Mary Clarke, CEO of Cognisco, a human capital risk solutions company, looks at how the banking sector could minimise its exposure to risk and help change public perceptions.

The banking sector came under great scrutiny last year with several high profile cases such as HSBC fined a record £1.2bn in the USA for failing to implement anti-money laundering controls and Barclays fined £290m in the UK for breaches of the Libor and Euribor rates. These are just some of the many examples in the global banking sector demonstrating what can happen if companies fail to manage the risks posed by employee behaviour within their organisation.

All companies gather accurate information about their financial performance but few apply the same level of scrutiny to their workforce performance. Understanding an employees’ competence, skills, knowledge and experience, as well as how they actually behave on the job and their attitude to risk, is paramount for all businesses, but even more so for the banking sector where the commercial stakes are so high.

Employee misunderstanding and/or inappropriate attitude to risk may result in significant fines and loss of shareholder value. Analysts IDC say that 23% of employees misunderstand at least one aspect of their jobs and that the cost of employee mistakes to UK businesses is estimated at £19bn annually. Apply this globally and the amount of money wasted because businesses have been complacent about employee competence is astronomical.

According to Oracle[i], financial crime costs an estimated $20 billion in losses annually, and the operational costs of compliance are growing substantially year on year. Furthermore, recent events and high-profile cases have put the sector under an even higher level of scrutiny.

Increased regulations and expectations
Some may say that many of the large global banks have got so big that is difficult to ‘know’ every individual, however, with an ever increasing regulatory environment and a damaged reputation to turn around, the sector has a responsibility to ensure all their employees are competent to do their jobs and if they aren’t, put procedures, training coaching and mentoring in place to address any skills and knowledge gaps.

Compliance Officers are recognising that processes and controls alone are not enough and that if they are to provide Board Assurance and therefore mitigate risk, their approach to compliance will have to extend to include how individuals actually behave in their work.

There is now a growing realisation that successful risk management outcomes depend on understanding the behaviours of employees and what is influencing or driving those behaviours. In reality, most companies have poor insight into the drivers of employee behaviour in relation to risk management and it is not effectively embedded into their business operations.

What can be done?

Most companies adopt a robust approach to the recruitment process and put new recruits through their paces using psychometric and competency assessments. However, this is often the first and last time employees are ever assessed in this way, with annual reviews and appraisals being measures of how an individual is performing, rather than competency. Typically, employees will move through the ranks in a company, without their competency and knowledge ever being tested again, a factor which inevitably places the company at risk.

This lack of insight can lead to other problems. If managers don’t know how competent their employees are, they won’t understand their training and development needs and they won’t identify potential risk factors within the organisation. Managers might also overlook star performers who are able to take on greater responsibility or who could be used in other areas of the business. Worse, they may fail to spot weaker individuals who may misunderstand key aspects of their role or may not even be fit to practice, increasing the risk still further.

One way that companies can gain a better understanding of their workforce is by putting in place Competency Frameworks for each role in the business. Such frameworks can be mapped against national and global standards and internal strategic and operational requirements. They define the core competencies needed for each role as well as the desired level of knowledge, motivation, behaviour and experience.

Defining a Competency Framework is ultimately business critical. As well as providing a guide and structure for Human Capital planning it creates a direct link between the individual employee and the over-arching business strategy.
Measuring employee development
The next step is how to accurately measure employee development against these frameworks. One solution is introducing customised assessments that can help achieve these measurements because they provide accurate, factual and objective results.

The assessments that tend to produce the most accurate results are those with well-designed questions which are validated by occupational psychologists and meet international/national standards. The questions are mapped against the ‘ideal’ competencies for every job role within a company and based on realistic scenarios that an employee would encounter in their job. That way the results are meaningful and highlight accurately how well a person understands aspects of their role, how they apply knowledge, their decision making and their attitude or behavior.

Customised employee assessments work best if they test employees in work-based scenarios asking them a series of multiple response style questions that can’t be guessed. Assessments that measure a combination of competency, knowledge and confidence will also identify quickly any knowledge gaps, areas of misunderstanding or employees with low confidence which could impact their decision making.

The results provide rich data for managers and a rounded picture of an individual. They will reveal not only how competent a person is but their likely behaviour and attitude when performing their role. Managers will be able to see where additional and specific training and support is needed and this information could also form the basis of a future training and development plan.

What can often be the worst risk factor for a business, especially in the banking sector is someone who is overly confident, but lacks the knowledge and skills to do the job properly. Without an assessment this potential issue is easily overlooked because they have the confidence, but they can pose a significant risk to the business if they don’t have the correct knowledge and skills.

By gaining such insights into their employees, organisations are able to deliver more tailored and cost effective training programmes and better manage their employee career progression. It can also help managers address and eradicate any unacceptable employee behaviour by providing targeted interventions that improve individual performance. Managers will also understand their workforce better – how they perform, behave on the job and what makes them tick.

To conclude
The spotlight will no doubt remain on the banking and financial sector for some time and it is more important than ever that the sector ensures across the enterprise that their employees are compliant and competent to do their jobs. Not just to avoid record fines, but to start to build up its reputation again. Employee assessments are one way of finding out how people actually behave in their roles and how confident people are doing their jobs. Skills and knowledge gaps and potential risk areas can then be identified and the right training programmes put in place.

Risk inside an organisation does not sit in one easy to define central function. Rather it exists in a myriad of behaviours and habits of individuals spread across all levels of the operation. Ensuring that the drivers of employee behaviour in relation to risk management are effectively embedded into the operations of the business, will go some way to ensuring illegal practices such as money laundering on the scale of what has just happened at HSBC, couldn’t happen in the future.