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Risk of personal liability affecting bank business decisions

04 May 2017  |  2342 views  |  0 Source: Thomson Reuters

Concern by financial executives about the risks of personal liability appears to be affecting the strategic business decisions they make, according to a global survey of compliance and risk practitioners at financial firms.

For the first time, Thomson Reuters research shows a direct correlation between bank culture and conduct risk, as well as with the steps firms are taking to change culture and mitigate risk.

The study, Thomson Reuters Culture and Conduct Risk 2017 survey report, suggests that increased actions by regulators worldwide are beginning to change behaviors of decision makers at banks, brokerage and asset management firms, and insurance companies. The 2017 survey was expanded specifically to cover culture, as well as conduct risk, to reflect evolving regulatory expectations.

Nearly one-third of respondents (29 percent) say their firms have declined potentially profitable business opportunities due to culture and/or conduct risk concerns, compared with 37 percent of respondents at global systemically important financial institutions (G-SIFIs). A clear majority, 77 percent, say they take conduct risk factors into consideration when determining business strategy.

“Our annual survey provides insight into industry thinking and emerging best practices, as well as regulatory expectations,” co-author Stacey English, head of Regulatory Intelligence, Thomson Reuters, said. “The frank concerns and views shared by participants reinforce challenges their peers face in all financial services sectors. Neither culture nor conduct risk are new concepts but this year’s survey emphasizes how both remain at the top of firms’ and regulator priorities, directly impacting strategy as they face greater prospects of personal liability.”

Most executives (87 percent) at G-SIFIs agreed that continued focus on culture and conduct risk will increase personal liability, compared with 73 percent at other firms. The disparity is potentially the result of a lack of consistent definition for culture and conduct risk.

Once again, respondents ranked culture, ethics and integrity (59 percent) as their top three concerns of conduct risk, followed by corporate governance and tone from the top (52 percent), and conflicts of interest (49 percent).

“Our conduct survey has become an indispensable measure for the global compliance community,” said Phil Cotter, managing director - Risk & Supply Chain, Thomson Reuters. “This research provides valuable insights for compliance and risk professionals as they develop policy frameworks, monitoring protocols and report compliance to their customers, firm leaders, regulators and shareholders.”

While benchmarking often takes place among firms of similar size or sectors, culture and conduct risk comprise an area in which all firms can learn from the G-SIFIs, which the survey shows have done much more to define their approach.

Other key takeaways from the 2017 survey include:

• Board challenges and responsibilities: The top three conduct risk challenges for board are changing regulatory environments, developing metrics and management information, and cultivating an appropriate culture. Board level focus on conduct risk remains high, with 48 percent reporting it had increased in the last year.

• New approach to managing culture and conduct risk: There are signs of a maturing approach to culture and conduct risk management, despite the lack of a common definition for conduct risk. Overall, more than half of firms (55 percent) report they have embedded frameworks or implemented their firm’s approach, although additional work and resources are needed, compared with 68 percent for G-SIFIs. Still, 14 percent of firms report having neither a formal program nor resources for their firm’s approach to culture and conduct risk management.

• Divergent approaches to measurement: Measuring culture and conduct risk has proved to be challenging for firms, reflected by a wide range of indicators that are used to assess culture, including compliance monitoring, internal audits, staff opinion surveys and complaints analysis. In contrast, G-SIFIs report using both individual performance objectives and internal attestations as cultural indicators.

For this year’s survey, which concluded in fourth-quarter 2016, Thomson Reuters Regulatory Intelligence surveyed compliance practitioners at over 750 financial services firms including banks, brokers, asset managers and insurers and including most of the largest G-SIFIs, in Africa, the Americas, Asia, Australia, Europe and the Middle East. The survey builds on annual surveys of similar respondents revealing year-on-year trends and developments intended to help regulated financial services firms with planning, resourcing and direction, and enable them to benchmark their practices, experiences and resource allocations with those in the wider global industry.

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