Making Conduct Risk [Good] Business as Usualtaking a strategic approach to Conduct Risk Management

Scottish IOR Conference1st November, 2013

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Introduction

15 years plus in strategy and risk management

CEO & Founder of Manigent (consultancy)

CEO & Founder of StratexSystems (software)

2006/07 -12 month / 21 organisation research project into the integration of strategy and risk management

2008 - Created the Risk-Based Performance Management methodology during various strategy and risk related engagements in the city

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Agenda

The emerging regulatory landscape

Implementation of a Conduct Risk Management framework

Taking a strategic approach to Conduct Risk

The emerging regulatory landscape

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With the creation of the FCA, Conduct Risk becomes central to the regulatory agenda

3 Pillars Regulatory Approach

Outcomes

Firm Systematic Framework (FSF)

1. Consumers get financial services and products that meet their needs, from firms they can trust;

2. Markets and financial systems are sound, stable and resilient, with transparent pricing information; and

3. Firms compete effectively, with the interests of their customers and the integrity of the market at the heart of how they run their business.

FCA Objective

To make relevant markets work well so consumers get a fair deal.

Event-driven work Issues and products

CONDUCT RISK

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FCA has a range of new powers

Power to; ban products or restrict

sales stop misleading

financial advertising tell the public earlier

about enforcement action

Better tools to regulate markets

“The key difference between the future and now is we (the FCA) are being given the power to shoot first and ask questions later”

Martin Wheatley to the Association of British Insurers, September, 2012

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Business Model and Strategy Analysis

The FCA has new regulatory tools

Stage 1Are the interests of customers and

market integrity at the heart of how the firm is run?

Governance and Culture

Product Design

Sales Processes

Post-sales/services and transactions handling

Stage 2

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What does the FCA really want from firms?

“We will have a greater expectation of a strategic approach to the conduct agenda and senior management and board engagement in it.”

Clive Adamson, Director of Supervision, Conduct Business Unit, FSA, January 2012

“We accept the FSA has not been as effective a conduct regulator as it could have

been”

“Led in many cases to a tick-box and overly legalistic

compliance culture within firms, encouraged by what has

been seen as a tick-box regulatory approach”

Clive Adamson, Director of Supervision, FCA, 19/4/2013

“We accept that firms need to be able to generate acceptable returns for shareholders, and have to

be financially robust but this is about ‘good profits' rather than profit at any cost - either to

firms' own stability or their customers’ best interests.”

Martin Wheatley, FCA CEO

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What does the FCA really want from firms?

“We will have a greater expectation of a strategic approach to the conduct agenda and senior management and board engagement in it.”

Clive Adamson, Director of Supervision, Conduct Business Unit, FSA, January 2012

“We accept the FSA has not been as effective a conduct regulator as it could have

been”

“Led in many cases to a tick-box and overly legalistic

compliance culture within firms, encouraged by what has

been seen as a tick-box regulatory approach”

Clive Adamson, Director of Supervision, FCA, 19/4/2013

“We accept that firms need to be able to generate acceptable returns for shareholders, and have to

be financially robust but this is about ‘good profits' rather than profit at any cost - either to

firms' own stability or their customers’ best interests.”

Martin Wheatley, FCA CEO

Customers at the heart of your firm’s business model and strategy

A strategic approach with strong senior management and board engagement

Good profits

Stability and accountability

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How are you responding to the Conduct Risk agenda?

Embedding Conduct Risk Management into

the existing Management approach

Specific Conduct Risk Management Framework

Vs.

Which approach has your firm taken?

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How are you responding to the Conduct Risk agenda?

To truly put customers at the heart of your

business

To meet regulatory requirements Vs.

What is your firms motivation?

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What we have seen over the last few months

“We have created a Conduct Risk Management framework which adds 175 new indicators to our monthly MI” – Director of Operational Risk

“Conduct Risk is been handled by the compliance team – CEO”

“We don’t see a real need to change, Conduct Risk is just TCF 2.0” - CRO

Specific Conduct Risk Management Framework

To meet regulatory requirements

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We believe Conduct Risk represents a big opportunity for your firm and for the Risk Management profession

Drive strategic and operational change to drive improvements is customer satisfaction and profitability

Embed risk management as a core part of your firm’s strategic and operational execution culture

Drive improvement across management processes, information and decision-making

Raise your professional profile and that of your team

Embedding Conduct Risk Management into

the existing Management approach

To truly put customers at the heart of your

business

Implementation of a Conduct Risk Management framework

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Developing a Conduct Risk Management framework is an understandable response by firms

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However, we believe a specific Conduct Risk Management framework is an sub-optimal responseCreating a new, specific Conduct Risk Management framework can have a number of potential pitfalls:

Can create significant duplication and confusion

Can significantly increase the amount of data been collected and reporting…but reduce the amount of insight generated

Perpetuates the tick-box approach and culture

Misses the opportunity to: Drive real business change and improvement Put risk management (and customers) at the heart of strategic and

operational execution

Taking a strategic approach to Conduct Risk

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An integrated model for Strategy and Risk Management

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Business Drivers Strategy Map Strategic Risk Map

Operational Risk Map

Appetite Alignment Matrix

Process Alignment Matrix

Initiative Alignment Matrix

Process Architecture Initiative Portfolio

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An integrated model for Strategy and Risk Management

Stra

tegi

cAl

ignm

ent

Ope

ratio

nal

Business Drivers Strategy Map Strategic Risk Map

Operational Risk Map

Appetite Alignment Matrix

Process Alignment Matrix

Initiative Alignment Matrix

Process Architecture Initiative Portfolio

What our Business Objectives?

What our Strategic Risks?

What our Operational Risks?

Are we operating within Appetite?

What are our key value drivers?

Are our initiatives aligned?

Are our BAU processes aligned?

What are our key BAU

processes?

What are our key change initiatives?

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Central to this integrated model for Strategy and Risk Management is the Strategy Map

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The Strategy Map is a leading tool to enhance the communications, execution and monitoring of strategy

Improve Shareholder Value

Productivity Strategy Revenue Growth Strategy

Improve Cost Structure

Increase Asset Utilization

Enhance Customer Value

Create Value from New Products & Services

Human, Information, and organisational Capital

Shareholder ValueROCE

Cost per Unit Asset Turnover Customer Profitability New Revenue Sources

Price

Product/Service Attributes

Strategic Competencies

Strategic Technologies

Climate for Action

Operations Theme

Customer Value Proposition

Quality

Low Total Cost

Customer Solutions

Product Leader

Customer Satisfaction Customer Acquisition Customer Retention

Time Function Service Relations Brand

Relationship Image

� Market and Account Share

Customer Management Theme

Innovation Theme Regulatory and Society Theme

To satisfy our shareholders and customers, what

business processes must we excel at?

To achieve our vision, how should we appear to our

customers?

To achieve our vision, how will we sustain our ability

to change and improve?

To succeed financially, how

should we appear to our

shareholders?

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The Strategy Map articulates how an organisation creates valueFi

nanc

ial

Cust

omer

Inte

rnal

Pr

oces

sLe

arni

ng &

G

row

th

Drive sales execution

Sustainable Growth

“We align our incentives to our

appetite & desired behaviours”

“Their fees are clear and fair”

Deliver Revenue Growth

Objective KPIs InitiativesTargets

Drive sales execution

YTD % Increase in income 25%

Implement new sales process

Objective Statement of what

strategy must achieve and what’s

critical to its success

KPIs How success in achieving the

strategy will be measured and

tracked

Targets The level of

performance or rate of

improvement needed

Initiatives Key action programs

required to achieve Priorities

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However, to create value, risk-taking must be aligned to strategy…Fi

nanc

ial

Cust

omer

Inte

rnal

Pr

oces

sLe

arni

ng &

G

row

th

Sustainable Growth Objective Appetite AlignmentExposure

Drive sales execution

Objective Statement of what

strategy must achieve and what’s

critical to its success

Appetite How much risk

are we willing to run to achieve the

objective?

ExposureHow much risk

are we currently running?

Alignment Is our current risk-taking aligned to

appetite?

Moderate High Over-exposedDrive sales execution

“We align our incentives to our

appetite & desired behaviours”

“Their fees are clear and fair”

Deliver Revenue Growth

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Effective risk management supports value creation and value protection...Fi

nanc

ial

Cust

omer

Inte

rnal

Pr

oces

sLe

arni

ng &

G

row

th

Sustainable Growth Objective Risks MitigationThresholds

Drive sales execution

Mis-selling resulting in reputation loss

Appetite Tolerances

Controls Initiatives Policy &

procedures Processes

Objective Statement of what

strategy must achieve and what’s

critical to its success

RisksThe threats and

opportunities (risks) exist which may

impact achievement of objectives

ThresholdsThe appetite and

tolerance thresholds used to monitor risk

Mitigation The activities undertaken to manage risk

Drive sales execution

“We align our incentives to our

appetite & desired behaviours”

“Their fees are clear and fair”

Deliver Revenue Growth

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The Strategy Map can be used to demonstrate the role customer outcomes play in the firm’s strategy

Fina

ncia

lCu

stom

erIn

tern

al

Proc

esse

sLe

arni

ng &

G

row

th

Drive Shareholder value

Deliver Revenue Growth Control Costs

“We received good value”

“Their fees are clear and fair”

“Their solutions continue to meet our

changing needs”

“We have quick, convenient access to

our financial info”

Drive sales execution

Ensure effective Complaints handling

Deliver outstanding customer service

@ POSContinuously seek to

understand client needs

“We align our incentives to our appetite & desired

behaviours”

“We sell the right products, to the right

people, the right time”

“We leverage our data to deliver positive customer

outcomes

Information Capital Cultural Capital Human Capital

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The Strategy Map can be used to demonstrate the role customer outcomes play in the firm’s strategy

Fina

ncia

lCu

stom

erIn

tern

al

Proc

esse

sLe

arni

ng &

G

row

th

Drive Shareholder value

Deliver Revenue Growth Control Costs

“We received good value”

“Their fees are clear and fair”

“Their solutions continue to meet our

changing needs”

“We have quick, convenient access to

our financial info”

Drive sales execution

Ensure effective Complaints handling

Deliver outstanding customer service

@ POSContinuously seek to

understand client needs

“We align our incentives to our appetite & desired

behaviours”

“We sell the right products, to the right

people, the right time”

“We leverage our data to deliver positive customer

outcomes

Information Capital Cultural Capital Human Capital

Having clear and achievable financial objectives is critical to ensure the firm is sustainable and will be around to provide on-going service

By convention, customer outcomes are expressed is phases you would like to hear your customers use to describe your firm and products/services

To deliver financial and customer outcomes, we must be clear about the key processes which will enable us to deliver those outcomes.

Underpinning the delivery of the key processes, financial and customer outcomes is the organisational culture.

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‘Slice’ the Business Strategy by Customer Perspective to get a ‘Conduct Risk’ view

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Customer related processes and initiatives are aligned to customer objectives via alignment matrix’s

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The Strategy Map can be used as a starting point in the definition of risks & controls related to customer outcomes

Fina

ncia

lCu

stom

erIn

tern

al

Proc

esse

sLe

arni

ng &

G

row

th

Deliver Revenue Growth

“Their fees are clear and fair”

Drive sales execution

“We leverage our data to deliver positive customer

outcomes

Information Capital

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Use the same approach at an operational level to wrap a risk & controls framework around customer related processes (and initiatives)

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Processes

KPIs Actions Key Risks

KRIs Actions Assessment Key Controls

KCIs Actions Assessment

Events

Certification

Risk Appetite

From a Conduct Risk perspective, define, manage and monitor key customer

processes, such as New Product Development, Sales Execution,

Customer service, Complaints handling etc.

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Apply the RACI model at a Strategy and Operational level to clarify and embed accountabilities for Customer outcomes

“The buck stops here”

Those with Yes/No authority related to the objective, risk or

control.

“Keep in the loop”

Those involved prior to decisions or action related to the objective, risk or control.

“The doers”

Those people working on delivering the objective, managing the risk or applying the control.

“Keep in the picture”

Position(s) that need to know about decision or action related to the objective, risk or control.

PP

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Line of Sight Dashboards which require Accountable sign-off reinforce a culture of accountability

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Using existing management ‘tools’, Conduct Risk can be embedded within your existing management approach

Stra

tegi

cAl

ignm

ent

Ope

ratio

nal

Business Drivers Strategy Map Strategic Risk Map

Operational Risk Map

Appetite Alignment Matrix

Process Alignment Matrix

Initiative Alignment Matrix

Process Architecture Initiative Portfolio

What our Customer

Objectives?

What our Conduct Risks?

What our Conduct Risks?

Is our Conduct Risk Appetite aligned to

our Strategy?

What drives customer value?

Are our initiatives aligned to customer

outcomes?

Are our processes aligned to customer

outcomes?

What are our key BAU

processes?

What are our key change initiatives?

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Why take a strategic approach to Conduct Risk?

Our experience (with Financial Services and non-Financial Services firms) shows the benefits of taking a strategic approach: Significant improvements in Board and Senior

Management engagement Significant improvements in Management

Information and Insights – shaping the focus on the ‘vital few’

Improved regulatory engagement Activities to deliver your Conduct Risk

requirements have the additional pay-off of driving real business value

Enables the CRO/Risk Team to demonstrate real business value via enhanced risk management practices

Integrating Strategy & Risk Management an Introduction to Risk-Based Performance Management

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Risk-Based Performance Management (RBPM) is a holistic and integrated approach to strategy execution and risk management

Performance Management

Risk Management

Strategy Management

Appetite

What are we trying to achieve?

Are we on track?

What is our Risk Appetite?

Are we operating within appetite?

Governance & Communications

Culture

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The Risk-Based Performance Management (RBPM) methodology is based on seven management disciplines

Business Drivers

Shareholder Value

2. Manage Performance

3. Manage Risk

1. Set Strategy

5.Governance

6.Communications

7.Culture

Capital ?Income

Share Price ?Economic value add

4. Appetite Alignment

Reputation

Profit

Appetite Appetite

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The Risk-Based Performance Management (RBPM) roadmap can be used to guide the implementation of an effective response to the Conduct Risk agenda

Define Strategic

Goals

Define Strengths & Weaknesses

Define Business Drivers

Define the Strategy

Define Processes

Define Initiatives

Define Operational

Risks

Define Operational

Controls

Define Indicators

Assess Risks & Controls

Monitor Appetite

Alignment

Define Strategic

Risks

Define Strategic Controls

Define the Business Model

Define Risk Appetite

Align Risk Appetite &

Strategy

Define Strategic

Objectives

Board Executive

Formulation Execution

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Contact details

Andrew SmartCEOManigent & StratexSystems

Email: andrew.smart@manigent.comBlog: www.riskbasedperformance.comWeb: www.manigent.com |

www.stratexsystems.com LinkedIn: http://uk.linkedin.com/in/ajsmartTwitter:@AndrewJSmart