How to stop people wrecking your business - the fine art of managing Conduct Risk

This week's guest blog is from the very excellent Sandra Quinn on the subject of getting a grip on managing Conduct Risk or to put it another way the risks arising from how your firm and your staff behave – no, no please don’t stop reading, I promise it will be interesting and it may just save you and your business from going to the wall.  Here are a few recent headline examples of how this can cost a few quid.

1.     During the 00’s the costs to firms of miss-selling of Payments Protection Insurance (PPI) is estimated at around £9bn,

2.     BP has made a provision of $41bn in its 2010 accounts to cover the costs for the Deepwater Horizon disaster

3.     Societe Generale and UBS rogue trader incidents are estimated to have cost more than $9bn

4.     In October the share price of Homeserve plunged 50% amid claims of misselling and the suspension of telephone sales.

As Sandra explains, managing this kind of risk to date has generally not been top priority. But now, with the “beefed up” regulators keen to ensure positive outcomes for customers and a public keen to ensure that firms are environmentally sensitive, socially responsible and ethically sound the challenge of managing conduct risks is now firmly on the agenda. If nothing else, the new Bribery Act brings the issue of managing conduct risk home to every firm and executive, with the potential for criminal sanctions and possibly gaol time if you get it wrong.

“Most organisations have a history of and a structure for managing their credit risk, their operational risk and their cash flows. To date though, very few businesses have systematically defined and managed the risks inherent in employing human beings and asking them to act with integrity in a complex and pressurised environment (Conduct Risk).   Regulators have been focusing for some time on the fair treatment of customers. Now increasingly they are pressing for firms not just to ensure they have decent processes but to go further and ensure they are getting fair outcomes for their customers. The problem for firms is that it's not just a proper process that defines the outcome. It's people who design and follow process and adding more process and more prescription doesn't necessarily mean you get a fair outcome. And what applies for financial services applies more broadly too. Think Bribery Act and the aggressive enforcement agenda of the SFO. Think data privacy. And more besides.

If we are to learn the lessons about how to manage this risk then we will need to look again at our enterprises through the lens of conduct risk and people.  Of specific interest and a good place to start will be to review how we treat our customers, how we set business targets, manage performance, reward and incentivise staff as well as deliver training and manage compliance to the front line.  After all, few, if any, people got up one morning and said “hey, I think I’ll go out and miss sell some PPI/endowment policies/pensions” or "I think I will cut a few corners in how I install or maintain that piece of kit". Most I bet did what they thought the organisation wanted or valued, constructively if not explicitly.

Much of the focus in financial services firms on this comes through compliance trying to ensure that regulatory obligations are met.   Other firms are starting to implement responsible business programmes, training, ethics and integrity seminars.  Compliance and trying to reboot ethics can only do so much.  But the reality for most organisations is that they run on business objectives, management information, financial and other incentives, and devolved decision-making.  These are the levers which make organisations and their people work  So, if we are going to really reduce Conduct risk we know that any successful solution for identifying, assessing and mitigating people and conduct risks has to get to grips with the DNA of organisations. After all, what gets measured and what gets valued, gets done.

Which leads me nicely to a major dilemma businesses are facing: the potential for firms to save money through better management of conduct risk is clear but ... with tight margins, pressures on costs, spans of control increasing and decreasing job security for staff in a tricky employment market, the conditions are arguably right for more not fewer conduct risk issues.

So the option is for an organisation either to bury its head in the sand or to take a good hard look at a lot of the ground breaking work that is being done in this field to construct solid, reliable Conduct Risk frameworks that allow businesses to seriously reduce and manage their exposure.

I hope for all our sakes they take the latter option”

Sandra Quinn is CEO of Quinnity Limited and is working with Capgemini to provide clients with real solutions to the myriad of Conduct Risk challenges they face.   Having worked for both the FSA and Lloyds Banking Group, where she set up a people risk framework, Sandra understands the challenges of both the regulator and the regulated. She is currently applying her learning from financial services with a client in multiple sectors.

Paying for the Peace & Quiet - How to economically provide “core” services to the far flung corners of the UK

Unsurprisingly, due to our austere times, I seem to have had a strangely high number of conversations recently about the provision of all manner of “core” services (banking services, mobile coverage, broadband access, TV coverage, energy provision and post office services, to name but a few) to the far flung reaches of our sceptred isle.  

At the heart of the conversation is the basic economic reality that the providers of these services can only provide them at a loss.  Now, when times are good and big businesses can afford to be seen as champions of Corporate Social Responsibility, putting in some loss making services to win PR brownie points and to appease the regulators seems to make sense.  However, when times are tough it puts real pressure on the providers to look again at the manner in which they provide the services.  To date there are a number of alternative models that are in place and it would appear that this is a rich area for potential innovation for “core” service providers.

1.       Community Purchase Schemes: This is where the community raises funds to purchase a specific service for an area e.g. Broadband.  What’s interesting is that there is potentially quite a lot of scope for extending this kind of thinking to the maintenance of existing services too e.g. banking services and post office services.  The concept is simple – you want us to provide you a service – you pay.  Now the plus side of this is that the raising of funds and maintenance of a service can galvanise a community and improve community spirit, making it a popular option in the affluent countryside areas that are keen to use/keep a service.  However, there are many communities who will find the fundraising beyond their reach.  This type of scheme will just not work for them.  It’s therefore not a socially inclusive option but it does make economic sense.

2.       Service Sharing Schemes:  For some services e.g. those requiring physical buildings (banks, post offices, shops etc) it is the provision of the staff and fuel that make them uneconomic to run, and whilst some communities could fund these overheads most couldn’t.  So what’s the alternative?  Well interestingly businesses could learn a lot from one of the other central pillars of the community – the church.  Faced with declining attendances, reduced incomes and increasing costs the church has been creating new “sharing” models that could potentially be replicated in business.  In some rural areas several churches from the same denomination will “share a vicar”.  The vicar will cover multiple churches.  In other areas different denominations “share a church”.  In this case “competing” denominations bury their differences and share a common building and associated costs.   Now imagine these models extended to banks, post offices, retailers.  It’s not going to feel comfortable to the service providers but by thinking a little laterally they can keep the regulators happy, maintain their CSR kudos and deliver a socially inclusive service.

To my mind this and other new models of service provision are definitely worth exploring in these austere times.   An area for real innovation.

Being Innovative – How to get started 2: Ask yourself some challenging questions ahead of “unleashing” innovation

In one of my previous blogs I looked at how a CEO/COO who really wanted to see Innovation break out in their organisation needed to “Fake it to Make it” – so, if you are a CXO who’s following along, here’s what you need to do next – simply ask yourself some challenging questions to ensure you can effectively unleash innovation in your organisation.  Easy to say very difficult to do – why - because this is a business problem most CXOs don’t face every day.  Ask them to reduce a cost base, manage a product launch, reorganise a distribution network and they are all over it.  However, ask them to unleash innovation and they are lost.  It’s the equivalent of asking a plumber to carry out laser eye surgery.   They don’t know what questions to ask or what to do.  As a result most CXOs default to instant action and rapidly implement all or some of the following initiatives to “get things going”

1.       Employee suggestion box – “they know where the problems lie”

2.       Customer suggestion box – “they’ll tell us what they want from us”

3.       Innovation Training – a 1 or 2  day sheep dip for senior managers to help them become innovative

4.       A communication campaign – encouraging everyone to “unleash their inner creativity”

Now whilst these are actually all potentially useful and viable solutions and they do show “executive intent” they are no substitute for some basic planning and the asking of some first order questions that may deliver much more suitable interventions, notably here’s my Top 10:

1.       What are the business outcomes I want from unleashing innovation?

2.       How much budget and resource am I prepared to allocate to delivering these outcomes?

3.       What type of Innovation do I want to “unleash”? – e.g. business model, product design, pricing structure etc.

4.       What level of innovation do I want to “unleash”? e.g. from better sharing of best practice to development of a new business

5.       Do I have people in or around my organisation that are capable of unleashing it – if yes how do I engage them, if no how do I find some?

6.       What process do I need to put in place to govern and manage innovation?

7.       What kind of incentives do I need in place to encourage innovation?

8.       What will we stop doing to make space for innovation?

9.       How do we need to change our culture so that it is accepting of innovation?

10.   What external resources can help me drive innovation? E.g. technology, expertise etc

When you’ve answered these questions you are right on the brink of being able to unleash innovation into your business.  The good news is your now walking and talking innovation and are asking all the right questions– in subsequent blogs I’ll dig into some of these questions in a bit more detail and do please feel free to get in touch if you are feeling overwhelmedJ