence that you treat setbacks as an opportunity to learn and improve, rather than to scatter blame around your colleagues. Strange as it may sound now, we should learn to celebrate adversity and how we overcome it, as these values will earn the regulator’s respect.

Having said all that – ask me again in six months’ time.  We will probably have further guidelines emerging then!”

Risk is very much front of mind at Board level, let’s embed the right behaviours and culture.

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