Conduct Risk Management

Using a Behavioural Approach to Protect Your Board and Financial Services Business

Roger Miles

• Publisher: Kogan Page
• Year: 2017
• Print ISBN: 9780749478612
• eBook ISBN: 9780749478629
• Edition: 1
• Topic: Business
• Subtopic: Decision Making
• Index: Business

Conduct risk is at the core of behavioural regulation, a new approach to regulating financial services, whose new agencies and public prosecutors have spread rapidly across the world. Its prosecutors intervene assertively to challenge financial service providers to show clear evidence of a new customer-centric approach, which understands and responds to the hidden drivers of customer behaviour. They use their unprecedented powers to levy very large fines and even to imprison wrongdoers - often for not taking precautions rather than for any active wrongdoing. Conduct Risk Management is a tool for recognizing, acting on, and predicting conduct risk impacts in regulated business. Conduct Risk Management sees beyond econometric and other 'box-ticking' traditions of risk management. Whilst protecting senior managers, it helps all staff to make positive use of conduct risk to promote behaviour the regulator will accept as 'good', as good behaviour is good business. The new conduct regulations personally affect every manager in financial services, and their suppliers, with new regulations making senior managers liable to imprisonment for failures in organizational conduct. Conduct Risk Management sets out plainly what practitioners need to know to understand the regulator's intentions, to prove compliance, protect competitiveness and maintain licence to operate.

08

The ‘behavioural lens’, Part 1

Wide view

Introduction: Normal and not-normal

The phrase ‘inappropriate behaviour’ has now become the catch-all fashionable term to describe what your granny would just have called ‘being naughty’. In workplaces, social spaces and (especially) halls of education around the world, lists of inappropriate activities are posted by people in authority who hope that everyone will note the points and then behave better. Should we expect this compliance strategy to work?

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Example inappropriate behaviours

Extracts from a typical modern university campus list1:

• aggressive communications;
• unwanted attention;
• written material (exam topic, e-mail, etc) suggesting that a student may be unstable/mentally unwell;
• stalking (repeated attempts to impose unwanted communication or contact);
• threats of harm.

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This is all about what we consider normal and expect in a given context. Yet, if you sniggered inwardly at the banality of that campus list, stop and think for a minute: has your firm, or a firm you know, perpetrated some of these things on customers, in the past? Over years of running a consumer helpline for a major trade association, I recall many instances of providers doing all five of these, and more. No, really: one major brand, for example (who shall remain nameless) used to maintain a file marked ‘NUTTERS’, where certain persistently complaining customers would be logged. Others’ handling of both sales and complaints would fit the above definitions, as in ‘repeated attempts to impose unwanted contact’ (cold-calling, anyone?), and ‘threats of harm’ (saying you will impose a penalty charge on a customer who wants to leave a contract early).

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Themes and concepts in this chapter

acceptable and expected behaviour – affective/affect – agency/power (loss of) – asymmetric incentives – asymmetric information – ‘bank run’ – behavioural lens – bounded rationality – bystanding – cognitive load/overload – cognitive miser – constructive challenge – customer detriment – customer-centric – delayed harm – denial – disruption – dissonance – dread – dynamic sense-making – emerging markets – hidden harm – hostility triggers – imposition – inappropriate behaviour – insider dealing – loan-to-value – meritocratic – moral courage – mortgagor – negative equity – ‘normal people’ and social perception – overload – physical v existential dread – privileged treatment – procrastination – public goods – reifying/reification – relentlessly empirical – repossessed – risk appetite – risk (in)equity/fairness – risk-averse – ‘rock star defence’ – rogue trader – social labelling – social licence – socially defined – spotlight effect (bias) – stakeholders – sticky bias – ‘tells’/tell signs – tipping point – tolerance v acceptance (of risk) – tragedy of the commons – transparency – trust and goodwill – untouchables – ‘what actually happens’ – whistleblowing

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Acceptable and expected behaviour, then, are what makes the normal person’s world go round, and we should not be arrogant in trying to hold our efforts at expert risk management aloof from this. In fact, as we have heard directly from the regulator’s view in Chapter 7, mastering the art of seeing that normal person or customer-centric view is at the core of good conduct. As we have also seen, econometric measures of risk and corporate performance are of precisely no value at all in this task. What is needed is something new. What is needed is, in fact, what follows in this chapter.

Luckily, we already have most of the toolkit for doing this, in our heads, thanks to human evolution. Less fortunately, most people are not familiar with how to access and arrange this intuitive knowledge into a useable framework. Again, simply read on – over the next dozen pages, all the hard work, behavioural research and social science heavy-lifting has been done for you (and yes, it took 20 years, but that’s the beauty of textbook publishing).

To begin at that common starting-point we all have: each one of us has a personal sense of appropriate behaviour. It is about what we consider normal, in the context, taking cues from all around us. Let’s start with a couple of easy ones.

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Normal?

• Drinking a bit too much, losing a few clothes and singing raunchy songs might be just the kind of behaviour that makes one the life and soul of a bachelor party (or indeed, let’s be modern, bachelorette).
• Calling a competitor rude names, and even manhandling them some, is all part of the cut-and-thrust, if you’re playing various types of field sports.
• Yet none of those forms of behaviour is likely to play well at, for example, a job interview.

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It is clear from this – indeed, obvious to anyone with regular social skills – that appropriate behaviour is very much a matter of context.

Who, then, decides what’s ‘ac...

Table of contents

• Cover
• Praise for Conduct Risk Management
• Title Page
• Contents
• About the author
• Acknowledgements
• Dedication
• 01    TIME FOR A FRESH APPROACH
• 02    BEHAVIOURAL SCIENCE SETS REGULATORS THINKING…
• 03    THE ONSET OF FINANCIAL CONDUCT REGULATION
• 04    WHY REGULATORS HAD TO CHANGE DIRECTION
• 05    THE ROOTS OF MISCONDUCT
• 06    THE POLITICS OF PROSECUTION: CONDUCT RULES GO GLOBAL
• 07    ESTABLISHING WHAT YOUR ‘GOOD BEHAVIOUR LOOKS LIKE’
• 08    THE ‘BEHAVIOURAL LENS’, PART 1: WIDE VIEW
• 09    THE ‘BEHAVIOURAL LENS’, PART 2: STAYING AHEAD OF THE REGULATOR
• 10    LOOKING BACK, LOOKING AHEAD
• Glossary
• Recommended reading – with author’s comments
• Index
• Copyright