Conduct risk is a priority for banks. Daniel Melo, Senior Director for Fair Isaac Advisors, FICO’s consulting practice answers our questions about conduct risk and discuss how models and systems designed to address conduct risk can help identify and measure other operational risks while improving business efficiency and increasing the return on your investment.
Please give a brief description of conduct risk and its meaning to the layman.
Conduct risk usually refers to the risk a bank’s misconduct poses to a bank’s customers, but the risk is also there for shareholders and the bank itself. When a bank has inappropriate policies, or policies that are not followed by its employees, this can result in large losses, fines and inappropriate charges. You can read about conduct risk nearly every day in the UK, where many of the top banks have been tarnished for PPI misselling, LIBOR fixing and other bad practices. This has led the Financial Conduct Authority to tackle conduct risk head on.
With so many potential implications for customer satisfaction, organisational reputation and regulatory compliance, every financial institution, its organizations and employees, need to put conduct risk in the center of its radar. In some cases, it may mean the introduction of new policies or processes that could require significant cultural change within the organisation.
Given the problems banks are facing in other markets, you’d think conduct risk would be a universal focus. But it isn’t. Outside the UK, the term is rare, and fewer banks are focused on creating a systematic way to prevent the kind of fraud, waste and abuse that leads to catastrophic fines, losses, lawsuits and reputational damage.
How can using a systemised approach in addressing conduct risk benefit both the customer’s experience as well as the efficiency of the business employing the system?
Banks have started to tackle conduct risk mitigation by assessing priority areas and reinforcing guidelines for conduct. But most have not yet determined how to operationalize conduct risk mitigation into everyday decisions and systems. It’s one thing to tell people to behave and follow procedures, but how do you make sure they’re doing that? How quickly can you identify a problem?
To provide excellent service and a fantastic customer experience, all financial institutions must manage their conduct to reduce or mitigate the risk of errors and mistakes. The advantage of a system for managing conduct risk is that it enables you to monitor activity at the right level of granularity, automatically detect when a certain behavior or action falls outside established parameters, and immediately create a case to correct the behavior. Banks use this kind of automation in all their customer decisions — it has equal value for monitoring and guiding internal actions.
Systematizing conduct risk management also enables you to identify areas that need improvements. Are there gaps exposing the institution to claims of wrongdoing? Could one mistake lead to more and make the problem bigger? Is it worthwhile taking action to change the process (balance between risk and reward)? Can you identify any priorities that would justify the investment?
Please explain how, by adopting an analytics-based system, banks can restore trust in both their consumers and the regulatory bodies they are aligned to.
The adoption of analytics restores trust by enabling the prediction of breaches and the prescription of actions to reduce and/or eliminate breaches. The combination of predictive and prescriptive analytics with continuous learning loops enables a systematic approach to Decision Management capable of significantly increasing the adaptive agility of an enterprise, as well as the quality of its operations.
Building conduct risk measures into each stage of the customer lifecycle as needed—making it part of day-to-day operations—can help ensure that the right steps are taken as a matter of course, lessening the burden on employees and ensuring every customer interaction is watertight. An analytics-based system works by encoding a bank’s rules and parameters right into the bank’s operations. It’s a way of ensuring that the correct actions are taken, and that any actions that appear to be outside the bank’s standards are flagged – much as the bank would flag a credit card transaction that looks suspicious.
What we tend to hear when banks encounter conduct risk issues is “We didn’t know this was happening.” When you have the right system in place, that won’t be an issue.
In what ways does data-driven analytics provide a clearer insight to tell a bank where their next conduct risk exposure may come from?
Many banks have traditionally taken an expert-led approach to compliance and risk management, relying on individuals to identify trends and predict customer behaviour. However, these analyses are often subjectively biased and do not always provide a clear measure of risk. In addition, manual assessments can quickly become overwhelmed when faced with large account and customer volumes.
While expert opinion is essential when designing the policies and processes that address both business opportunities and conduct risk responsibilities, it is data-driven analytics that can provide the clearer, deeper insight that will tell you where your next conduct risk exposure is coming from.
With this understanding, you can make more accurate decisions about what policies and processes you need to implement and more effectively measure their impact. Analytics-based Link Analysis is also critical in spotting chains of error or malpractice. While an individual instance of customer detriment is of course undesirable, when repeated it becomes part of a wider pattern or habit among your employees that could create a multifaceted and significant conduct risk exposure. Being unable to spot these connections could leave your organisation vulnerable.
For example, say staff at a particular branch are trying to boost their monthly sales figures by selling high-value long-term savings products to customers in their 80s. While the sales may make the branch staff happy and add to the bank’s revenue, the products sold are not appropriate to the target group or in the customers’ best interest. They could result in a significant compensation bill, not to mention reputational damage for the bank, should consumers and regulators become aware of the practice.
Using tailored analytic models across all sales activity and customer interactions will enable you to predict where your conduct risk efforts should be focused. We help our customers harness decision models that utilise a vast range of conduct risk inputs and other variables to identify decision strategies that balance profit, regulation and customer satisfaction.
FICO provide many solutions to address the problem, are there any ways in which a bank can use an analytics-driven framework to manage their conduct risk which will turn it into a competitive business advantage?
We believe there is a significant first-mover advantage, and those banks that take proactive action now have a lot to gain. Not only will they avoid penalties from the regulator and compensation payouts to customers, but they will also create proof that they are living up to their customer charter.
More transparent customer service and fairer treatment are what many consumers are demanding—and the ones that get it are likely to respond with increased loyalty. Combating conduct risk is an undeniable challenge, but the tools to meet it are at hand. A fully operationalised, analytics-driven framework will help harness and manage your conduct risk exposure and turn it into one of your greatest competitive advantages.
What new innovations is FICO working on over the course of 2014?
FICO’s innovation imperative is to enable Analytics-driven solutions by aggregating all of the necessary capabilities, and then, connecting them. FICO subscribes to the notion that the mitigation of conduct risk requires a systematic approach.
Customers implementing a conduct risk solution must consider
1) The management and integration of the rapidly growing sources of structured and unstructured data
2) The integration of typically disjointed enterprise processes
3) The deployment and proactive management of models
4) The deployment of persistent feedback loops
5) The deployment of actionable performance dashboards, and last but most importantly
6) The deployment of a cohesive and agile decisioning capabilities.
In 2014, FICO is introducing a number of new capabilities organized in a complete and fully integrated Stack designed to solve for all of these challenges. The FICO Decision Management Platform is at the center of the Stack. It delivers a real time, Analytics-driven decisioning engine complemented by modeling, rules management, and optimization capabilities. Complementing the FICO Decision Management Platform, the company will also introduce the FICO Analytic Cloud, a first of its kind. Not only will it deliver the power of FICO’s Decision Management Stack, it will also serve as the collaboration hub for data scientists, analysts, developers, and integrators to solve for fundamental business challenges, such as conduct risk.
Q&A with Clare George-Hilley, co-founder, Centropy PR
Clare George-Hilley is the co-founder of Centropy PR
Global Banking and Finance Magazine recently caught up with Clare George-Hilley, co-founder of fintech and financial services specialist PR agency Centropy, as the company toasts to three years of trading. We asked Clare about what life is like running an agency in the city, the trends she is seeing in the financial services space and what the future holds following the Covid-19 outbreak.
Why did you decide to set up Centropy PR?
I was looking for an opportunity to launch my own agency, both my husband and I had been in the public affairs and public relations industry for over a decade and we thought the time was right to go out on our own.
We could see that the financial services industry was surging, with challenger brands and new technology transforming traditional banks and setting new standards of customer service. There was a huge market opportunity to create and launch a PR agency that could provider first class comms support, alongside a deep understanding of complex regulations such as AML, KYC, and the GDPR. Likewise, many traditional technology firms are diversifying their offerings, to tap into the growing market opportunity posed by the fintech boom.
So, we worked on a business plan, designed a strategy for winning clients and officially launched in September 2017. Within a few months we had a growing portfolio of clients and a thriving business, since that point, we have never looked back!
How is Centropy doing now and what are you plans for growth?
The last three years have flown by and our client portfolio has grown and diversified quickly. We now manage PR campaigns for clients on everything from cryptocurrency, wealth management to payments and trading software.
We’ve also hosted parliamentary debates with key industry figures, including Members of Parliament (MPs) on topics such as the future of the financial services industry and the impact of challenger banks on traditional providers. The team is expanding quickly and we’re investing heavily in the latest training and support to ensure our team members are equipped to reach their full potential.
How do you see the next 12 months?
The Covid-19 outbreak has crippled the economy, forcing millions of people to work from home due to the very serious health risks. The knock-on effect of this crisis will lead to companies cutting costs where possible to save jobs, so tech will play a vital role in ensuring many businesses stay afloat.
We are already working with contactless payments specialists and other fintech companies that offer solutions to help companies survive and thrive despite the inevitable challenges ahead.
We aim to continue building our portfolio of expertise, testing ourselves with new challenges and delivering the best possible service to clients
This is a Sponsored Feature.
Lessons from past recessions and advice for business owners during the coronavirus pandemic
By Neil Davis, managing director and co-founder of Sterling Networks
What is Sterling Networks?
“Sterling Networks is a professional organisation founded in 2014 which facilitates networking events for businesses across the Midlands, Oxfordshire, Wiltshire and the South West. Over 300 members attend our fortnightly breakfast and lunchtime meetings.”
What is your background prior to establishing Sterling Networks?
“During the 1990s, I worked in the corporate team for Halifax. My wife, Tracey, and I went onto own a manufacturing business, which was also called Sterling, and produced a range of gifts, merchandise and promotional items.
“We soon realised tradeshows were a great way to meet distributors and clients. From there, the business grew exponentially, and we managed to build a network of around 500 distributors. Eventually, we became ground down by the manufacturing business – in part because the local manufacturing sector was being devastated by competition from China – and took the decision to sell the business and relocate to Spain.
“After spending several years living abroad, we moved back to the UK to set up Sterling Integrity (EXPO’S) & Sterling Networks (Networking) We were inspired by a desire to help businesses make meaningful connections with one another, and we haven’t looked back since.”
The UK has recently entered a recession, brought about by the coronavirus pandemic. What have you learned from past recessions and how are these experiences helping you to navigate the current crisis?
“I’ve lived through a number of recessions and have seen the pain that insolvency causes companies on a large scale. It’s taught me that there are those who win and sadly those who lose, and that businesses must adapt to a rise in demand for certain products or services at a time of financial crisis.
“Given the nature of what Sterling Networks offers [an opportunity for business owners to connect and grow together] I decided we could build upon the brand due to the demand for new business during the pandemic. We therefore moved our networking events from face-to-face to virtual via tools like Zoom and have gained a steady stream of new members in recent months, reaching an overall total of well over 300.
“On top of that, we’ve taken new staff on during the crisis and have launched a number of new regional groups across the country. I was determined that Sterling should come out of the pandemic with a head start, so my attitude to the recession has been much more positive than those who are forecasting nothing but doom and gloom.
“We can’t pretend high street retail wasn’t suffering long before the pandemic came along, and thousands of new businesses are sure to start up to meet the demand for the products and services that people require at a time such as this. In order to develop and grow businesses need to focus on where changes need to be made to meet this demand.”
Sterling Networks has been providing emotional support to its members throughout the pandemic. What advice have you been giving to members that could be useful to other business owners?
“I try not to be too opinionated and respect other people’s views when giving advice to members, as there are always two sides to every circumstance. I’ve been careful not to say to people that they should be doing one thing or another, as I don’t know their business and its needs quite like they do. The only thing that I have been telling members is the importance of setting up one-to-ones with one another. By doing so, they can listen to the needs and concerns of other, like-minded business owners and work out ways that they might be able to help one another.
“The pandemic has meant we all have a bit more time on our hands, so the advice I would give to people is to use this extra time wisely. Not having to travel physically from one meeting to another means there is a greater opportunity to connect with more people. It’s important to remember that individuals outside of your business can be just as valuable as those within it.”
What makes you hopeful for the future and are there any words of encouragement you can give to budding entrepreneurs?
“The key events that have happened to this country during my lifetime – whether wars, recessions, or the pandemic – have enabled me to take stock of things. While these experiences are certainly challenging, we all become stronger for living through them, and it gives me great confidence that the world will ultimately improve as a result of the pandemic.
“The whole world is effectively rebooting right now, as is the business community. I like to think entrepreneurs will recognise this opportunity to take better care of their peers, and this translates to greater collaboration between organisations. Speak to as many people as you can, ask all the questions that you need to and do your homework. This might well be a difficult time for us all but planning for the future must start now if it is to become as prosperous as I know it can be.”
Exclusive Interview with Ugo Loser, CEO of ARCA Fondi SGR
Arca Fondi SGR is a mid-sized Italian active asset management company. Founded in 1983 by a consortium made up of 12 regional banks, the company has grown in time, expanding its network of distributors and its client base. Nowadays Arca manages Mutual Funds, Pension Funds and Institutional Accounts with total AUM exceeding 30 € bln, reaching more than 100 banks and financial institutions and serving more than 800,000 final clients.
What are the key contributors to ARCA Fondi SGR’s success over the past 35 years?
Arca has always put clients and distributors first. That is to say we have always privileged fair pricing for funds and developing high quality products and services for our customers. This requires constant innovation as an objective and looking for people’s talent to be free to produce its effect
Why are people the founding element of ARCA Fondi SGR and how have you sustained this vision over the years?
We work in small teams, people are young and motivated and can perform duties with a high level of autonomy and responsibility. Innovation is asked to everyone, everyday
What makes Arca Fondi SGR different from other asset management firms in Italy?
Arca is a company focused on doing what it can do very well, that is to say mutual and pension funds, services for clients and banks. We never follow short term trends but always look for long lasting impact on the industry, like we’ve done may times in the past
What products/services has ARCA Fondi SGR pioneered?
Arca has been the inventor of “Arca Cedola”, fixed-horizon, coupon paying funds, which have been with no doubt the greatest product innovation of the past 12 years on the Italian market. This type of funds, at first strictly based on bonds and later as a balanced product, has encountered an enormous success both with clients and distributors due to its simple and effective value proposition. Arca is a market leader also in the “PIR” segment of funds, a range of product focused on mid and small sized companies, that have been the best performers in the Italian stock market for the last few years. In services, Arca is a leader in technology applied to asset management. Our website, app and digital services for clients and banks are award winning, state of the art combination of data, technology and channels, and the best is yet to come on this side.
What strategies do you have in place to sustain your market position and withstand professional competition in the country?
As I mentioned, we do not waste resources on projects with dubious results, instead we constantly invest on people, products and services. The high level of profitability that Arca has been able to maintain even in difficult years for the markets of the banking sector is a further testimony that this strategy works very well
How do you use technology to create meaningful experiences for your customers?
First of all, we have created a whole new division, Arca InnovAction Lab, dedicated to technology, data and processes. This ensures projects are delivered quickly and they are free to leave bad past practices behind. Arcaonline.it, Arca’s website, provides distributors with detailed information on clients’ portfolios, asset under management and subscription/redemption requests. It monitors aggregate selling data offering to our partners a suite functions and analytics to track commercial campaigns. And if the banks branches need assistance, they may ask Sara, our digital chatbot. A broad and timely multimedia production, covering exclusive reports, comments, presentations, videos, webinars and newsletters is also available on the website.
Customers, subscribing Arca’s funds through its distributors’ network, may access Arcaclick, a dedicated area on Arcaonline.it. With Arcaclick the client can easily browse through her portfolio of funds, analyze its characteristics, view transactions and historical funds’ performance in customizable views. Arcaclick is also a powerful source of information on Arca product range: Prospectus, KIIDs and other literature is easily accessible along with news, comments and reports. Arcaclick may also be accessed via Arca Fondi App, a free application for mobiles and tables, running on both iOS and Android. Available 24/7 and in mobility, Arcaclick gives clients the opportunity access information, news and details of their personal portfolio anytime and anywhere.
What key trends will drive pension growth in 2020 and beyond?
The Italian market for pension funds is still very small and therefore there is a great opportunity to grow. Arca Fondi manages the biggest open ended Italian pension fund and it’s been constantly at the top of its rankings. As people and workers are looking for yield and to weather short term volatility, the pension fund is very well poised to profit from this trend.
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