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Compliance & Risk

Behavioral science gains traction as more banks seek to mitigate employee risk

Anna Wood  Change Management & Organizational Development Expert

· 6 minute read

Anna Wood  Change Management & Organizational Development Expert

· 6 minute read

Can financial institutions skillfully apply behavioral science strategies to mitigate risk? Many already are

The application of behavioral science to mitigate risk in the financial industry is gaining traction, with the effort being largely led by three major European banks. Now, however, other financial institutions are following suit as they seek to identify behavioral “hot spots” within their organizations and understand the root causes of certain employee behavior.

While these firms share a common belief and intent, how they are implementing behavioral science — including the stage at which it is leveraged within organizations, the level of practitioner experience, team structure, organizational position, and approach, to name just a few factors — may vary, notwithstanding the strategy’s attendant implications and impact.

The added value for this type of risk mitigation stems from the ability to identify the root causes of behavior that may lead to misconduct that risks the integrity and reputation of a financial institution. There is also the potential avoidance of costly regulatory and legal action. In other words, behavioral science can offer a look and analyses into the drivers of employee behavior and organizational impact.

“In applying a behavioral lens to risk management, it is important to understand the root causes of behavior in the work place and to consider those drivers in mitigating risk and designing interventions,” said Wieke Scholten, Senior Behavioral Specialist at the Dutch consultancy &samhoud. “The behavioral drivers can be captured in four main categories: contextual, organizational, social, and individual.”

Behavioral risk teams’ presence grows 

The three major European banks that have been early innovators in applying behavioral risk within their organizations are ABN Amro, NatWest Group, and ING.

“We believe the behavior of our employees and leadership, and the choices that they make is the outcome from all the signals they get from our organization as a whole,” Wies Wagenaar, Head of Compliance, Conduct & Ethics at ABN Amro, explained recently.

The experience of these institutions has attracted attention and in turn prompted new entrants, including two U.K. banks — HSBC and Standard Chartered — along with the Royal Bank of Canada. All three institutions have recently formed behavioral risk teams and are gradually finding a foothold within their respective organizations.

At Standard Chartered, Kate Miller, leads Conduct & Behavioral Analysis, a team of five that has been together since 2019. Based in Singapore, her group operates within the second line compliance function.

To build credibility, showcase capability, and increase the team’s internal brand, Miller focused on a suite of applications in 2020 that was aligned to four outcome areas: workplace culture and decision making; risk awareness and management; customer centricity; and sustainability. Alongside, she created the team’s methodology and framework to support the various stages of behavioral risk identification and subsequent intervention.

Miller said the primary objective of applying behavioral science within the second line of defense was to “focus a behavioral lens on what employees are doing versus what we think they are doing, in relation to areas such as the application of policies and procedures and how different parts of the organization manage risk.” In addition, the team seeks “to understand the factors influencing decision-making and subsequently driving behavior, such as incentives, scorecards, and team dynamics.”

“It’s the responsibility of the organization, leadership, and middle management, who serve at the front lines, to create a climate where employees can deliver results that are expected and at the same time not cross unethical lines.”

At HSBC, David Grosse heads a team of three; and unlike other team leaders who are trained in behavioral science, Grosse’s career is in banking risk, to which he is now studying and applying behavioral science methodologies and techniques. He has just completed an MSc in Behavioral Science at the London School of Economics and sees many areas and insights that can help in identifying behavioral risk and opportunity in the bank.

“The investigation of behavior and the application of behavioral science is the one area of risk that least lends itself to a separated three lines of defense model,” said Grosse, whose unit works closely with the heads of various businesses across HSBC’s Global Banking and Markets division. “We need to have a joined-up philosophy that covers business, risk, compliance, HR and audit… almost more of a united way of thinking about behavior than being too rigid.”

Grosse said, however, that his team at HSBC shares the same objectives as the behavioral risk teams at other banks. “Ultimately, we share the same philosophy and are looking at the drivers of human behavior,” he added. “What we are looking at is a complex system… We are trying to look at the behavior of thousands of people and hundreds of teams. That is not a simple problem — that is a complex problem.”

Meanwhile, in North America, Dr. Rimma Teper, Senior Director of Behavioral Science within internal audit at the Royal Bank of Canada, considers contextual and environmental factors in applying behavioral science. In her view, misconduct comes from the climate that employees are working in. “There is no such thing as bad people,” said Teper, who reports to the bank’s chief audit executive. “Context shapes behavior. How employees manage pressure and uncertainty are conditions to evaluate.”

It is the “responsibility of the organization, leadership, and middle management, who serve at the front lines, to create a climate where employees can deliver results that are expected and at the same time not cross unethical lines,” Teper said, adding that ultimately, her goal is to “bridge insights gleaned from a behavioral theory lens with business strategy and answer the ‘so what’ question.”

Where are U.S. banks?

What’s noticeable about the aforementioned banks is the absence of any U.S. institution. While there is evidence to suggest that some large U.S. financial firms have begun to experiment with behavioral science, the lack of traction is curious particularly because, from a research perspective, much of the leading thought in behavioral science comes from American academics.

Is it an issue of the difficulty in measuring effectiveness and success? If the goal of behavioral science is to mitigate and prevent risky behavior, then how can an institution measure that which has not yet happened or materialized?

Or is the European approach seen as too intrusive? Perhaps U.S. banking executives are uncomfortable with having experts trained in organizational psychology sitting in on their meetings and evaluating whether they are creating a climate that might lead to risky behavior.

Either way, as behavioral science leaves its mark on mitigating risk, it exposes the gap and role of leadership on being more aware of the influence that culture has on individual and team behavior and vice versa. Perhaps the next step is taking a long-term approach and moving firm culture to support the employee behavior it hopes to elicit.

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