January 26, 2015
Thomson Reuters Survey Reveals Conduct Risk Regulatory Focus Expected to Increase Along with Personal Liability Concerns for Senior Managers
LONDON/NEW YORK - Thomson Reuters, the world’s leading source of intelligent information for businesses and professionals, today announced the findings of a new study which revealed that managing and mitigating conduct risk continues to be one of the highest regulatory priorities, yet financial services firms remain unclear about what conduct risk is and how to address it. This lack of clarity, coupled with recent regulatory actions, appear to be driving concern about personal liability consequences.
The Thomson Reuters Conduct Risk Report 2014/15 follows up on last year’s study by looking at what practical actions firms have taken and what changes and progress have been made over the past 12 months. The results show an increased focus by regulators on the behavior of firms and how they conduct their business. Firms have boosted the time and resources devoted to the management of conduct risk, yet there is still a significant gap between awareness and implementation of effective policies across a firm.
Thomson Reuters Accelus surveyed more than 200 compliance and risk practitioners from financial services firms across the Americas, Europe, Africa, Asia, Australia, and the Middle East to gain insight into how the industry is defining and responding to conduct risk. Respondents represented firms from across the financial services sector including banks, insurers, and fund managers.
Key findings from the report include:
- 67% of respondents said the regulatory focus on conduct risk would increase the personal liability of senior managers.
- 81% of respondents still do not have a working definition of “conduct risk”; only a slight decrease from 2013 when 84% of respondents reported not having firm specific definitions.
- Firms are reacting to enhanced focus from regulators by creating specific teams or employing conduct risk specialists at all levels of an organization.
- Global systemically important financial institutions (G-SIFI’s) have appeared to have done more, with only 6 percent reporting no conduct risk-related changes in the past 12 months.
“We’re seeing regulatory bodies all over the world strengthening their guidelines and enforcement when it comes to conduct risk,” said Andrew Neblett, managing director, Enterprise Risk Management at Thomson Reuters. “Interest around conduct risk has grown significantly over the last year, and will continue to be a focus point for regulators throughout 2015. Financial firms are going to have to continue to take tangible steps towards managing and enforcing compliance processes or else they will be subject to steep penalties and fines.”
“Tone From the Top” Driving Conduct Risk Approach
The results show that while regulators have been active, so have financial firms. Roughly half of respondents (48%) reported a “tone from the top” communication implemented in 2014. Nearly 40% of firms surveyed said there has been implementation of new policies and procedures and nearly 32% have undergone training to address conduct risk. Firms also reported working to increase new policies and training with nearly a quarter (24%) of respondents saying they created specific risk conduct teams while 18% have introduced board appointments.
“Tone from the Top”, the need for a firm’s leadership to be seen setting and driving a suitable compliant approach to all aspects of the business, was overwhelmingly the biggest change in the last 12 months, according to the survey. Respondents rated it the number one change in Asia (61%), Europe (42%), the Middle East (50%), the UK (57%) and North America (34%). Over a third of respondents from Australia (36%) said that no changes have been made this year, while over a quarter of respondents from Africa (27%) had the same response.
Even with a potentially worrisome 18% of all respondents indicating that no major changes have been made in the last 12 months, the results, by-in-large, show willingness by firms to try and embrace the concept of conduct risk. The implementation of conduct risk policies takes time, however. The survey noted “the true test of whether changes have been successful in firms is not the introduction of policies or training programs but a noticeable change in behaviour within firms.” The results indicate there is a concern that firms are doing the right things but the changes and actions may not be manifesting themselves.
No Clear Definition of Conduct Risk
The survey found that a large majority of respondents still do not have a working definition of conduct risk (81%). The survey shows that one reason for the lack of working definitions by respondents is the deliberate decision taken by regulators not to create an overarching definition of risk, rather leaving it to firms to create a definition specific to their own organization.
The regional results showed that 100% of respondents from the Middle East did not have a working definition of conduct risk, nor did 91% from Australia , 90% from Africa, 84% from North America, 83% in Asia, 81% from Europe, and 73% in the UK. Conversely, only 74% of G-SIFI firms said they did not have a working definition of conduct risk.
Approach to Risk Management
The survey found a developing picture when it came to the maturity of a firm’s approach to conduct risk. Many firms rated their approaches as either implemented but requiring further work (37%) or in development (31%); only 14% considered their approaches to be robust and embedded. For G-SIFI firms, 21% of respondents claimed to have a robust and embedded network, with 46% rating their approach as implemented but requiring additional work, 25% as in development, and only 7% reporting they had no formal framework.
In 2013, 62% of respondents said they implemented plans but further work was still needed; 22% said that plans were in development or no formal program existed; while only 16% of firms reported having a robust and embedded framework in place. The results show that firms appear to have significantly progressed their approaches to conduct risk but that progress is not yet being evidenced in an embedded framework.
These results show the continuing challenges that firms face. Conduct risk covers such a broad variety of different areas that complete adoption of an effective conduct risk approach is going to take time. Regulators have made their expectations clear when it comes to conduct risk, and it is now up to firms and senior individuals who lead them to respond, develop, and implement a consistently strong approach that can be seen across an organization.
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