Conduct and Consumer Protection Risk

Transcription

1 Conduct and Consumer Protection Risk Institute of Banking, Athlone Event, 30 May 2018 Helena Mitchell Head of Consumer Protection: Supervision Division

2 Contents Introduction PART I - Overview of the Central Bank s role in protecting consumers PART II Consumer Protection Risk Outlook PART III - Conduct and Consumer Protection Risk PART IV - Consumer Protection Risk Assessment (CPRA) Model Conclusion

3 Overview of the Central Bank s role in protecting consumers

4 Overview of the Central Bank s role in protecting consumers Statutory Objective 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) Statutory Function 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 How we discharge our consumer protection mandate Safeguardin g Stability Gatekeeper/ Prudential Supervisor Policy-Maker/ Influencer Conduct Supervisor Enforcer

6 Who is responsible for protecting consumers?

7 2018 Consumer Protection Risk Outlook

8 Consumer Risk Themes Impact of a Lack of Consumer Focused Culture in Firms 2. Risks to Consumer Protection from Digitalisation of Financial Services 3. Financial Vulnerability Caused by Indebtedness & Loan Arrears 4. Implications for Consumer Protection Arising from Brexit 5. Impact of IT Risk on Consumer Protection

9 Consumer Risk Themes Risks to Consumer Protection by the use of Consumer Data 7. Cyber Risk Implications for Consumer Protection 8. Risks from Ineffective Disclosure & Product Complexity 9. Risk of Firm s Regulatory Capacity Impacting Consumer Protection Efforts

10 Have you read our Discussion Paper on the Consumer Protection Code and the Digitalisation of Financial Services?

11 Conduct and Consumer Protection Risk

12 What is Conduct Risk? Fifth Annual Survey by Thomson Reuters Some key points: 600 firms from around the world participated 43% reported having a separate working definition of conduct risk (up from 21% the previous year) Last year s survey pointed to practical difficulties in defining conduct risk Failure to define may result in failure to recognise emerging risks in the business

13 If you don t define it, how can you manage it?

14 Central Bank Definitions PRISM 2011: Conduct Risk Assessment CPRA 2017: 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

15 Consumer Protection Risk Assessment Model (CPRA)

16 Why do consumers need protection? 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 tradeoffs 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. Extract from a speech by Governor Philip R. Lane entitled The Role of Financial Regulation in Protecting Consumers, University College Cork, 23 February 2017

17 Why do consumers need protection? 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

18 Who is responsible for protecting consumers?

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

20 CPRA Model

21 Targeted CPRAs

22 What does this mean for you? 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); We will observe at board and key committee meetings; walk-through systems and conduct substantive testing on the consistency of application of the controls; 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.

23 Module 1 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

24 Who is responsible for protecting consumers?

25 Modules 3, 4 & 5 The Product Lifecycle 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 postsales processes to meet customers needs and expectations Are systems and controls posing unreasonable post-sales barriers?

26 Central Bank Review of Lenders Advertising of Mortgage Cashback Offers Review of advertising against requirements in the Consumer Protection Code and Mortgage Credit Regulations c.200 advertisements reviewed Key information and qualifying criteria not always included Content unclear or out of date Lenders instructed to amend or withdraw almost three quarters of the advertisements Is this good enough?

27 Module 2 People & Culture What does an effective 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 Mistakes are corrected in a fair and expedient way

28 Module 2 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 to consumer protection (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?

29 Incentives drive behaviour Are you familiar with our Guidelines on Variable Remuneration for Sales Staff?

30 Central Bank Review of Culture and Behaviour in Retail Banks The Central Bank will report to the Minister for Finance on the: current cultures and behaviours in the retail banks today; risks associated with those current cultures and behaviours; and actions that may be taken to ensure that banks prioritise customer interests in the future The Minister committed that on foot of this report, the Government will determine whether any additional legislative and regulatory changes are needed that would enhance accountability in the banks for ensuring customer interests are prioritised Review is underpinned by the CPRA and supported by the Dutch Central Bank Findings will inform our future supervisory strategy

31 Conclusion

32 Conclusion Each firm must understand all of the risks it poses to consumers - Strategy Business model Culture 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 aim for minimum compliance with the letter of the law are no longer tolerable

33 Thank you Root cause analyses of many recent cases of misconduct in the financial sector suggest that misconduct is not just the product of a few individuals or bad processes, but rather the result of wider organizational breakdowns, enabled by a firm s culture. (Kevin J. Stiroh, Executive Vice President of the Financial Institution Supervision Group of the Federal Reserve Bank of New York, December 2017)

34 Related Links G20 High-Level Principles on Financial Consumer Protection (October 2011) Central Bank of Ireland, Discussion Paper on the Consumer Protection Code and the Digitalisation of Financial Services (29 June 2017) Thomson Reuters, Culture and Conduct Risk 2018: Benchmarking 5 years of implementation Central Bank of Ireland, PRISM Explained (November 2011) Central Bank of Ireland, Guide to Consumer Protection Risk Assessment (March 2017) Philip R. Lane, Governor of the Central Bank of Ireland, The Role of Financial Regulation in Protecting Consumers, (February 2017) Derville Rowland, The Evolution of the Consumer Protection Framework, Prague (March 2017) Central Bank of Ireland, Guidelines for Variable Remuneration Arrangements for Sales Staff (July 2014) Statement by Minister Paschal Donohoe on the Tracker Mortgage Examination, (November 2017)