“Everybody has a role in ensuring that a new conduct strategy is successfully implemented, and all parts of the business are inextricably linked”
As part of the knowledge exchange in the lead up to the Compliance and Conduct Risk in Financial Services Forum (June 21-22, London), Ethical Corporation sat down with Marc Granville, Compliance Manager, Jordan International Bank.
Ethical Corporation: Where do you feel most progress has been made, and where is there most still to be done?
Marc Granville: We are seeing progress. Particularly since the banking crisis, firms are better understanding requirements, are starting to see the benefits of raising standards, and are adopting better behaviours. Good progress has been made and demonstrated through improvements to governance, increased standards of advice and enhanced processes and procedures. It is increasingly evident that, as the FCA has said, “Culture and Conduct are two sides of the same coin”.
Culture has been spoken about by the regulator for a long time now. The FSA’s Treating Customers Fairly culture paper, from back in July 2007, highlighted a number of areas including leadership at all levels, setting the tone, driving behaviour of staff and the quality of decisions.
Whilst I remain concerned that some industry players continue to tarnish our industry’s reputation, many firms have made sound progress. I do accept that culture shifts take time, and this shift presents a number of difficulties. Larger institutions will have historic ways of operating which may need to be reconsidered or completely undone. Smaller companies owned by overseas parents will have their own embedded cultures which may require adjustment.
Whilst I believe firms have made good progress, there are a number of areas where there’s a lot to be done, particularly in two areas:
Practicalities around how Boards own and articulate strategy, and disseminate culture and expected behaviours; and
The actual demonstration of embedding and improving behaviours throughout firms and how this feeds back into, for example, performance reviews, fitness and properness assessments, and remuneration.
It can be difficult to demonstrate effective shifts in culture. Firms need to be able to come up with useful and relevant MI and other measures, and to be able to communicate such measures effectively.
EC: What do you think will impact conduct risk the most in the next 12 months, and also over the next three to five years?
Marc Granville: We have an ageing population and some people are getting very low returns from their investments. Where people need to take a certain level of risk in order to get meaningful returns, sometimes that is not something they are either prepared or able to commit to doing. So one area that will impact conduct risk is the need for an ageing population to receive sound financial advice. This needs to be delivered in a way which is both easily understandable and cost effective whilst at the same time providing the prospect of reasonable returns.
In a low-interest-rate environment people may not be able to get the level of returns which have been historically possible or in line with their hopes or expectations. I think that creates pressure and may lead to difficulties, particularly for those firms which are heavily invested in the activities of financial advice and investment management. Over the longer term, another area that will impact conduct risk is the possibility of another financial crisis.
We are approaching the vote on Europe and there remains much economic uncertainty around the world. An exodus of foreign investment would clearly affect the UK’s economy, particularly given the size and reliance on the service sector. The relative attractiveness of our tax environment, and more broadly whether firms want to do business here, are also relevant factors.
There is further European regulation on its way, which could impact how easy or difficult it is to give financial advice. This may also have an effect on the sustainability of business models for firms operating in this space and create issues around conduct. One other issue is the risk of “regulatory creep”. The cost of regulation has been an issue for a long time and the direction of future regulation will, over the coming years, create a number of challenges.
I am of the view that much of the regulation will continue to lead to positive outcomes, driving better behaviours. The Senior Managers Regime in particular will oblige firms to re-think and review behavioural frameworks, which can only be seen as a positive. UK Regulators in many ways are a leading light, with other jurisdictions building their regulatory models based on our approach.
Ironically the same standards can be applied differently depending on where you are operating. Such differences can also affect conduct risk. For example, if you are a firm with a branch in London and a branch somewhere else, do you adopt the same standards or do you have different standards? I think that’s a big issue around conduct risk.
You might have a whistleblowing policy that’s valid for a group company operating worldwide but on the other hand you might have completely different approaches depending on where you are operating, the activities being conducted and differences in culture.
EC: How do you establish what everyone’s role is when drawing up and implementing a conduct risk strategy?
Marc Granville: A suitable point to start is by considering the work done on the responsibilities map. The list of responsibilities, governance arrangements and agreed statements of responsibilities under the Senior Managers Regime are key and organisations are now required to produce, validate, submit and implement such requirements.
A key point is that Boards need to be clear about their strategy and live their values, and be seen to live those values. But that also means that educating Boards is essential – continual dialogue and training around our regulator’s expectations and engaging with Boards as a team unified by a common strategy. You have to get the right messages coming down from the top.
Firms need to be careful not to inadvertently have 2nd line of defence functions ending up doing more than what the regulators expect; you may end up with more paperwork and inefficiencies without actually changing the culture.
The importance of governance cannot be overstated. By establishing clear lines of communication particularly with ‘the layer beneath the Board’, appropriate terms of reference and understood limits, by ensuring the smooth running of committees, appropriately skilled to implement any agreed strategy, you have a better chance of disseminating good conduct across the different levels of management, and getting it to reach into all corners of the business.
Everybody has a role in ensuring that a new conduct strategy is successfully implemented, and all parts of the business are inextricably linked. The overriding principle of being ethical and putting the customer first, and of being honest and open, drives those behaviours whichever part of the business you’re in.
EC: How do you know if you’re successfully implementing a good strategy? How do you establish your KPIs, and your measuring and reporting methods?
Marc Granville: Part of knowing whether or not you have got a good strategy is simply through measurement; not just through the usual financial indicators but more generally, for example through staff turnover MI, Board effectiveness and senior management competency reviews, gap analysis, whistleblowing data, and wider training and competence (T&C) KPIs such as complaints, persistence, cancellations of business, etc.
The issue of skills at Board Level is an interesting topic. Significant regulatory and technical know-how mean that Boards require constant training to both remain up to date, and to be aware of and able to meet what is expected of them. A long term perspective is essential and the movement away from quick profit to a model of sustainability needs to be carefully planned for.
In addition, the engagement of senior management colleagues when it comes to understanding and following risk management or compliance processes is of upmost importance. Whilst you can walk the talk it is only through behavioural measures that you can see whether or not new cultures are actually being embedded.
The FSA’s Treating Customers Fairly culture report, from July 2007 said: “If we are satisfied that a firm has robust systems and controls and the senior management are reviewing and using reliable MI which demonstrates that they are treating their customers fairly, we will significantly reduce the level of testing we carry out on the firm’s culture regarding treating customers fairly”.
I think that by Boards having an engaged culture and by both challenging and supporting management, you are more likely to achieve longer-term success. The Senior Managers regime will drive better behaviours and it will force firms to take a good look at how they operate in practice and to consider what metrics are actually needed. This will mean that a bank’s business model and chances of success will now be benchmarked against a more robust regulatory challenge, and this, in itself, is likely to lead to improvements such as – where necessary – changes in process and personnel over time.
EC: How do you balance Risk and Compliance?
Marc Granville: It’s a fine balance, because as a compliance officer I am fully aware of the regulatory position. I also pay close attention to risk impact and probability so for me it’s always very much been about working in tandem with risk, and being proportionate, professional and pragmatic. The regulatory focus is heavily on banks managing risks appropriately with regulations embedding sound risk practices.
The fact that the UK is at the forefront of adopting and embedding cutting edge risk methodologies means that, naturally, Compliance and Risk will end up working hand in hand. The risk profile of each institution needs to be clear and their business should be conducted in line with the agreed profile. An activity which is high risk is not necessarily a bad risk but you need to have enhanced controls. The Compliance function needs to ensure that these controls are set and implemented in accordance with such risks.
The whole drive to better behaviours will lead to efficiency gains, and will lead to increased standards and quality. In turn this will help consumers, because they’ll get better and clearer communications and fairer products. There are a lot of positives that come out of just raising your game. Unearthing poor conduct can work in a positive way; it depends on how it’s presented and how you approach the problem.
If you consider the fines that large banks and other institutions have had through the years, there have been some really bad examples of poor behaviour, but improvements are usually put in place, practices revisited and revised, and the institutions in question continue to attract investment and prosper.
When it comes to communicating how business risk and culture shouldn’t clash, there is a big responsibility on senior managers and Boards to ensure that that message permeates through the whole firm, beyond frontline staff. The culture has to come down through the senior managers and out to businesses more widely.
It is also important to have effective supervision. You have to remember that ‘supervision’ is exactly that: it’s about supervising and helping and coaching people, creating the right culture, explaining to people how things work, what your values are. If people don’t understand those values, because they’re detached or they’re not managed properly or they don’t feel involved in the business, then you’re creating and storing up problems for the future. Compliance and Risk working together and with the right balance will in turn enhance the right culture.
EC: How do you address the issue of conflict of interest, and transparency, in cases of whistleblowing?
Marc Granville: As a business, not just in financial services but whatever industry you are in, you need to install a culture of openness and not a culture of fear. You need to have an effective HR function and promote whistleblowing in order for people to understand exactly what they can and cannot do. You also need to educate managers so they can identify when behaviour does represent poor conduct. You don’t want to create a situation where absolutely everything and anything is reported, but at the same time nor do you want to create a situation where individuals are not able to actually recognise where there is a problem.
It’s also important to consider how to make the reporting process as easy as possible, so it’s clear who people should go to, and how they can easily report and escalate matters.
Above all you need to be consistent in this approach. It’s also important to incentivise good values by encouraging open and good behaviour, and to install a culture where poor conduct is seen as an opportunity for improvement, and not used as a stick. A blame culture puts significant pressure on staff when they have done something wrong, even when this amounts to a simple mistake.
Having said that, there do need to be consequences for poor conduct: effectively getting away with poor conduct is part of the reason why conduct has become such a big issue in the first place.
It comes back to educating about responsibility. Boards have a key role here – they need to promote a supportive business culture where the values are understood and are at the heart of business, and are thought about when decisions are being considered and made. By the Board nurturing that culture and treating people fairly through the firm, and by the values being at the heart of behaviours, I think you’re more likely to move towards full transparency.
Marc Granville will be speaking at the upcoming Compliance and Conduct Risk in Financial Services Forum (21-22 June, London). Download your brochure for the event here to find out more about the other industry experts you could meet, learn from and network with.compliance risk strategy MI Investment Environment sustainability governance engagement transparency
June 2016, London
The 2nd annual forum brings together leadership from Compliance, Conduct risk and European Regulators to deliver a holistic view on how compliance and conduct risk are each changing financial services.