Tag Archives: Banking

Compensation & Misconduct in Banking

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On 10 May 2016 the Financial Stability Board (FSB) hosted a round table on compensation practices to share experiences and lessons on the use of compensation tools to address misconduct in banks.

Senior executives responsible for risk and remuneration functions at 22 large internationally active banks and officials from the FSB Compensation Monitoring Contact Group (CMCG) participated in the round table.

Key takeaways  

The round table considered the processes for governing and applying compensation and related risk management tools to help better identify, mitigate and redress misconduct risk.

Participants also explored challenges related to use of current tools, including differences in their application among jurisdictions and also discussed the relative importance of compensation tools compared to other approaches to handling misconduct.

Participants believe that compensation tools are just part of the toolkit used in reducing the risks of misconduct; some banks advocated more (principle-based) dialogue between firms and supervisors on the full set of tools used to manage talent and culture with a focus on:

  • promoting good behaviours including effective use of compensation tools
  • enhancing individual accountability at all levels of the organization
  • providing guidance on what “good behaviours” look like

Participants indicated that there has already been significant change with most firms recognising that compensation and conduct are directly linked.

Furthermore firms are increasingly looking to actively manage conduct via compensation tools:

  • ex ante (explicit performance targets and encouragement of positive behaviour) and
  • ex post (ensuring appropriate consequences for poor behaviour)

More generally, banks are focused on turning values into actions and ensuring that lines of business “own” conduct risk; at most banks, codes of conduct set the framework for expected behaviour and are supported with explicit expectations for roles and responsibilities.

Banks pointed to the importance of “tone from the top” in signalling where to place the balance between performance and customer and counterparty interests while recognising the importance of long-term relationships with all customers. They noted however, that to be effective and to actually change culture and values, a holistic approach to culture, conduct, and employee development and reward systems must be developed, all of which takes time.

A number of banks requested more guidance from regulators on “what good looks like” and welcomed initiatives such as round tables to share examples of better practice. Notwithstanding this, they also emphasised the importance of allowing time to embed existing regulations.

Without doubt, regulators are holding boards accountable for culture and in this context the role played by rewards in driving behaviours. This is a key issue for the Remuneration Committee and in particular it’s Chair.

The real challenge for directors and senior executives is to understand “what actually happens” on a day to day basis in their firms. Econometrics provide only partial answers. Increasingly boards will need to evidence observed behaviours and the steps taken to prevent, stop and/or remedy conduct failures; including how their observations link back to reward systems.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

SEC “Cybersecurity is one of the greatest risks facing the Financial Services Industry”


Mary Jo White, Chair of the U.S. Securities and Exchange Commission (SEC), delivered a Keynote Address Investment Company Institute 2016 General Meeting in Washington, DC on the 20th May

The Commission is the primary regulator of the mutual fund industry which is comprised of 8,131 mutual funds with approximately $15 trillion in assets held by 54 million U.S. households as of March 2016.

White advised that the current and future health of the markets and the financial security of investors depend on the success of both its regulatory efforts and how well the industry participants do their jobs as fiduciaries and responsible leaders of the marketplace.

She highlighted 3 significant areas of regulation for the asset management industry:

  • controls on conflicts of interest;
  • a robust registration, reporting and disclosure regime; and
  • controls on specific fund portfolio composition risks and operational risks

Looking to the future, White highlighted disclosure effectiveness and ETFs as key areas of focus for the SEC. She also highlighted a number of areas where the sector must take the lead.

White believes a key challenge for the industry is the risk in using technology and service providers. She stressed the importance of firms ensuring that a fund is adequately prepared to promptly and effectively respond to risks that may be triggered by service providers and its own use of technology, including implementing alternative and reliable means to satisfy the fund’s regulatory requirements.

Cybersecurity is a particularly critical element of this challenge – as I have said before, cybersecurity is one of the greatest risks facing the financial services industry.  Cyber risks can produce far-reaching impacts, and robust and responsible safeguards for funds and for their investors must be maintained”.

The Commission has been very active in drawing attention to the issue and examining and enforcing the rules it oversees in respect of cybersecurity. Its regulatory efforts are focused primarily on ensuring that our registered entities have policies and procedures to address the risks posed to systems and data by cyber-attacks.

While no one can prevent all disruptions from cybersecurity events, you should consider the full range of cybersecurity risks to your funds and consider appropriate tools and procedures to prevent breaches, detect attacks and limit harm”.

BRG recently undertook a Cybersecurity Preparedness Benchmark Study. The study examined six main areas:

  • Leadership
  • Information Governance
  • Risk Management
  • Essential Protection
  • Incident Response and
  • Security Culture

For financial services, BRG partnered with the Institute of Operational Risk.

The results of the Benchmark will be released shortly.

For further information, please contact:

USA:                      Faisal Amin         famin@thinkbrg.com

UK/EMEA            Tony Moroney  tmoroney@thinkbrg.com

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

FCA stresses mortgage affordability, competition and innovation

FinTech brgJonathan Davidson, Director of Supervision retail and authorisations at the Financial Conduct Authority (FCA), delivered a keynote speech at the Building Societies Association Annual Conference.

Davidson stated that the FCA has a keen interest in strategy:

  1. strategic factors which shape the landscape
  2. resulting strategies and the business models
  3. how business models create a sector that works well for consumers

He acknowledged some of the strategic questions the building society sector is dealing with, namely:

  • the digital challenge,
  • the growth of challenger banks
  • the economies of scale of the large banks

Davidson also shared some of his thoughts on how the FCA approaches interventions that have an impact on building societies and their respective strategies and business models:

  • The FCA expect firms to have their customers at the heart of how they do business; how they develop products and services and how they treat customers.
  • Promoting competition is not just about preventing market share dominance; it’s about ensuring that building societies and other firms have the opportunities to reach consumers and grow.
  • Innovation if not managed appropriately they can lead to serious risks that can prove existential to individual firms and taken to their extreme could potentially affect a whole market; affordability and responsible lending rules serve to prevent the return of the irresponsible lending practices pre-crisis and so protect the strategically important mortgage market.
  • The FCA is concerned as to what will happen to borrowers in the event of a rate rise; over a million borrowers have never seen an interest rate rise.
  • FCA recognises the importance of meeting the financial services needs of older consumers; it will publish a series of recommendations in 2017.
  • The FCA mortgage market study will also look at consumers’ ability to make effective choices and whether the tools available such as price comparison websites, best buy tables or interactions with advisers, do in fact effectively help customers source the products that best meet their needs.

The UK’s 44 building societies approved £57.8bn in new lending in 2015; some 395.3k new mortgages giving them a 26% market share. At the end of 2015, they held mortgages with a value of £265.2bn; 21% share.

Retail savings balances increased by £10.4bn and at the end of 2015 building societies held savings balances of £246.6bn; 18% share of the UK market.

The BSA believes that as customer owned organisations, that its member firms genuinely have their customers at the heart of their businesses. Intuitively this sounds right, however, it equally raises the bar for boards and senior executives to ensure their firms consistently achieve “good customer outcomes”.

Strong product governance is a prerequisite, not just at the point of sale but throughout the life of the relationship with customers/members. With huge quantities of mortgages being written on short-term fixed rates, the moment of truth will be the re-pricing of mortgages on roll-over.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

Digitalisation – old game, new rules or an entirely new game?

Bank Reg

Erkki Liikanen, the Governor of the Bank of Finland, delivered a fascinating speech at the at the Payments Forum in Helsinki

Some of his key points:

Digitalisation and Financial Services

  • Digitalisation is a wide-ranging use of information and communications technology in the renewal of business models; it may also help create entirely new products and services.
  • Digitalisation also facilitates completely new kinds of operating practices in the financial sector. Traditional players are being challenged by Apple, Google, Amazon, Facebook and Alibaba, i.e. operators whose success is based on the intelligent harnessing of digital platforms and networks e.g. payments and trade financing. In addition, challenge is coming from specialised financial services providers i.e. FinTech.
  • Some traditional operators have forged new partnerships with each other and/or have started cooperating with new players; many banks have established start-up accelerators and incubators for FinTech businesses and/or have made significant private equity investments in start-up companies.

Digitalisation and Financial Platforms

  • The success of many new companies has been based on platforms i.e. an operating model that facilitates value-creating interaction between external producers and consumers e.g. Uber, Facebook, Alibaba and Airbnb.
  • A platform has two functions: it provides a framework for interaction and it sets the ground rules for interaction. Its aim is to create a favourable environment for parties to innovate and generate added value from which everyone benefits.
  • Underlying the enormous growing power of platforms are network effects i.e. each new user also increases the value of the platform for old users.
  • New digital technologies have removed constraints on growth, enabling rapid scaling of business operations; particularly where information is a key production factor.
  • Notable financial market platform phenomena include, for example, peer-to-peer lending and crowdfunding platforms.
  • Platforms and networks are also at the heart of blockchain technology.

Digitalisation and the Payments Market

  • An essential driver of digitalisation is young people who are accustomed to doing everything via the internet, often on a mobile device; new players entering the market have created operating models that place the user at the centre of payment services.
  • Ease and convenience are the features required of payments in the future; from a monetary authority’s perspective, security and reliability should be added to the list as without trust, even the easiest to use payment method will not survive.
  • Real-time payment transmission will be an essential element of the digitalisation of payments in the future, as will 24/7 availability of services.

Digitalisation and Regulation

  • Reliable, secure and efficient payment services that openly and extensively utilises the opportunities of digitalisation may help stimulate productivity growth in an economy.
  • The task of central banks is to ensure the credibility and efficiency of the financial system; and to set common ground rules and regulation to ensure its stability.
  • Technological advances and the entry into the market of new actors and practices are a challenge to regulation; striking the right balance between reliability and safety (of payment services) and the introduction of new innovations is key.

Digitalisation and FinTech are now ubiquitous in Financial Services. And while there are many consumer benefits, there are also risks which creates a real challenge for regulators.

Looking out the curve, regulation will most likely driven by “what a firm does” as opposed to “what the firm is”. Numerous regulators in Europe, the USA and elsewhere have already alluded to this.

The OCC has gone a step further, opining that ultimately consumers will want the protection of buying products and services from firms that are regulated.

It only takes a couple of incidents of market failure and/or consumer detriment for this to become a reality.

In terms of the latter, new players must ensure that “good customer outcomes” feature just as strongly as “customer experience / satisfaction” in their product design and on-going product governance objectives.

For the avoidance of doubt, they are not the same thing!

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

Banks not working hard enough for customers


The Competition and Markets Authority (CMA) has set out proposals to reform retail banking, improve competition and get a better deal for customers.

In its provisional decision on remedies, the CMA outlines a wide-ranging package of proposals to tackle the issues hindering competition in personal current accounts (PCA) and in banking services for small and medium-sized enterprises (SMEs); its proposals include new protections for overdraft users.

Alasdair Smith, Chair of the Retail Banking Investigation, said:

For too long, banks have been able to sit back and not work hard enough for their personal and small business customers. We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks. They will also protect those who fall into overdraft from being stung with unexpected fees”.

The CMA believes it is hard for bank customers to work out if they are getting good value due to the complicated and opaque nature of charges, exacerbated by the perceived riskiness of changing banks:

  • 60% of personal customers have stayed with the same bank for over 10 years
  • 90% of SMEs get their business loans from the bank where they have their current account

The CMA considered whether the largest banks should be broken up but it came to the view that this would not address the fundamental competition problems. It also considered whether to get rid of ‘free if in credit’ (FIIC) current accounts but concluded that even though FIIC accounts are not really ‘free’, they do work well for some customers.

The CMA remains concerned however that competitive pressures are weak and that to transform the market, customers should be provided with the right information so that they can determine which bank offers them the best value. This includes the development of new online comparison tools and an improved current account switch service (CASS).

Its proposals include new measures targeted at overdrafts, with a particular focus on users of unarranged overdrafts; in 2014 this contributed £1.2 billion to bank revenues. Going forward, banks may need to set a monthly maximum charge and to alert customers they are going into unarranged overdraft in order to give them the opportunity to avoid the charges.

The CMA also wants to harness big technology to empower customers to compare and switch accounts e.g. the ability for bank customers to click on an app and get comparisons tailored to their individual circumstances and information on that bank offering the best deal. It estimates that personal and SME bank customers could benefit to the tune of £1bn over 5 years.

No doubt the Financial Conduct Authority (FCA) will be watching closely as many of the issues being tackled by the CMA also fall under the heading of Behavioural Economics i.e. some errors made by consumers are persistent and predictable.

The FCA believes that consumers do not always make choices in a rational and calculated way. In fact, most human decision-making uses thought processes that are intuitive and automatic rather than deliberative and controlled.

Academic literature identifies ‘behavioural biases’ as specific ways in which normal human-thought systematically departs from being fully rational.

For its part, the FCA is particularly interested in how:

  • consumers make predictable mistakes when choosing and using financial products
  • firms respond to these mistakes
  • behavioural biases can lead firms to compete in ways that are not in the interests of consumers

Firms play a crucial role in shaping consumer choices. Product design, marketing and/or sales processes can exacerbate the effects of biases and cause problems. Biases can also create de facto market power.

Making financial services work well for consumers is an overall strategic objective for the FCA. And as firms will be aware, the CMA and the FCA have a MOU in respect of their concurrent powers to enforce consumer protection legislation in financial services.

Boards and senior executives need to ensure their actions do not result in customer detriment and/or a distortion of competition. Conduct Risk has not gone away. If anything it has a sharper focus under the Senior Managers (Certification) Regime.

The CMA invites submissions in writing by 7 June and will publish its final report on the retail banking market investigation by 12 August 2016.

See BRG white paper: The Behavioural Regulators’ Agenda

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

Boards ultimately have responsibility for Sales Incentives and Customer Outcomes


FinCoNet, the International Financial Consumer Protection Organisation, has published its Report on Sales Incentives and Responsible Lending, outlining key findings on the topic.

It is no real surprise that sales incentives are a key driver of both culture and behaviour towards consumers. Key findings of the report include: Continue reading Boards ultimately have responsibility for Sales Incentives and Customer Outcomes

“Conduct Risk Appetite”: A misnomer, exposing firms to significant sanctions!

uncertainty-aheadBRG held a webinar on Seven Practical Steps towards Mastering Conduct Risk on 8 December in conjunction with the British Bankers Association.

A key message from the webinar was that the often-bandied phrase “conduct risk appetite” is a misnomer (i.e., a firm can’t set a tolerance for customer detriment or market failure; by inference, both must be zero).

That’s not to say things won’t go wrong; they will, but that’s different. When things go wrong, the board must move swiftly to rectify the situation. This is where values, culture and tone at the top matter most.

Other key messages for managing conduct risk included:

  1. Press on with practical compliance: boards and senior executives need a hands-on approach including clear responsibilities and apportionment; they must also ensure their people are competent.
  2. Understand your customer’s view: find out (independently) what your customers accept and expect, both now and in the future—it’s ok to use “big data”, but you must observe real customers too!
  3. Appreciate the regulator’s view: read what the regulators are reading—for example, behavioural risk (especially on biases and rule-gaming), Financial Service Ombudsman and Data Commissioner findings, consumer attitudes research—and importantly, understand the growing impact of regulatory convergence (e.g., Consumer Finance Protection Bureau and Australian Securities and Investment Commission conduct-related fines and sanctions).
  4. Start product design to the benefit of your customers: involve risk and compliance managers early on; consider the entire lifecycle of a product/relationship, not just point-of-sale.
  5. Hire, train, and keep high-quality people: intuition is good—listen to your employees.
  6. Set incentives for doing right by customers: profit should take care of itself!
  7. Take a forward-looking view: Assess new risk and consider new measurement tools; improve horizon scanning, including causal analyses of conduct prosecutions; use a behavioural lens to read through to different aspects of your business.

If you are interested in a copy of the slides, email tmoroney@thinkbrg.com.

Also see our white paper The Behavioural Regulators’ Agenda.