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Mary Clarke, CEO, Cognisco

The introduction of the new Senior Managers Regime and Certification Regime in March 2016 is set to change the banking industry. It will set out the standards of behaviour expected from those in positions of authority and it is tougher than previous legislation, making those in senior positions more accountable for their behaviour.

These reforms are a result of a review of the industry undertaken by the Parliamentary Commission for Banking Standards (PCBS) in June 2013 and its report, ‘Changing Banking for Good’, recommended legislative and other action to improve the professional standards and culture in the UK banking sector.

These changes will also bring “people risk” to the forefront of the banking agenda in a bid to change banking culture for the better, however, the big question is how prepared the banks are for these reforms?

New Senior Managers regime

Under the Senior Managers Regime[i], individuals who hold key roles and responsibilities will have more checks placed on them. Whilst they will still need to be pre-approved by regulators, the legal onus will be on the banks to ensure there are procedures in place to assess their fitness and propriety before applying for approval, and at least annually afterwards.

The Regime also applies to other staff who could pose a risk of significant harm to the bank or its customers. Firms will need to put in place procedures for assessing the fitness and propriety of these staff, for which they will be accountable to the regulators. This will include the recruitment and on-going reassessment of those staff that fall under this regime.

Banks have until 7th March 2016 to ensure all staff that are subject to the Senior Managers Regime or the Certification Regime are aware of the new conduct rules and how they apply to them.

The impact of these reforms is starting to be felt and an article on the BBA web site[ii], the leading trade association for the UK banking sector, suggests that it is HR departments in banks who will feel the impact of the changes most.

The article highlights that “the ‘people risk’ element in banking has suddenly escalated to a must have agenda item for all Risk Committees and be on the Board agenda” and that implementation of the new regime is going to fall on HR.

However, whilst the article points out how HR departments will need to meet the demands of the new reforms, it fails to mention that banks and their HR teams also need to be looking at how to identify and address the risky behaviour that has gone unchecked in the past.

Driving a cultural shift by identifying people risk

The new reforms are intended to drive cultural change in the industry but for this to happen,  banks will need to find better ways to identify; measure and evidence unethical behaviour amongst their workforce.

Historically it’s the employees of banks that have knowingly or unknowingly been responsible for many of the recent scandals, and cracking down on bad behaviour and its root causes is the only way to improve standards in the sector. This must be done in tandem with the new accountability rules.

Whilst many banks have strengthened their governing processes since the financial crisis, many still don’t have systems in place to measure how people act or behave at work or that enable them to identify patterns of risky employee decision making.

Many rely on the same metrics, methods and data they have always used to try to meet the new expectations placed on them, and whilst some improvements will be made, it’s unlikely these will be enough.

Banks need to understand what their employees really know and understand about all aspects of their roles and how likely they are to act, work or behave in any given circumstance.

In Cognisco’s experience 30% of any company’s workforce has serious gaps in understanding or misplaced confidence which poses a consistent and significant risk to the business and companies need to find better ways to identify and address these risks.

Whilst banks have compliance and enterprise risk management systems, these don’t provide the critical data and insight they need on the actual behaviour and understanding of their people.

Having an accurate way of measuring and assessing people risk is necessary, otherwise banks have people doing what they think is right and usually there are multiple views on ‘right’ if it is not clearly defined, and fragmentations lead to exposure to risks.

Processes alone are never enough, and certainly not if people don’t adhere to them. Processes only work up until the point a person fails to abide by it or is confused or told to bend the rules on certain occasions. The processes may not be suitable, but often this is only realised when something goes wrong. Then it’s important to get to the root cause and this can only be identified by insight on people, teams or projects, evaluating the effectiveness of the process and putting in place the right interventions, to prevent the same thing happening again.

Gaining a better understanding of people risk

To really understand their people risks, Banks must start to assess how their employees are engaging with the process or initiative and how they behave, act and think in different situations, as well as their appetite for risk.

Assessing employee competency

One effective way of doing this is measuring and assessing how competent, knowledgeable and confident people are about all aspects of their jobs to reveal what they understand and how they apply knowledge and the decisions they make in certain situations.

By assessing people’s competency and confidence together, companies can spot ‘risky’ individuals – people with low knowledge and high confidence as well as those with high knowledge but low confidence, who might not make the right decisions when under pressure.

Such assessments enable managers to gain insight into how individuals are performing at work, their weaknesses and their knowledge gaps and the decisions they are likely to make. The results data helps companies analyse who are their star performers as well as those individuals who might need more training in certain areas or who are actually not fit to practice and how might place the organisation at risk.

Organisational risks and culture do not sit in one easy to define central function. They exist in a myriad of behaviours and habits of individuals spread across all levels of the operation.  Ensuring that the drivers of employee behaviour in relation to risk management are effectively embedded into the operations of the business will help to shape banking culture for the better.

Banks must understand where their people risks lie, to ensure they meet the accountability reforms coming in next year. By understanding and addressing their people risk and getting to the root causes of behaviour, banks should be able to drive a positive culture change which will help them regain public trust and restore their damaged reputations, and meet the new conduct rules effectively.



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