In my new article for Credit Control Journal, I explore the possibility of turning conduct risk into a competitive opportunity. That’s easy to say — we reflexively refer to every challenge as an opportunity these days — but what does it mean?
One thing is for certain: Conduct risk is a moving target. From PPI to LIBOR to robo-signing of mortgage foreclosures to foreign exchange fixing, there will always be a new example bothering regulators and consumers. So the competitive opportunity has to involve flexibility and speed. It has to involve a systematic approach that closes the biggest loophole of all, human behavior.
Here are some other factors needed in a systematic approach to conduct risk:
Analytics. A scalable end-to-end conduct risk framework that uses analytics to predict and identify unusual behavior can form the basis for effective standardized processes, consistent customer messaging and clear audit capabilities.
In my article, I cite the example of a large UK bank that wanted a robust set of tools to systemically manage its conduct risk policy around product sales. The models had to be easy for business users to understand and update, and the solution needed to connect seamlessly to the bank’s existing IT platforms. By automating its processes and implementing analytics and predictive models, it is now able to measure which sales activities carry the highest risks, both initially and over time. All assessments are recorded automatically, creating a clear and easy-to-review audit trail along with regular reporting to guide analysis and measure each score card’s performance.
Analytics can also prove very useful when trying to curb SIIB manipulation. Investigations have shown that the controls surrounding banks’ SIIB submissions are often inadequate, so banks can use analytics to compare their SIIB submission to historical submissions, to market benchmarks and to the submissions made by peers, in order to improve their risk-based assessment. These analytics can flag outlier submissions, thus allowing control teams to focus their investigations on submissions deemed the highest risk. However, it is vital that these techniques are embedded seamlessly in the governance structure surrounding banks’ submissions towards SIIBs, as this is ultimately what regulators will be assessing.
Standardized and automated processes. Automation and standardization are key for two reasons. Firstly, maintaining a clear and manageable audit trail for every customer interaction using manual methods like spreadsheets quickly becomes untenable, as well as being open to human error. Secondly, adopting a standardized approach ensures that every customer interaction or decision is managed in precisely the same way, leaving no room for unfair preferential or discriminatory treatment to sneak in.
Comprehensive application. Conduct risk can emerge any time you communicate with a customer. Sales is a particular hotbed for conduct risk, has caused some of the largest problems to date, and will need particular vigilance moving forward. Have all the appropriate checks been carried out to ensure the customer can afford the product they are buying? Do they genuinely need it? Are they being offered the same price as other customers with a similar profile? Are you sure that the salesperson the customer spoke to was not using overly aggressive techniques to convince them to buy? Operationalizing the way sales interactions are recorded can bring useful insights from an internal perspective as well as giving peace of mind that conduct risk is minimized.
As with sales at the beginning of a customer journey, the collections process at the end can generate significant conduct risk. Today, automated speech analytics technology can be used to monitor all phone conversations, using analytical models to determine what has or has not been said, and automatically flagging any areas of concern. Similar models can be applied to managing any other communications channels (such as text messages, emails, and even social media feeds) to ensure a consistent, compliant standard across all collections communications.
With so many potential implications for customer satisfaction, organizational reputation and regulatory compliance, conduct risk needs to be on the radar of every employee – not only the risk and compliance teams. A fully operationalized, analytics-driven framework will help harness and manage your conduct risk exposure and turn it into one of your greatest competitive advantages.
For more on this subject, read FICO's new white paper on Turning Conduct Risk into a Competitive Opportunity.