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Conduct and other non-financial risks are under the public spotlight

May 28, 2018

Contacts

Partners James Caird, Jania Baigent

Financial services regulation

The priority directors and senior management place on conduct and other non-financial risks is under the public spotlight.

This is an issue which requires active attention from businesses – we detail below the questions you should be asking.

The constant pressure for businesses to produce strong financial results can result in financial risks dominating the attention of boards and executives. However, high-profile Australian inquiries into the financial services industry have placed a renewed emphasis on non-financial risks. New Zealand regulators are also increasingly emphasising these issues.

The importance of non-financial risks is not limited to the financial services industry. Boards of directors and senior management across all industries should reflect on whether their approach to these risks is adequate.

The impact of current scrutiny from regulators

Non-financial risks include matters such as operational, compliance, and conduct risks. The latter, conduct and culture, has jumped into the forefront of regulatory reviews and investigations.

The ongoing Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has placed considerable emphasis on businesses’ failures to give conduct and other non-financial risks the same importance as financial risks.

In New Zealand, the Financial Markets Authority and the Reserve Bank of New Zealand recently met with the Chief Executives of New Zealand banks, and sent them a public letter requesting the banks to demonstrate what steps they have taken in order to be comfortable that there are no material conduct issues within their businesses. The same letter has also been sent to Life Insurers in New Zealand.

Last year the FMA issued “A guide to the FMA’s view of conduct” and stated they will be applying a “conduct lens” when regulating businesses.

In short, the strong focus on conduct and culture is set to remain.

Conduct and other non-financial risks should be at the forefront of considerations

Boards of directors and senior management across all industries need to have conduct and other non-financial risks at the forefront of their considerations. Questions they should be asking themselves include:

  • Does the board of directors have an adequate understanding and oversight of conduct and other non-financial risks?
  • Does the board of directors challenge sub-committees and senior management as to emerging non-financial risks?
  • Is there clear accountability for non-financial risks, and is there sufficient ownership of these risks at executive levels?
  • What are the processes for identifying non-financial risks, and how do these work in practice (as opposed to on paper)? Are the processes essentially reactive, or pro-active, in nature?
  • Once risks are identified, how are they escalated internally and are they addressed with sufficient urgency?
  • Are there adequate resources allocated to compliance functions within the business?
  • Do remuneration frameworks encourage best practice behaviours within the business (from front-line employees and agents to directors)?

The consumer is the ultimate stakeholder when considering questions of conduct and culture. Many of the shortcomings seen in the Australian inquiries did not result from a lack of a customer-centric approach, but rather because there were inadequate processes in place to identify and address non-financial risks in a pro-active and timely manner. Good intent was used to justify poor risk outcomes.

The good news is that robust governance and practices around conduct, culture, and other non-financial risks is achievable, provided boards of directors and senior management give it the ongoing priority it deserves.  

Simpson Grierson advises boards of directors and executive senior management teams on good governance practice. Contact one of our partners for further information.