The Impact of Culture and Conduct – Industry’s Biggest Blind Spot

Looking beyond regulations aimed at cultural reform, Synpulse’s Prasanna Venkatesan discusses how conduct and culture can be operationalised, measured and managed in private banking.

Risk management in private banking is undergoing a metamorphosis. Increasingly so, focus is shifting to the strengthening of organisational risk culture as a proactive deterrent to misconduct. Regulators see a solution in shaping the collection of beliefs, values and assumptions that manifest in how employees of a bank conduct themselves and bring to life the overall culture of the organisation.

Private banks in Asia called to take action

Regulators worldwide have recently pushed banks to address their culture and conduct issues, with the IMF (International Monetary Fund) highlighting that the problem of ‘poor culture’ has become systemic in the financial sector. In Asia, both MAS (the Monetary Authority of Singapore) and the HKMA (Hong Kong Monetary Authority) have increased the pressure on financial institutions to shift from a compliant risk culture towards an embedded one.

Regulators in both Hong Kong and Singapore have been loud and clear about the importance of culture as a key driver of conduct’. MAS further emphasised their message in a roundtable on “Elevating Standards of Culture and Conduct in the Banking Industry” last month. The HKMA also released a “Bank Culture Reform” circular in 2017, and followed up with a self-assessment exercise to be carried out this year. These requirements are the first steps toward defining the minimum requirements and they mark the beginning of a long journey of change ahead.

Private banks in both Singapore and Hong Kong are now compelled to weigh profitability against sustainability and the client’s best interest. Starting with a self-evaluation around risk culture, the senior management must ensure the establishment of appropriate governance controls, supervisory oversight, training practices and compensation.

Regulators want private banks to not only penalise poor behavior, but to also reward good risk behavior and eventually have a proactive approach towards risk management. However, most banks in Asia are still dependent on legislation and harsh controls to drive their fundamentally reactive risk frameworks. Evidently, a culture of personal remains underdeveloped.

What the regulators want to see are concrete steps towards instilling an embedded risk culture as the core emphasis of cultural change programmes. Conduct training and awareness campaigns remain the most popular initiatives among institutions, and while they require a lower initial investment, their long-term results are lacking when compared against full-fledged and data-driven risk frameworks. Only few private banks are deploying or have already deployed data and predictive analytics within their culture change programmes.

Some of the common challenges faced by banks include addressing the gaps in the current risk culture setup and setting up the right risk framework, while at the same time preventing a culture of fear and abuse.

Best practices in building a risk culture framework

The construction of a comprehensive, fair and transparent risk culture framework begins with a deep dive into the bank’s existing culture, and an assessment of the relevant topics, such as the Tone from the Top, Organisation and Responsibility, Recruitment and Training, as well as Risk Management and Risk Control. Ratings in these areas are then benchmarked against market best practices, to uncover gaps and provide direction for an implementation roadmap in line with the desired corporate culture and strategy.

Next, the senior management must set the tone for change by clearly defining the boundaries of desirable and undesirable behavior. This message must be consistently and effectively communicated across the organisation, while deploying interactive sharing and cross-functional working groups to ensure employee empowerment.

Once a centralised view is defined, the risk culture framework can be built. Data from the various streams within the framework is amalgamated into a “Balanced Scorecard”, a remuneration framework for front-office staff and supervisors. In many banks, the top performers are still rated solely on achievement of financial targets, without proper regard for the conduct that produces the results. The Balanced Scorecard is a major component of a fully transparent and appropriately monitored incentives programme that weighs financials performance against risk conduct and behavioral metrics to align with the desired organisational culture. Performance is rewarded and undue risk-taking is punished.

Finally, risk management skills of employees must be regularly honed. Care should be taken to prevent the training programme from becoming a bureaucratic requirement (i.e. an exercise aimed solely at fulfilling CPD hours) and instead aim to increase awareness and develop knowledge and understanding of key processes within the bank.

Next steps

The impact of culture and conduct may very well be the financial industry’s biggest blind spot. The biggest mistake an institution can make is to approach risk culture reforms as a tick-in-the-box exercise.

By identifying and understanding the current and future state of culture and conduct, banks can implement appropriate forward-looking framework reforms and Balanced Scorecards. In time, predictive models can be built around the data collected.

Although establishing the right framework and metrics will take time and investment, predictive analytics are set to become heavy artillery in future data-driven change initiatives.

Prasanna Venkatesan is a Singapore-based Partner and APAC Regulatory Compliance & Risk practice lead at Synpulse.

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