Top 10 business trends to watch in 2017: Risk management culture (8/10)

As high-profile incidents of unethical behaviour rattle the financial services industry, risk management culture, ethics and trust are in the limelight. In 2017, financial institutions will be asking: can we rebuild trust in the industry?

Financial institutions becoming client-centric

Among the many risks that financial institutions face, one is often overlooked: the risk related to organisational culture. Unlike recent years, when stories about collusion in high-stakes trading businesses dominated the discussion, we’ve now seen bad behaviour in consumer-facing areas like call centres and branches focused on deposits and lending. The industry as a whole has, however, progressed since our 2014 Global Banking Risk Culture survey.

We see more focus on the best interests of customers, more boards holding management accountable for changes in employee behaviour, and new technology to track and measure progress. While firms are doing better overall, they still struggle to drive consistency across geographies and lines of business. Many institutions haven’t yet managed to get the tone in the middle to align with the tone at the top.

Reputational damage far more costly than punitive fines

As we move forward, regulators increasingly focus on prevention and punishment across financial services. The change in the geopolitical landscape in 2017 won’t likely abate regulators’ and legislators’ concerns around risk management culture. Customers and shareholders want to interact with institutions they trust, and reputational damage over the long term can be far more costly than punitive fines. Where harmful unethical behaviour is blatant, we’re likely to see high-profile management changes to signal that the board takes ethics seriously.

Stakes are higher in a world with artificial intelligence. As the industry adopts artificial intelligence, programmers will need to code both prescriptive rules and principles-based algorithms. The financial institution will be on the hook if the automated advice doesn’t uphold a fiduciary duty.

Align the tone at the top and the tone at the middle

As regulators continue to examine sales practices, for example, firms should identify the potential unintended consequences of existing compensation and incentive plans. What gets measured gets done. Companies should use risk management culture surveys to measure changes in employee behaviour. Using these tools across the firm allows leaders to measure, analyse and adapt.

The tone at the top shapes an organisation and drives behaviours. However, many firms focus too much on the tone at the top and not enough on the tone in the middle. Real issues arise when managers don’t embed the firm’s culture in their daily activities. The firm’s values and ethics need to be modelled in all interactions. Examine risk management culture throughout the talent lifecycle. The risk culture should be embedded from onboarding to promotion decisions to employees leaving the firm.

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