Conduct Risk Management Shifts to ‘Predict and Prevent’ Approach

In its annual Compendium on culture and conduct risk supervision, Starling highlights a shift from ‘detect and correct’ to ‘predict and prevent’.

US regtech firm Starling has released its 4th annual Compendium, summarising trends in the supervision of culture and conduct risk among banking industry regulators and standard setters.

The report features contributions from leading industry figures worldwide, including BOE (Bank of England) Chief Economist Andy Haldane, BCBS (Basel Committee on Banking Supervision) Secretary General Carolyn Rogers, MAS (Monetary Authority of Singapore) Deputy Managing Director Ho Hern Shin, and APRA (Australian Prudential Regulation Authority) Head of Risk Culture Mark Roe – among others.

“Such contributions have made the report an annual ‘must-read’ for those in the industry interested in the governance and supervision of culture and conduct related risks,” said Stephen Scott, CEO and founder of Starling.

A key takeaway from the Compendium is that the mitigation of misconduct and the social harm it may cause is no longer enough; there is now “insistence that firms demonstrate an ability to do social good.”

The Compendium points to social and economic tensions and imbalances highlighted by the Covid-19 crisis as key factors that have contributed to the recent growing emphasis on ESG across global markets.

“Concern for good governance and beneficial social outcomes, such as improved DE&I [diversity, equity and inclusion], are now especially prominent amidst the culture and conduct risk reform agenda,” it says.

A spate of governance failures and the Covid crisis have prompted heightened scrutiny by regulators on firm culture, however the emphasis has shifted from “an examination of the inputs of good culture, governance and risk management to the outputs of relevant control measures.”

“Firms are expected to demonstrate an ability to assure good outcomes ex ante.”

The Compendium also highlights the emergence and expansion of executive accountability regimes – notably in Singapore, Hong Kong and Australia – which increase the individual liability for executives who preside over misconduct scandals.

With this has come a shift away from the traditional ‘detect and correct’ approach to conduct risk management towards a ‘predict and prevent’ imperative, which entails the development of leading indicators and predictive metrics to detect poor risk management outcomes before they occur.

“In recent years, bank regulators have looked to behavioral science to better assess conduct norms, propensities and risks among firms,” the Compendium says. “Now, many firms have begun to turn their own attention to behavioral science, in the context of operational risk management, but also with a view to improving the performance of business units and corporate functions.”

The Compendium also highlights a regulatory focus on ‘speak-up culture’, new challenges from work-from-home protocols, and more coherent collaboration among the regulators, the private sector and regtech firms to address conduct risk and culture issues.

The Compendium can be downloaded here.

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