Welcome 27. Belfast Region Committee. "Conduct & Consumer Protection Risk"

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1 Belfast Region Committee "Conduct & Consumer Protection Risk" Helena Mitchell Head of Consumer Protection: Supervision Division Central Bank of Ireland Welcome 27 September 2017

2 Conduct & Consumer Protection Risk Institute of Banking, Sligo Event 27 September 2017 Helena Mitchell Head of Consumer Protection: Supervision Division

3 Contents Introduction Overview of the Central Bank s role in protecting consumers Central Bank Act, 1942 Delivering on our consumer protection mandate Conduct / Consumer Protection Risk Thomson Reuters fourth annual survey Culture and Conduct Risk 2017 Central Bank definitions Consumer Protection Risk Assessment (CPRA) Model Why we introduced the CPRA Model What this means for you Modules of the CPRA / risks we are seeking to assess and mitigate Governance and Controls People and Culture Product Development Sales Post Sales Conclusion

4 Overview of the Central Bank s role in protecting consumers

5 Overview of the Central Bank s role in protecting consumers The Central Bank Act, 1942 (as amended) Statutory Objective Statutory Function the proper and effective regulation of financial service providers and markets, while ensuring that the best interests of consumers of financial services are protected (S6A (2)(b) Central Bank Act, 1942 (as amended)) the function of monitoring the provision of financial services to consumers of those services to the extent that the Bank considers appropriate, for the purposes of protecting the public interest and the interests of consumers. (S5A (1)(f) Central Bank Act, 1942 (as amended)) 5

6 Delivering on our consumer protection mandate Safeguarding Stability Gatekeeper/ Prudential Supervisor Policy-Maker/ Influencer Conduct Supervisor Enforcer 6

7 Conduct and Consumer Protection Risk

8 Conduct and Consumer Protection Risk Fourth annual survey by Thomson Reuters Some key points: 750 firms participated 21% reported having a separate working definition of conduct risk (down from 39% the previous year) Practical difficulties in defining conduct risk Failure to define may result in failure to recognise emerging risks in the business 8

9 Conduct and Consumer Protection Risk PRISM 2011: Conduct Risk Assessment CPRA 2016: Enhanced Conduct/ Consumer Protection Risk Assessment The risk a firm poses to its customers from its direct interaction with them Risks to consumers from a firm s strategy, business model, culture, governance and other internal structures, its systems and processes or the behaviours of individuals at any level within the firm

10 Consumer Protection Risk Assessment Model

11 Context - Why we introduced the CPRA Model? Governor Philip R. Lane Extract from a speech entitled The Role of Financial Regulation in Protecting Consumers, University College Cork, 23 February 2017 The fast pace of financial innovation has created a complex world for consumers, where the range of available financial products is broad, and the consequences of financial choices are significant. Coupled with this, the typical household tends to have a limited personal track record in making financial decisions, since the purchase of financial products happens only infrequently. This is problematic, since the demands for financial sophistication and knowledge are sizeable if a consumer is to navigate safely through the options put forward by providers of financial services. Financial decisions often require consumers to assess risk and uncertainty, for example, and to consider trade-offs between the near term and the long term. A growing body of academic literature shows that, among the general population, the level of financial knowledge, skills and ability to consider such complexities is low.

12 Governor Philip R. Lane Extract from a speech entitled The Role of Financial Regulation in Protecting Consumers, University College Cork, 23 February 2017 Three key points Financial products and services can be complex and are quickly becoming even more complex Financial decisions require an assessment of risk and uncertainty Many consumers are not experienced in making these assessments, yet the consequences of their decisions can be significant So... Consumers therefore need help and protection when making financial decisions They must be able to trust that you, as the professionals who are designing and selling these products, will have their best interests at the centre of all that you do

13 Modules of the CPRA /risks we are seeking to assess and mitigate

14 CPRA Model Module 1: Governance & Controls M1.1 Organisation Structure M1.2 Board & Board Committees and Management & Management Committees M1.3 Control Functions / Consumer Monitoring M1.4 Strategy and Risk Appetite M1.5 Consumer Protection Risk Management M1.6 Consumer Reporting Product Life Cycle Module 3: Product Development Module 4: Sales / Transaction Process Module 5: Post Sales Handling M3.1 Product Governance Arrangements M3.2 New Product Development M3.3 Product Monitoring / Existing Product Reviews M3.4 Distribution Arrangements M3.5 Product Management Information M3.6 Marketing and Advertisement M4.1 Sales / Transactions Governance Arrangements M4.2 Operation of The Sales / Transactions Processes M4.3 Quality Assurance M5.1 Post Sales Governance Arrangements M5.2 Operation of the Post Sales Process M5.3 Quality Assurance M4.4 Management Information M5.4 Management Information Module 2: People & Culture M2.1 Firm s Values & Behaviours M2.2 Leadership & Tone from the Top M2.3 Internal Communication M2.5 People Practices M2.6 Training M2.7 Performance Management, Reward & Incentives M2.4 Speak Up, Challenge & Escalation M2.8 External Environment & Communication

15 Targeted CPRAs Module 1: Governance & Controls M1.1 Organisation Structure M1.2 Board & Board Committees and Management & Management Committees M1.3 Control Functions / Consumer Monitoring M1.4 Strategy and Risk Appetite M1.5 Consumer Protection Risk Management M1.6 Consumer Reporting Product Life Cycle Module 3: Product Development Module 4: Sales / Transaction Process Module 5: Post Sales Handling M3.1 Product Governance Arrangements M3.2 New Product Development M3.3 Product Monitoring / Existing Product Reviews M3.4 Distribution Arrangements M3.5 Product Management Information M3.6 Marketing and Advertisement M4.1 Sales / Transactions Governance Arrangements M4.2 Operation of The Sales / Transactions Processes M4.3 Quality Assurance M5.1 Post Sales Governance Arrangements M5.2 Operation of the Post Sales Process M5.3 Quality Assurance M4.4 Management Information M5.4 Management Information Module 2: People & Culture M2.1 Firm s Values & Behaviours M2.2 Leadership & Tone from the Top M2.3 Internal Communication M2.5 People Practices M2.6 Training M2.7 Performance Management, Reward & Incentives M2.4 Speak Up, Challenge & Escalation M2.8 External Environment & Communication 15

16 What this means for you 1. Governance & Controls Product Life Cycle CPRAs will be intrusive in nature Once we assess the design of a control, we will then seek concrete evidence of how effective the control actually is We will review policies and procedures (including HR policies, such as recruitment, induction, performance management and reward); 3. Product Development 4. Sales / Transaction Process 5. Post Sales Handling We will observe at board and key committee meetings; walk-through systems and conduct substantive testing on the consistency of application of the controls; 2. People & Culture We will interview a selection of staff from various levels in the firm - board level, compliance and risk functions, HR, product development, marketing and sales staff potentially including all of you sitting here today.

17 Module 1 Governance & Controls Governance & Controls Decisions that impact on customer outcomes occur at every level in the firm Objective of Module 1 is to determine the extent to which a firm has put in place effective governance and control measures that enable the identification, management and effective mitigation of consumer protection risk Examples of Risks: The firm has not considered consumer protection risk when developing its strategy or risk appetite Business and control functions do not support the identification, monitoring and management of risk Ownership for identification, assessment, mitigation and monitoring of risk is not clear

18 Modules 3, 4 & 5 Product Lifecycle Product Development Product Life Cycle 4. Sales / Transaction Process 5. Post Sales Handling Extent to which the firm designs and reviews all consumer products to meet customers reasonable needs and expectations Are marketing and distribution arrangements delivering adequate safeguards to protect consumers? Extent to which a firm ensures that a consumer understands the products s/he is being offered and that it meets her/his needs Are products sold in the right way to the right people? Extent to which the firm designs and reviews post-sales processes to meet customers needs and expectations Are systems and controls posing unreasonable post-sales barriers?

19 Module 2 People & Culture People & Culture What does a positive consumer-focused culture look like? Consumers can be confident that firms are acting in their best interests at every point in their relationship with the firm Boards and senior management set and own the consumer tone through their commitment to fair consumer outcomes Firms design and test products, specifically with consumers interests in mind Firms communicate clearly with consumers and help them to make informed decisions Firms engage constructively with consumers who have queries or complaints and deal with claims and appeals fairly Staff are incentivised to sell suitable products to the consumers, for whom they were designed

20 Module 2 People & Culture People & Culture Module 2 focuses on a firm s intended culture Is there evidence of clear values in place, underpinned by behavioural expectations that support consumer protection? Sufficiency of ownership of and commitment (tone from the top)? Communication of values and expected behaviours throughout the firm? How does the firm reinforce its expected behaviours in key stages of the employee lifecycle? Recruitment Induction Promotion How effective are the firm s speak-up and escalation channels? Does the firm encourage staff to report behaviour that is not aligned to, or does not support consumer protection? How does the firm incentivise staff (financial and non-financial) to deliver fair consumer outcomes?

21 Conclusion

22 Conclusion A firm must be able to demonstrate with concrete evidence that it understands the risks it poses to consumers from its Strategy Business model Internal structures and processes Employees behaviour Many well-publicised systemic conduct failings Significant financial and reputational cost to firms More importantly, significant detriment to those people who keep firms in business Genuine errors will occur and risks will crystallise, but you can and must do more to protect consumers Proactive and pre-emptive risk identification and mitigation is a must Risk management frameworks that strive for minimum compliance with the letter of the law are no longer tolerable

23 Conclusion THANK YOU Useful Links OECD/G20 High Level Principles on Financial Consumer Protection Speech by Governor Philip R. Lane, University College Cork The Role of Financial Regulation in Protecting Consumers, 23 February 2017 Guide to Consumer Protection Risk Assessment, 28 March 2017 Address by Helena Mitchell, Head of Consumer Protection: Supervision Division, to the Society of Actuaries in Ireland, ERM Forum A regulatory perspective on consumer risk, 10 May 2016 Thomson Reuters Culture and Conduct Risk Report 2017