Banking as we knew it, is over—a tale of tarnished reputations, greed, dissolved trust and Millennial disruption.
The Millennials are rocking the boat in a corporate storm of howling regulators and tidal waves of corporate scandals. Draining your boat with buckets will not help you survive, you have to plug the holes and building an effective Risk Culture is the only way to do that.
The Millennial Disruption index shows that 53% don’t think their bank offers anything different than other banks; 33% are open to switching banks in the next 90 days and 70% says that in 5 years, the way they pay for things will be totally different. http://www.millennialdisruptionindex.com/
With the recent Global media headlines it is not only those who were exposed who suffer; all banks are affected, it is an industry thing. Even if your CEO did not appear in a court or testified in front of some committee, you are perceived to be part of the problem simply because you are part of the industry and thus you have a reputational risk problem.
Trust is built through relationships and organisations like banks cannot have relationships, only people can have relationships; so – you cannot do it without your people.
Traders have used the volatility caused by extreme events to make vast amounts of profit by going well beyond their risk appetite (often without knowing it and seldom with the blessing of the Board of Directors), sadly the same extreme events have also put some out of business as they went way beyond their risk tolerance levels and just crashed.
Some banks are still operating without clearly defined Risk Appetite and Risk Tolerance levels and even where these exist, they are rarely communicated to the entire workforce; the people actually responsible to operate within them. Without a clearly defined Risk Appetite being communicated to them, people will take excessive risk to boost their performance ratings and bonuses and the brutal cycle of greed starts.
It is often thought that excessive risk taking just happens where the big money rolls, but insights into the causes for tarnished reputations show cracks all over.
Look again at those star performers on the sales team, they might carry some of your highest levels of reputational risk. Before the downturn I picked up a bank’s staff newsletter one day, a publication with pictures of the monthly stars and the great business achievements they made by exceeding the sales targets. A quick calculation revealed that at the average cost of a new vehicle, the “star” of Auto Loans wrote in excess of 100 deals that month. A little more investigation and closer scrutiny showed that he had many “agents” working for him, friends and family all over the city were selling to friends and colleagues on his behalf; a large number of non-bankers carrying the corporate flag to customers without any connection to the bank, no training in customer service and certainly not qualified to give financial advice. Who will answer to the cases of miss-selling and misrepresentation? In case you wondered; yes, all these agents were paid by the bank employee with the extra money from his vast bonuses for being the top performer.
Risk Culture Building is defined as the process of growth and continuous improvement in the way each and every person in an organisation will respond to a given situation of risk as to mitigate, control and optimize that risk to the benefit of the organisation.
We have known for a long time that no two people will respond the same way to a situation of risk, the way any person responds to risk is influenced by a number of factors, the main ones are:
• Nationality & culture
• Childhood experiences (and formative environment)
• Work ethics, trust & honesty
• Education (and the way it was obtained)
• Work experience
• Religion and other spiritual thinking
• Attitude towards life (and death)
Risk practitioners generally failed to address these underlying human aspects. Since the publication of the Basle accord, ISO 31000 and other standards and regulations, it has often been argued that compliance with these standards and regulations will mitigate and control risk, but this is only true if the standards and regulations are embraced in an effective Risk Culture. Just like the policies, procedures and systems, these are worthless if human attitude, acceptance and desired response lack.
Addressing the aspect of people risk is the only way an organisation can improve the results of how their people respond to a situation of risk and the effectiveness of their risk management function. No organisation can ever have a perfect risk management culture, but organisations can achieve a level of maturity where they have an effective risk culture process and every employee is risk-minded and does something on a daily basis to mitigate, control and optimize risk.
The development of Risk Culture Building is focused on awareness and training in business ethics and human behavior, both the behaviors we want to encourage and the behaviors we want to avoid. Organisations should frequently evaluate the progress (or regress) they are making on the path to maturity and implement action plans.
At the end it all goes into the “Human Control Malfunction” - box and it is important to realise that your key human controls are often those who get paid the least.
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