“It takes 20 years to build a reputation and five minutes to ruin it.” (Warren Buffett)
Since the start of the financial crisis, we have witnessed a cataclysmic shift in both the perception of financial services firms and the manner in which firms are regulated.
Historically, customers and politicians alike placed trust in personal financial advisors and the wholesale market on the belief that integrity, sound morals and clear ethics were commonplace.
However, much has changed since the fall of Lehman Brothers in 2008. Firms and regulators have uncovered multiple examples of poor conduct, mis-selling, market manipulation, unethical behavior and failures in governance, systems and controls.
Research from the CCP Research Foundation indicates that conduct related costs were over £200 billion globally between 2010 and 2014. These costs span failures across retail, corporate and wholesale and impact the spectrum of financial services from banks and insurers to asset managers and intermediaries.
Since then, firms have either voluntarily or upon request from the regulator exerted significant time and resources in identifying these historical issues and remediating them where necessary.
Whilst firms incur significant costs in undertaking these Past Business Reviews (“PBRs”), they offer firms a unique opportunity to demonstrate that the future will be different from the past. Specifically, they offer:
- Tone from the top: PBRs offer a live opportunity for the regulator and customers to assess whether the messages of reform and cultural change from boards and senior management actually apply in practice and they can go some way to rebuilding trust.
- Regulator: The manner in which firms approach PBRs give a clear signal to the regulator of the changes in culture and governance within a firm and the manner in which it focuses on good customer outcomes.
- Culture/conduct: Undertaking a PBR in the right way sends a clear message to staff that senior management seeks to impose sound conduct within the organization with a focus on ensuring fair and reasonable outcomes for customers.
- Public: Where the PBR is in the public domain such as the Interest Rate Hedging Products review (IRHP Review) or the Payment Protection Insurance review (PPI Review), PBRs provide a firm with an ability to help repair any negative media and/or public perception of the firm.
Notwithstanding this unique opportunity, we have seen mixed results. Some firms have welcomed the opportunity with open arms whilst others have suffered through mismatced expectations, devoting inappropriate and insufficient resources and implementing an ineffective approach to customer engagement.
By way of example, in June 2015, Lloyds Banking Group was fined £117m for failing to handle PPI complaints fairly whilst the Bank of Beirut received a £2.5m fine in March 2015 for failing to implement the ‘remediation plan action points’ identified by the FSA/FCA in prior years.
Duff & Phelps’ Kinetic Partners division has undertaken a plethora of PBRs across the financial services spectrum as well as acting as trusted adviser to firms subject to a regulatory investigation. Whilst all PBRs are bespoke in their breadth, service line and depth of review, we identify some common areas of best practice:
- Scoping: Firms often devote insufficient time to identifying the scale and nature of the issue and do not seek clarity on any request issued by the regulator.
Best practice includes liaising with the regulator to ensure a clear understanding of scope and devoting resources up front to assess the full scale of the issue and numbers of customers affected.
- Pilot: A number of PBRs suffer setbacks as the regulator and/or senior management identify issues with the assessment criteria or conclusions reached after a significant period of time.
Best practice involves taking a representative sample through the process from selection to customer engagement and ensuring appropriate oversight from senior management and/or the regulator as appropriate.
- Governance: A clear governance process and senior management oversight is fundamental to set the right tone from the top and to ensure the project is on time and budget.
Best practice requires the allocation of an accountable executive and the creation of meaningful management information to track progress.
- Customer engagement: The customer experience is critical to a successful PBR. Customers have no knowledge of the significant effort exerted to reach the customer engagement phase.
Best practice involves creating a well-defined customer engagement plan and the ability to communicate in a manner that explains the issue, decision, process and next steps in a clear and appropriate way.
- Wider learnings: Firms are often faced with PBRs across multiple parts of their business.
Best practice includes incorporating the learnings from all PBRs and refining the overarching project and governance approach on an ongoing basis. Indeed, many firms have set up remediation centers of excellence to ensure consistency in approach and a central liaison with the regulator.
Ultimately, firms must enhance their governance, systems and controls whilst working on identifying and mitigating Conduct Risk to ensure that the issues of the past do not continue to be problems of the future.
“It takes less time to do a thing right than to explain why you did it wrong.”
(Henry Wadsworth Longfellow)