“Conduct Risk – what is it and who cares anyway?”
Event with Helena Mitchell
Head of Consumer Protection: Supervision Division
Central Bank of Ireland
Welcome
3 December 2015
Conduct Risk – what is it and who cares anyway?
Helena Mitchell – Head of Consumer Protection: Supervision Division
Consumer Protection – Supervision
“Getting it right for
consumers”
Credit
Institutions &
other lenders
Stockbrokers
& Investment
Firms (MiFID)
Retail
Intermediaries
Consumer
Protection –
Supervision
Payment
Institutions / EMoney / B de
Change
Insurers
Debt
Management
Firms
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Contents
•
What is conduct risk?
 Definitions
 Key drivers
 Summary of key points
•
Culture & conduct risk
•
Product governance & conduct risk
•
The cost of getting it wrong
•
What does it all mean in practice?
•
Who cares anyway?
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What is Conduct Risk?
“the risk of inappropriate, unethical or
unlawful behaviour on the part of the
organisation’s management or
employees, which can be caused by
deliberate actions or may be
inadvertent and caused by
inadequacies in an organisation’s
practice, frameworks or education
programs”
– The Australian Conduct Regulator (ASIC)
“consumer detriment arising from the wrong
products ending up in the wrong hands, and
the detriment to society of people not being
able to get access to the right products.” –
The Financial Conduct Authority (FCA)
“Conduct risk means the current or
prospective risk of losses to an institution
arising from inappropriate supply of financial
services including cases of wilful or negligent
misconduct.” – European Banking Authority (EBA)
“All financial consumers should be treated equitably, honestly and fairly at all stages of
their relationship with financial service providers. Treating customers fairly should be an
integral part of the good governance and corporate culture……” - Organisation for Economic
Co-operation and Development (OECD)
“the issue is so broad in scope that a single, narrow definition neither seems possible nor
desirable.” ESRB refers to ‘misconduct’ risk as “risks attached to the way in which a firm
and its staff conduct themselves.” – European Systemic Risk Board (ESRB)
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Central Bank’s Mission
“Safeguarding Stability, Protecting Consumers”
•
Macro-prudential

•
Micro-Prudential

•
systematic importance of banks - safeguarding financial stability
financial, operational and reputational
Consumer protection

any threat of consumer detriment
‘Conduct Risk’ - “the risk the firm
poses to its customers through its
direct interaction with them”
– PRISM Explained 2011
‘Consumer Risk’ is anything that would
threaten our objective that firms treat
consumers fairly and with dignity and
respect
– Consumer Protection Outlook Report 2015
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Key points about Conduct Risk
•
Inherent factors that drive conduct risk
 Information imbalances between a bank and its customers
 Human behaviour and biases
•
Internal structures and culture
•
External / environmental factors
 Impact on consumers’ decision-making
•
Multi-faceted and omnipresent
 Conduct risk is not just at the point of sale
•
Advances in technology - new challenges in managing this risk
 Automated sales
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Relationship between culture
and conduct risk
“Laws control the lesser man,
right conduct controls the greater one”
(Mark Twain)
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What does good look like?
•
A culture which prefers the best interests of consumers in the longterm
•
Good conduct
•

provides the right products and services

to the right consumers

in the right way

for the right reasons
Deeply-rooted and sustained
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EY Financial Services - 2014 Global Consumer
Banking Survey
•
Confidence in global banking industry is on
the rise after years of sharp decline
•
Banks are providing traditional services
well
•
Falling short on aspects of customer
experience
•
Vulnerable to competition from new
providers
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Irish consumers surveyed
•
Different trends and findings compared with those from across
Western Europe and globally
•
Why is that?
62 %
67%
17%
50%
• expressed a decrease in confidence in the
banking industry from 2012
• lowest level of trust in the survey
• lowest customer advocacy score
• dissatisfied with how their problems were
resolved by their banks
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Priority - Culture in banking & financial services sector
•
Sector plays a pivotal role in
broader economy
•
A cultural shift is needed
•
Front-line staff must be able to
serve consumers’ needs in a better
and fairer way
•
Culture is not a ‘tick box’ exercise
•
Regulators cannot change culture
simply by introducing new rules
•
Firms have an obligation to selfregulate
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UK Banks could be facing lawsuits of up to £5 Billion
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Making that cultural shift
•
Roles for all
•
Boards must lead from the top
 modelling ethical, socially responsible behaviour
 promoting consumer risk awareness
 embedding the right culture in middle and front-line
 empowering all employees to apply their judgement in an environment where
consumers’ interests are first and foremost
•
Middle management must lead by example
 displaying the right behaviours, promoting accountability and transparency
•
Customer-facing and other front-line staff empowered to challenge
 without fear of any negative repercussions
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Relationship between product governance
and conduct risk
Product Oversight and Governance
•
Many examples of poor product
governance in public domain
•
Inappropriate sale of Payment Protection
Insurance (PPI)
•
Redress schemes arising from the sale of
debit & credit card protection insurance
•
Banks knew or ought to have known
element of insurance cover was
superfluous
•
Regulators respond with more rules!
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February 2015: Consumer Protection Outlook
Report
•
Firms must demonstrate that
products are fit for purpose
•
Ensure products are fully
understood by consumers and
suitable for their needs
•
Move away from legalistic terms &
conditions and unfair clauses
•
Conduct consumer testing on
products pre-launch
•
Simplify products, use plain English
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Plain English
Some examples of why it matters….
Pension Statements
Tracker Mortgages
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Post-crisis Regulatory Response
•
EBA published specific guidelines
 come into effect from January 2017
•
Guidelines a result of failures in conduct of financial institutions
resulting in consumer detriment
•
Provide a framework for robust and responsible product design
•
Extend to manufacturers and distributors
 cover the entire lifecycle of the product including post-sale monitoring
•
Ensure products meet the interests of the target market for which
they were originally designed
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“Developing products with the consumer’s interest,
objectives and characteristics in mind from the outset is a
cornerstone of ensuring good customer outcomes, and
should help to re-establish and maintain confidence in
retail banking.”
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What is the cost of getting it wrong?
The cost of getting it wrong
•
Fines and sanctions
•
Damage to reputation – individually & collectively
•
Restrictions on licences
•
Revocation of licences
•
Other costs – legal, redress & remediation
•
Loss of trust & confidence among consumers
•
Management time, fire-fighting
•
Individual accountability
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How much …..?
•
EBA Risk Assessment of European
banking sector
 A large number of EU Banks are impacted by
conduct concerns
 18% have paid out litigation of over €100 million
 10% of banks have made payments of over €1
billion
•
European Systemic Risk Board
 Fines, settlements and redress have cost EU
Banks €50 billion since 2008
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What does all this mean in practice for
Irish banks?
Managing Conduct and Consumer Risk
•
Like all risks, consumer risk must be effectively assessed and
managed
•
Consider historic and future sales
•
Internal processes must not encourage conflicts of interest
•
Clear link between reward, incentives and risk-taking
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Getting the basics right
•
Remuneration Arrangements
 ensure employees are acting in consumers’ best
interests
 provide products that meet consumers’ needs
 in addition to pre-existing rules for remuneration
arrangements for senior management in banks
•
Consumer Protection Risk Frameworks
 define consumer risk, which will be specific to each
firm
 articulate their consumer risk appetite statements
 take steps to ensure it becomes a living document
 develop appropriate metrics and methodologies to
monitor and manage consumer risk
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Central Bank’s challenge to regulated firms
•
Not enough to set tone from the top
 Own it
 Commit to it
 Deliver on it
•
Demonstrate how Consumer Protection Risk Frameworks and
employees’ behaviours are delivering fair outcomes for consumers
•
Enhanced on-site supervisory processes – to measure firms’ progress
in implementing frameworks
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•
How many people here today work in customer-facing or product
development roles?
•
How many of you know what your bank’s conduct risk appetite
statement or framework is and/or how it feeds in to your everyday
processes and procedures?
•
Do you think about good consumer outcomes when you develop or
sell retail products?
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Conclusion
What is it?
•
Unique to each firm
•
Action or inaction may be a
threat to treating
consumers fairly and with
dignity & respect…..
And who cares anyway?
•
We all do - or at the very
least we all should!
YOU ARE ALL AMBASSADORS FOR YOUR FIRM’S CULTURE
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“Remember, people will judge you by your actions,
not by your intentions.
You may have a heart of gold
– but so does a hard-boiled egg.”
(Anonymous)
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Thank you
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