Managing Conduct Risk
Addressing drivers, restoring trust
Identifying fundamental drivers of misconduct in the financial services industry to help firms drive sustainable solutions to improve conduct and restore trust.
SINGAPORE, 29 March, 2017 — Financial services companies across the world should embrace RegTech to address the drivers of poor conduct and produce better customer outcomes according to Deloitte's 2017 Managing Conduct Risk report.
Given that regulatory compliance costs are reaching unsustainable levels and the importance of restoring customer trust in industry, new approaches must be investigated said Kevin Nixon, Global & Asia-Pacific Leader, Centre for Regulatory Strategy, Deloitte.
“Our report sets out possible ways new innovative technologies can be enlisted to optimise responses for managing poor conduct. Innovation can help to improve the effectiveness and efficiency of conduct management programs, which in turn will create better customer and regulatory outcomes,” Nixon said.
The Deloitte report identifies eight fundamental drivers of misconduct and ways to address them.
"If firms want to restore customer trust, they need to move beyond piecemeal solutions and build a truly sustainable and trusted brand. We have new and emerging technologies available that can identify root causes and deliver solutions that optimise long term results," said Nixon.
8 key drivers of misconduct in financial services
Understanding and addressing the drivers of poor conduct is an essential step in ensuring good standards of behaviour. Being able to identify key conduct risks, design pre-emptive enterprise-wide conduct programs and meet regulatory and marketplace expectations are all key. The eight key drivers of poor conduct are:
- Customer needs and suitability not guiding product lifecycle practices
- Failing to have a ‘balanced scorecard’ for human resource decisions
- Individuals and leadership not responsible or held to account for misconduct
- Failing to identify and manage conflicts of interest
- Complex, disconnected or ‘growth at all cost’ businesses models
- Manual and complicated processes and procedures
- Weak systems for monitoring and surveillance
- Disparate subcultures or a problematic prevailing culture
These eight drivers often overlap and work together, to create an environment that incentivises, reinforces and spreads problematic behavior.
A new approach through innovation
Although trust in financial services is improving, challenges still remain. Compliance costs for firms can be reach more than US$1 billion each year, and governance, risk management and compliance work now represents an estimated 10-15% of the total financial services workforce. Overall, these significant investments in regulatory change programs and compliance pose a challenge to profitability. Despite investments in improving culture and ensuring fewer misconduct incidents, costs continue to spiral.
"The significant cost and effort required for regulatory compliance is an area where technology such as big data, artificial intelligence, biometrics and automation can make a significant difference. With a greater focus on adopting some of these innovative technologies, we believe RegTech can provide new, improved and more cost effective ways to not only catch misconduct in a timely fashion, but most importantly proactively address the drivers of poor conduct," Nixon said.
Managing poor conduct is an essential strategy, key to gaining and retaining customer trust, and meeting the expectations of regulators and the broader market. Designing the right conduct program, supported by the right technology solutions, starts by bringing together business, technology and regulation experts.
“In Southeast Asia, technological innovation is providing entirely new ways of doing established activities. Regulators in Indonesia, Singapore and Thailand are sponsoring various initiatives such as setting up FinTech ‘regulatory sandboxes’ to nurture innovation within the financial services industry. In addition, local banks are investing deeply, setting up new teams to drive innovation and partnering with technology players to develop solutions. To succeed, strong collaboration between these players in the ecosystem is key,” shared Thio Tse Gan, Southeast Asia Lead Partner, Centre for Regulatory Strategy, Deloitte.
However, Tse Gan warns that turning ideas into reality is not a straightforward task. “While innovative technologies could provide new and novel ways to drive good conduct, it may on the contrary also enhance privacy and cyber security risks. There are some issues to work through, but certainly not to lose heart over. Financial institutions that are willing to make the necessary investments to tap into the collective pool of knowledge provided by business, regulation and technology experts will stand to gain the most as they will be able to best draw out the relevant issues and enable a bespoke and sustainable solution to be mapped out,” he added.
For more analysis and details on the report, please visit the Deloitte Asia Pacific Centre for Regulatory Strategy website.