Managing risk culture in the finance industry

The risk culture of any team is based on the values, beliefs and understanding of risk that is accepted and promoted by an organisation.

It’s natural for teams working closely together to cultivate perceptions and predispositions that shape their attitudes in this area. But whether through complacency or compromise, it can be difficult to reverse risky behaviour once it has become the norm.

Risks are inherent in any business, and controlling them requires constant vigilance. Since the global financial crisis of 2008, the financial services sector has sought to mitigate risk by creating processes and environments that emphasise transparency. The challenge in creating and implementing risk strategies is in striking the right balance. How can policies designed to stop recklessness be implemented without threatening the spirit of entrepreneurship? And how can organisations apply these strategies efficiently and effectively?

According to a 2012 report from the Institute of Risk Management, a successful risk culture must outline a commitment to ethical principles, understand that risk needs to be managed continuously and create a formalised procedure that encourages whistleblowers to come forward. These reported risk events or near misses can then be used as learning tools.

“Ethical behaviour begins with corporate policies and employee incentives that pave the way for overcoming the broker mindset,” says Ammar Sikandar, vice president of Canadian private equity firm Kingsmen Capital. He believes that compensating employees well, offering generous benefits and introducing incentive programmes based on more than sales performance can have a positive impact on the motivations of staff.

“Many brokers only work on commission. They do not feel secure as they do not receive salaries, health insurance or pensions, which results in them believing that earning the maximum amount on every deal is the only option they have,” he adds.

Kingsmen Capital’s business structure and processes also work to ensure accountability. Client emails and calls are recorded – with permission – for quality assurance purposes, while the company’s underwriters work from a different office than sales staff to avoid conflicts of interest. This all helps create an environment where all staff get a sense of job security in return for shouldering a fair share of corporate responsibility.

“Everyone is still feeling the strain of the financial crisis, and there’s pressure on organisations and individuals to bring in business,” says Vicky Webber, an HR consultant for East of England accountancy firm Lovewell Blake. “Having formal policies ensures that staff know the right way to do things. They need to know they are working somewhere trusted and potential new clients need to have faith in the organisation they are working with.”

At Lovewell Blake, staff carry out money laundering checks on all new clients, which have to be signed off by senior staff with the process under continual review. Webber says staff aren’t pressured to bring in business “left, right and centre” without fully knowing who their clients are — or what risks might be involved.

In 2009, the Association of Chartered Certified Accounts (ACCA) published a review of corporate governance in the financial industry. It suggests that boards of FTSE 100-listed banks and life insurance companies be required to set up specialist risk committees to explore ways of creating a supportive culture.

According to the review, such committees should produce annual reports focusing on risk exposures, risk appetite, tolerance and future risk strategy. And, operating separately from audit committees, risk committees should continuously monitor compliance with International Financial Reporting Standard 7, a globally-recognised accounting standard which outlines requirements for risk disclosure.

The ultimate aim of risk committees is to create an ongoing dialogue with senior management that identifies and mitigates risky behaviour. But improving a poor risk culture can be difficult if recklessness is originating from the boardroom. For this reason, the review also recommends that non-executive directors must be able to challenge and test proposals put forward by the executive. It’s imperative that they believe the board’s decisions on risk matters are based on comprehensive information.

Planning and implementing cultural change within an organisation can be difficult, and challenging a hazardous risk culture requires many well-considered steps. From identifying the causes of harmful risk attitudes, to shaping consistent and enforceable policies that foster a more risk-aware culture, the management of risk is an ongoing responsibility for businesses operating in the financial sector.

It’s clear that developing frameworks to drive accountability and transparency has become vital for sustained commercial success. Making a commitment to corporate ethics is a crucial first step, but ultimately, ensuring that staff carry out the processes needed to support these values will go a long way towards keeping a company’s risk culture in check.

Johanna Hart is a freelance writer whose work has been published by Google, Facebook and Natwest.