Conduct Risk what is it and who cares anyway? Event with Helena Mitchell Head of Consumer Protection: Supervision Division Central Bank of Ireland

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1 Conduct Risk what is it and who cares anyway? Event with Helena Mitchell Head of Consumer Protection: Supervision Division Central Bank of Ireland Welcome 3 December 2015

2 Conduct Risk what is it and who cares anyway? Helena Mitchell Head of Consumer Protection: Supervision Division

3 Consumer Protection Supervision Getting it right for consumers Credit Institutions & other lenders Stockbrokers & Investment Firms (MiFID) Retail Intermediaries Payment Institutions / E- Money / B de Change Consumer Protection Supervision Insurers Debt Management Firms 3

4 Contents What is conduct risk? Definitions Key drivers Summary of key points Culture & conduct risk Product governance & conduct risk The cost of getting it wrong What does it all mean in practice? Who cares anyway? 4

5 What is Conduct Risk?

6 the risk of inappropriate, unethical or unlawful behaviour on the part of the organisation s management or employees, which can be caused by deliberate actions or may be inadvertent and caused by inadequacies in an organisation s practice, frameworks or education programs The Australian Conduct Regulator (ASIC) consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products. The Financial Conduct Authority (FCA) Conduct risk means the current or prospective risk of losses to an institution arising from inappropriate supply of financial services including cases of wilful or negligent misconduct. European Banking Authority (EBA) All financial consumers should be treated equitably, honestly and fairly at all stages of their relationship with financial service providers. Treating customers fairly should be an integral part of the good governance and corporate culture - Organisation for Economic Co-operation and Development (OECD) the issue is so broad in scope that a single, narrow definition neither seems possible nor desirable. ESRB refers to misconduct risk as risks attached to the way in which a firm and its staff conduct themselves. European Systemic Risk Board (ESRB) 6

7 Central Bank s Mission Safeguarding Stability, Protecting Consumers Macro-prudential systematic importance of banks - safeguarding financial stability Micro-Prudential financial, operational and reputational Consumer protection any threat of consumer detriment Conduct Risk - the risk the firm poses to its customers through its direct interaction with them PRISM Explained 2011 Consumer Risk is anything that would threaten our objective that firms treat consumers fairly and with dignity and respect Consumer Protection Outlook Report

8 Key points about Conduct Risk Inherent factors that drive conduct risk Information imbalances between a bank and its customers Human behaviour and biases Internal structures and culture External / environmental factors Impact on consumers decision-making Multi-faceted and omnipresent Conduct risk is not just at the point of sale Advances in technology - new challenges in managing this risk Automated sales 8

9 Relationship between culture and conduct risk

10 Laws control the lesser man, right conduct controls the greater one (Mark Twain) 10

11 What does good look like? A culture which prefers the best interests of consumers in the longterm Good conduct provides the right products and services to the right consumers in the right way for the right reasons Deeply-rooted and sustained 11

12 EY Financial Services Global Consumer Banking Survey Confidence in global banking industry is on the rise after years of sharp decline Banks are providing traditional services well Falling short on aspects of customer experience Vulnerable to competition from new providers 12

13 Irish consumers surveyed Different trends and findings compared with those from across Western Europe and globally Why is that? 62 % 67% 17% 50% expressed a decrease in confidence in the banking industry from 2012 lowest level of trust in the survey lowest customer advocacy score dissatisfied with how their problems were resolved by their banks 13

14 Priority - Culture in banking & financial services sector Sector plays a pivotal role in broader economy A cultural shift is needed Front-line staff must be able to serve consumers needs in a better and fairer way Culture is not a tick box exercise Regulators cannot change culture simply by introducing new rules Firms have an obligation to selfregulate 14

15 UK Banks could be facing lawsuits of up to 5 Billion 15

16 Making that cultural shift Roles for all Boards must lead from the top modelling ethical, socially responsible behaviour promoting consumer risk awareness embedding the right culture in middle and front-line empowering all employees to apply their judgement in an environment where consumers interests are first and foremost Middle management must lead by example displaying the right behaviours, promoting accountability and transparency Customer-facing and other front-line staff empowered to challenge without fear of any negative repercussions 16

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18 Relationship between product governance and conduct risk

19 Product Oversight and Governance Many examples of poor product governance in public domain Inappropriate sale of Payment Protection Insurance (PPI) Redress schemes arising from the sale of debit & credit card protection insurance Banks knew or ought to have known element of insurance cover was superfluous Regulators respond with more rules! 19

20 February 2015: Consumer Protection Outlook Report Firms must demonstrate that products are fit for purpose Ensure products are fully understood by consumers and suitable for their needs Move away from legalistic terms & conditions and unfair clauses Conduct consumer testing on products pre-launch Simplify products, use plain English 20

21 Plain English Some examples of why it matters. Pension Statements Tracker Mortgages 21

22 Post-crisis Regulatory Response EBA published specific guidelines come into effect from January 2017 Guidelines a result of failures in conduct of financial institutions resulting in consumer detriment Provide a framework for robust and responsible product design Extend to manufacturers and distributors cover the entire lifecycle of the product including post-sale monitoring Ensure products meet the interests of the target market for which they were originally designed 22

23 Developing products with the consumer s interest, objectives and characteristics in mind from the outset is a cornerstone of ensuring good customer outcomes, and should help to re-establish and maintain confidence in retail banking. 23

24 What is the cost of getting it wrong?

25 The cost of getting it wrong Fines and sanctions Damage to reputation individually & collectively Restrictions on licences Revocation of licences Other costs legal, redress & remediation Loss of trust & confidence among consumers Management time, fire-fighting Individual accountability 25

26 How much..? EBA Risk Assessment of European banking sector A large number of EU Banks are impacted by conduct concerns 18% have paid out litigation of over 100 million 10% of banks have made payments of over 1 billion European Systemic Risk Board Fines, settlements and redress have cost EU Banks 50 billion since

27 What does all this mean in practice for Irish banks?

28 Managing Conduct and Consumer Risk Like all risks, consumer risk must be effectively assessed and managed Consider historic and future sales Internal processes must not encourage conflicts of interest Clear link between reward, incentives and risk-taking 28

29 Getting the basics right Remuneration Arrangements ensure employees are acting in consumers best interests provide products that meet consumers needs in addition to pre-existing rules for remuneration arrangements for senior management in banks Consumer Protection Risk Frameworks define consumer risk, which will be specific to each firm articulate their consumer risk appetite statements take steps to ensure it becomes a living document develop appropriate metrics and methodologies to monitor and manage consumer risk 29

30 Central Bank s challenge to regulated firms Not enough to set tone from the top Own it Commit to it Deliver on it Demonstrate how Consumer Protection Risk Frameworks and employees behaviours are delivering fair outcomes for consumers Enhanced on-site supervisory processes to measure firms progress in implementing frameworks 30

31 How many people here today work in customer-facing or product development roles? How many of you know what your bank s conduct risk appetite statement or framework is and/or how it feeds in to your everyday processes and procedures? Do you think about good consumer outcomes when you develop or sell retail products? 31

32 Conclusion What is it? And who cares anyway? Unique to each firm Action or inaction may be a threat to treating consumers fairly and with dignity & respect.. We all do - or at the very least we all should! YOU ARE ALL AMBASSADORS FOR YOUR FIRM S CULTURE 32

33 Remember, people will judge you by your actions, not by your intentions. You may have a heart of gold but so does a hard-boiled egg. (Anonymous) 33

34 Thank you 34