East Region Committee Event Managing Conduct Risk a practical perspective. Welcome. 15 October 2015

Transcription

1 East Region Committee Event Managing Conduct Risk a practical perspective Welcome 15 October 2015

2 Maureen Stanley Head of Regulatory Compliance & Operational in Bank of Ireland 2

3 Conduct Risk a practical approach Maureen Stanley Head of Regulatory Compliance & Operational Risk, Bank of Ireland Group 1

4 What is Conduct Risk? A risk that behaviors will result in poor outcomes for customers (example definition) Market perspective : The industry has a lot of work to do to rebuild credibility with both customers and regulators. Regulators perspective : Banks are now required to have robust processes and metrics in place to manage and drive good conduct and culture Conduct risk means the current or prospective risk of losses to an institution arising from inappropriate supply of financial services including cases of wilful or negligent misconduct. Source: EBA SREP Guidelines, 19 December 2014 Customer Lens Industry commentators have questioned of the adequacy of bank culture. Conduct risk is the risk the firm poses to its customers from its direct interaction with them. Source: PRISM explained, November 2011 Regulatory Lens Bank Lens Sustained intrusion of regulation & enforcement into the conduct of banks Increasing focus on conduct issues 2

5 Banking not alone? Classification: Red 3

6 EU Legislative Drivers 4

7 Central Bank of Ireland The 5 Cs Complaints handling / root cause analysis Reliable Service New distribution channels Long term products Customer feedback Confidence Outcomes focussed Ability to measure Best Practice Evidence Based Business Models Culture Consumer Compliance Boards and senior management responsibility Values, Governance Incentives, targets/conflicts of interest Conduct risk framework Challenge Beyond minimum standards Delegation / Outsourcing Smaller firms / intermediaries Responsibilities of product producers Source: CBI Consumer Protection Presentation 5

8 The impact on costs and reputation? The UK Banks have experienced ongoing enforcement and regulatory sanctions : 2013 = 474 million 2014 = 1.47 billion 2015 to date = 900 million Over the past five years the related amounts have been increasing in the EU, reaching a cumulative total of c. 50 billion in fines for EU banks. c. 200 billion worldwide PTSB disaster sparks wider Central Bank tracker probe. Expert warns that errors in the administration of tracker mortgages happened at all banks. Irish Independent August 2015 High Court overturns Ombudsman's decision on misselling of an investment. Irish Times January 2015 Banks face fresh wave of PPI compensation claims after landmark ruling' The Independent - 28 May 2015 'Six banks fined 2.6bn by regulators over forex failings' BBC News, 12 November 2014 Compliance is the minimum expected Conduct Risk is wider than compliance with rules Board members must ensure that Conduct Risk is on the Board s agenda every month ' Mick Stewart, Central Bank of Ireland, 28 May 2014 Firm s payment services could have been used for money laundering and/or terrorist financing Central Bank says. Irish Times May

9 So what is good Conduct Risk? How do we demonstrate that we are addressing conduct risk? ensuring that a firm s conduct gives the right outcomes for its customers and the markets that it trades in on their behalf it is the consideration of all categories of risk (financial, operational and strategic) to determine if they drive poor conduct it does not mean re-doing everything it is not an additional risk sitting within or alongside the firm s current risk profile it is bespoke to each firm and should be proportionate (depending on business models, activity, size and the potential risk / impact to the firm s objectives) some people call it the lense through which existing known risks are now viewed Expectation is that firms put the well-being of customers at the heart of how they run their business it is dynamic Source: Conduct Risk Demystified Norton Rose Fulbright May 2015 Classification: Red it is not relabeling an existing risk framework it is not the same for all firms Regulators have not been prescriptive on the definition of conduct risk, as it wishes for firms to decide for themselves what it means to them there is no one size fits all framework risk It is wide, encompassing framework not only achieving good outcomes for customers, but also behaviour that poses a risk to the regulator s objectives to protect and enhance the integrity of the Irish and European financial systems and to promote effective competition, or where inappropriate behaviour is likely to result in poor consequences for customers including end customers 7

10 Ita Rogers Head of Conduct of Business in AIB 8

11 Institute of Banking Ita Rogers, Head of Conduct of Business Regulation, AIB 15th October 2015 Conduct Risk Management a practical approach Allied Irish Banks p.l.c.

12 Conduct Risk Management in Ireland What is the challenge? Extract from ESRB Misconduct Risk Report 10

13 Monitor Culture Conduct focused culture manifests in good outcomes for customers Monitor Voice of the customer Tone from the Top Define Values Code of Conduct Performance management Embed Clear set of values / acceptable behaviours Values act as an anchor for behaviour Customer Outcomes Training Good Conduct Culture - Way we do things - Structure & Governance around it 11

14 Conduct Risk Framework Definition Our regulators have set out their expectations but have not provided an off the shelf definition: CBI: The Central Bank s consumer protection objectives are based on the need to ensure that consumers are treated fairly and with respect and dignity by firms, and that firms act in their consumers best interests in all that they do. FCA: consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products. Definition should: - resonate with the firms strategy and culture - Focus on the fair treatment of Customers, - Be outcomes rather than process based; and - Incorporate market stability Management of Conduct Risk Governance conduct risk management objectives roles and responsibilities across the three lines of defence risk appetite Committee structures, including membership Roles and responsibilities across the three lines of defence Approval process for conduct related matters CBI Outlook Report: Ensuring the right business model, with the proper product oversight and governance in place, will form part of our regulatory work. We expect all firms to demonstrate that their products are fit for purpose - going beyond tick-box and disclosure to ensuring they are fully understood by their customers Ownership First line or second line? Customer strategy 12

15 Key Conduct Risk Areas Sales Process Sell the right products to the right customers Responsible lending Extend credit responsibly and support customers in difficulty Product Oversight Develop the Right customer propositions to meet customer needs Know the customer Reliable systems Effective protection from cybercrime Data Privacy Monitor Complaints and Errors Customer Outcomes Customer Communications Ensure customer Understanding Go beyond disclosure 13

16 Conduct Risk Metrics If you can measure it you can manage it Conduct Risk Metrics should: Link to the customer strategy and risk appetite Appropriate for the audience Look to external sources of information as well as internal Support open communication and challenge Be both leading and lagging Detective and preventative Focus on customer outcomes Lessons from other Industries Chemical Industry - DuPont Level of leadership focus and operational discipline around safe practices are leading indicators for accidents. Commercial aviation industry Zero tolerance for safety risk Risk assessment an essential component of decision-making Strong culture of employee speak-up, without assigning blame Clear and appropriate targets and metrics will drive behaviour rigorous adherence to procedures Source: Salz Review 14

17 Behavioural Economics Implications for Conduct Risk Behavioural Economics Why do people make certain decisions? Behavioural Economics examines biases in economic decision making. The jam experiment people don t like too much choice. In Australia a review of pension documentation found that changing the default from opt-out to opt-in can increase enrolment from 40% to 80% The ESRI are carrying out experiments on how consumers make complex decisions; sponsors include the CBI Does this alter what we mean by conduct risk? 15

18 FCA Occasional papers The FCA have published a series of detailed research papers on consumer risks and best practice in areas including: Vulnerable customers Customers communications Performance management The messages are challenging and far reaching. For example: Vulnerable customers: We are all capable of becoming vulnerable (divorce, ill health, bereavement) Products and systems often streamline customers and are not designed to meet non-standard needs. The response of frontline staff, whether in a branch or on the phone, is crucial to the customers experience Customer communications: opting-out rather than opting-in significantly impacts customer behaviour Performance Management Poor performance management practices can lead to undue pressure on sales staff and miss-selling Pressure on sales results over other considerations can permeate a firm 16

19 Conduct Risk Checks Have you defined what Conduct Risk is and has this been communicated to business lines? What do you / your firm see as its main consumer challenges? What are the biggest risks you pose to your customers? How are you seeking to address / mitigate these risks? How do you promote and ensure customer-focused culture and behaviours throughout your firm? How do you satisfy yourself that your firm is acting in the customers best interests from strategy to product governance to sales and customer service? What has worked particularly effectively to date in respect of getting it right for your customers? Conversely, what has not worked particularly well in respect of getting it right for our customers? Does senior management and the Board receive good Conduct Risk Management Information to allow them to opine on the status of Conduct Risk in your organisation? 17

20 Questions?