Both conduct risk and culture have come under scrutiny in recent years as being undermanaged across the industry, with conduct-related fines topping $350 billion.
Investors have observed significant (and non-hedgeable) value erosion given the magnitude of related fines and long-term reputational risk. The industry has struggled to restore trust and, as a result, senior executives and board members need to demonstrate that the risk is understood and managed, and that appropriate discipline and culture is being reinforced. Having a more structured approach to managing culture and conduct has never been more important.
Industry conduct frameworks have evolved rapidly over the past few years and are now the standard for global – and many regional – banks.
Conduct Frameworks In Financial Services
Industry conduct frameworks have evolved rapidly over the past few years and are now the standard for global – and many regional – banks. Developing a more structured approach to conduct in the financial services industry has been challenging for a number of reasons. Being able to create firm-wide change is an issue all businesses face, and in financial services there is no definitive playbook to follow.
Unlike risk types where the Basel Committee on Banking Supervision and local regulators are highly prescriptive on expected approach and industry thinking is advanced, for conduct risk there are only “expectations”. Firms often struggle to articulate what they mean by “culture”, let alone to measure and manage it.
Designing A Conduct Risk Approach That Works
A firm’s approach to conduct and culture needs to be orientated around the right group of stakeholders and calibrated to the local business and market.
Supervisory and industry efforts around the world have helped to define standards. Globally, guidelines such as the Basel Committee on Banking Supervision’s (BCBS) d328 highlight the role of the board of directors and senior executives in managing conduct risk. And groups such as the Group of Thirty (G30) have set recommendations for banks and regulators, for example in the Banking Conduct and Culture report which provide pragmatic guidance.
Our annual conduct surveys with key players in the financial services industry have helped illustrate what works across the industry, as well as stimulating debate.
Surveying The Industry On Conduct And Culture
Oliver Wyman has been working with the industry to raise standards around the world for many years.
Our annual conduct surveys with key financial services firms have helped illustrate what works across the industry, as well as stimulating debate, examining more than 30 specific levers that firms can use to influence conduct and culture.
Results have shown that there has been significant change across a number of leading firms – a new ecosystem of methodologies, risk assessments, incentives, business processes. And all of this has been helping – business behaviors have shifted, and the industry has identified and acted upon hundreds of risks we would not have otherwise seen.
With no room for complacency, however, many firms still feel there’s a long way to go to achieve lasting impact.
Behavioural Cluster Analysis Study
Oliver Wyman was part of the working group with the FICC Markets Standards Board (FMSB) that published the Behavioural Cluster Analysis study. This is a unique piece of research that has reviewed the behavioural patterns in 390 cases of misconduct in financial markets over the last 225 years stretching back to 1792.
This review indicates that the behavioural patterns evident in misconduct events are not unique to each case but that the same 25 behavioural patterns are evident in market misconduct cases and these consistently repeat and recur over time.
This work addresses a number of the findings of the Fair and Effective Markets Review 2015 (FEMR). In particular, identifying the root causes and relevant behaviours which underlie market misconduct is an essential step in preventing them recurring and the work leverages the experience of domestic and international markets to do this. The FEMR also called for the provision of real-life case studies in areas detrimental to the effective operation of markets and the need for the industry to reinforce collective memory in these areas.