Andrew Smart sought to de-mistify some of the market perceptions about Conduct Risk Management and show how to make Conduct Risk Business As Usual. He showed that Conduct Risk Management should not be regarded as a new management framework or process, rather it should be embedded within the business strategy and operational processes.

1. Making Conduct Risk [Good] Business as
Usual
taking a strategic approach to Conduct Risk Management
Scottish IOR Conference
1st November, 2013

2. Introduction

15 years plus in strategy and risk
management

CEO & Founder of Manigent
(consultancy)

CEO & Founder of
StratexSystems (software)

2006/07 -12 month / 21
organisation research project into
the integration of strategy and risk
management

2008 - Created the Risk-Based
Performance Management
methodology during various
strategy and risk related
engagements in the city
Page  2

3. Agenda
 The emerging regulatory landscape
 Implementation of a Conduct Risk Management
framework
 Taking a strategic approach to Conduct Risk
Page  3

4. The emerging regulatory landscape

5. With the creation of the FCA, Conduct Risk
becomes central to the regulatory agenda
FCA
Objective
To make relevant markets work well so consumers get a
fair deal.
1.
Outcomes
2.
3.
3 Pillars
Regulatory
Approach
Consumers get financial services and products that meet their needs, from
firms they can trust;
Markets and financial systems are sound, stable and resilient, with
transparent pricing information; and
Firms compete effectively, with the interests of their customers and the
integrity of the market at the heart of how they run their business.
CONDUCT
RISK
Firm Systematic
Framework (FSF)
Event-driven work
Page  5
Issues and products

6. FCA has a range of new powers
 Power to;
 ban products or restrict
sales
 stop misleading financial
advertising
 tell the public earlier about
enforcement action
 Better tools to regulate
markets
“The key difference between the
future and now is we (the FCA)
are being given the power to
shoot first and ask questions
later”
Martin Wheatley to the Association
of British Insurers, September,
2012
Page  7

7. The FCA has new regulatory tools
Business Model and Strategy Analysis
Stage 1
Are the interests of customers and
market integrity at the heart of how the
firm is run?
Governance and Culture
Sales Processes
Stage 2
Post-sales/services and
transactions handling
Product Design
Page  8

8. What does the FCA really want from firms?
“We accept the FSA has not
been as effective a conduct
regulator as it could have
been”
“Led in many cases to a tickbox and overly legalistic
compliance culture within
firms, encouraged by what has
been seen as a tick-box
regulatory approach”
Clive Adamson, Director of Supervision,
FCA, 19/4/2013
“We will have a greater expectation of a strategic
approach to the conduct agenda and senior
management and board engagement in it.”
Clive Adamson, Director of Supervision, Conduct Business Unit,
FSA, January 2012
“We accept that firms need to be able to generate
acceptable returns for shareholders, and have to
be financially robust but this is about ‘good
profits' rather than profit at any cost - either to
firms' own stability or their customers’ best
interests.”
Martin Wheatley, FCA CEO
Page  9

9. What does the FCA really want from firms?
“We will have greater expectation of a strategic
 Customers at the heart of youra firm’s business
“We accept the FSA has not
approach to the conduct agenda and senior
been as effective a conduct
model and strategy
management and board engagement in it.”
regulator as it could have
been”
Clive Adamson, Director of Supervision, Conduct Business Unit,
FSA, January 2012
“Led in many cases to a tick A strategic approach with strong senior
box and overly legalistic
management and board engagement
compliance culture within

firms, encouraged by what has
been seen as a tick-box
regulatory approach”
Good profits
Clive Adamson, Director of Supervision,
FCA, 19/4/2013
“We accept that firms need to be able to generate
acceptable returns for shareholders, and have to
be financially robust but this is about ‘good
profits' rather than profit at any cost - either to
firms' own stability or their customers’ best
interests.”
 Stability and accountability
Page  10
Martin Wheatley, FCA CEO

10. How are you responding to the Conduct Risk
agenda?
Specific Conduct Risk
Management
Framework
Vs.
Embedding Conduct
Risk Management into
the existing
Management approach
Which approach has your firm taken?
Page  11

11. How are you responding to the Conduct Risk
agenda?
To meet regulatory
requirements
Vs.
To truly put customers
at the heart of your
business
What is your firms motivation?
Page  12

12. What we have seen over the last few months

“We have created a Conduct
Risk Management framework
which adds 175 new indicators
to our monthly MI” – Director of
Operational Risk

“Conduct Risk is been handled
by the compliance team –
CEO”

“We don‟t see a real need to
change, Conduct Risk is just
TCF 2.0” - CRO
Specific Conduct Risk
Management
Framework
To meet regulatory
requirements
Page  13

13. We believe Conduct Risk represents a big
opportunity for your firm and for the Risk
Management profession

Embedding Conduct
Risk Management into
the existing
Management approach
To truly put customers
at the heart of your
business
Drive strategic and operational
change to drive improvements is
customer satisfaction and
profitability

Embed risk management as a
core part of your firm‟s strategic
and operational execution
culture

Drive improvement across
management processes,
information and decision-making

Raise your professional profile
and that of your team
Page  14

14. Implementation of a Conduct Risk
Management framework

15. Developing a Conduct Risk Management
framework is an understandable response by firms
Page  16

16. However, we believe a specific Conduct Risk
Management framework is an sub-optimal
response
Creating a new, specific Conduct Risk Management framework
can have a number of potential pitfalls:
 Can create significant duplication and confusion
 Can significantly increase the amount of data been collected
and reporting…but reduce the amount of insight generated
 Perpetuates the tick-box approach and culture
 Misses the opportunity to:
 Drive real business change and improvement
 Put risk management (and customers) at the heart of strategic and
operational execution
Page  17

17. Taking a strategic approach to
Conduct Risk

18. Strategic
An integrated model for Strategy and Risk
Management
Strategy Map
Strategic Risk Map
Alignment
Business Drivers
Initiative Alignment
Matrix
Appetite Alignment
Matrix
Process Architecture
Initiative Portfolio
Operational Risk Map
Operational
Process Alignment
Matrix
Page  19

19. An integrated model for Strategy and Risk
Management
What our Business
Objectives?
What our Strategic
Risks?
Business Drivers
Strategic
What are our key
value drivers?
Strategy Map
Strategic Risk Map
Alignment
Are our
initiatives
aligned?
Are we operating
within Appetite?
Process Alignment
Matrix
Operational
Are our BAU
processes
aligned?
Initiative Alignment
Matrix
Appetite Alignment
Matrix
What are our
key BAU
processes?
What are our
key change
initiatives?
What our
Operational Risks?
Process Architecture
Initiative Portfolio
Operational Risk Map
Page  20

20. Central to this integrated model for Strategy and
Risk Management is the Strategy Map
Page  21

21. The Strategy Map is a leading tool to enhance the
communications, execution and monitoring of
strategy
Improve Shareholder Value
To succeed
financially, how
should we appear
to our
shareholders?
Improve Cost
Structure


Cost per Unit
• Market and Account Share
Enhance Customer
Value

Asset Turnover

Customer Profitability

Customer Acquisition

Customer Retention
Create Value from New
Products & Services
New Revenue Sources
Customer Satisfaction
Customer Solutions
Customer Value Proposition
Product/Service Attributes
Price
To achieve our
vision, how will we
sustain our ability
to change and
improve?

Increase Asset
Utilization
Revenue Growth Strategy
Product Leader
To achieve our
vision, how should
we appear to our
customers?
To satisfy our
shareholders and
customers, what
business processes
must we excel at?
Shareholder Value
ROCE
Productivity Strategy
Quality
Time
Operations Theme
Low Total Cost
Relationship
Function
Service
Customer
Management Theme
Image
Relations
Brand
Innovation Theme
Regulatory and
Society Theme
Human, Information, and organisational Capital
Strategic
Competencies
Strategic
Technologies
Page  22
Climate for
Action

22. Financial
Customer
Internal Process
Learning &
Growth
Deliver Revenue
Growth
The Strategy Map articulates how
an organisation creates value
Objective
Statement of what
strategy must
achieve and what’s
critical to its
success
KPIs
How success in
achieving the
strategy will be
measured and
tracked
Targets
The level of
performance or
rate of
improvement
needed
Initiatives
Key action
programs
required to
achieve Priorities
Sustainable Growth
Objective
KPIs
Targets
Initiatives
Drive sales execution
Drive sales
execution
YTD % Increase
in income
“Their fees are
clear and fair”
“We align our
incentives to our
appetite & desired
behaviours”
Page  23
25%
 Implement
new sales
process

23. Financial
Customer
Internal Process
Learning &
Growth
Deliver Revenue
Growth
However, to create value, risktaking must be aligned to
strategy…
Objective
Statement of what
strategy must
achieve and what’s
critical to its
success
Appetite
How much risk
are we willing to
run to achieve the
objective?
Exposure
How much risk
are we currently
running?
Alignment
Is our current
risk-taking
aligned to
appetite?
Sustainable Growth
Objective
Appetite
Exposure
Alignment
Drive sales execution
Drive sales
execution
Moderate
High
Over-exposed
“Their fees are
clear and fair”
“We align our
incentives to our
appetite & desired
behaviours”
Page  24

24. Financial
Customer
Internal Process
Learning &
Growth
Deliver Revenue
Growth
“Their fees are
clear and fair”
Sustainable Growth
Drive sales execution
Effective risk management
supports value creation and value
protection...
Objective
Statement of what
strategy must
achieve and what’s
critical to its
success
The threats and
opportunities (risks)
exist which may
impact achievement
of objectives
Objective
Risks
Drive sales
execution
“We align our
incentives to our
appetite & desired
behaviours”
Page  25
Risks
 Mis-selling
resulting in
reputation
loss
Thresholds
The appetite and
tolerance
thresholds used
to monitor risk
Mitigation
The activities
undertaken to
manage risk
Thresholds
Mitigation
 Appetite
 Tolerances
 Controls
 Initiatives
 Policy &
procedures
 Processes

25. Learning &
Growth
Internal
Processes
Customer
Financial
The Strategy Map can be used to demonstrate the
role customer outcomes play in the firm‟s strategy
Drive Shareholder
value
Deliver Revenue
Growth
“Their fees are clear
and fair”
Drive sales execution
“We leverage our data to
deliver positive customer
outcomes
Information Capital
Control Costs
“Their solutions
continue to meet our
changing needs”
“We received good
value”
Continuously seek to
understand client
needs
Deliver outstanding
customer service
@ POS
“We sell the right
products, to the right
people, the right time”
Cultural Capital
Page  26
“We have quick,
convenient access to
our financial info”
Ensure effective
Complaints
handling
“We align our incentives
to our appetite & desired
behaviours”
Human Capital

26. Having clear and achievable financial Drive Shareholderis critical to ensure the firm is
objectives
value
Deliver Revenue and will be around to provide on-going service
sustainable
Control Costs
Growth
Customer
Financial
The Strategy Map can be used to demonstrate the
role customer outcomes play in the firm‟s strategy
Internal
Processes
By convention,are clear
customer outcomes are expressed“Their solutions you would have quick,hear
is phases
“We like to
“Their fees
“We received good
continue to
convenient
and customers use to describe your firm and meet our
value”
yourfair”
products/services access to
changing needs”
our financial info”
Deliver outstanding
Learning &
Growth
Ensure effective
To deliver financial and customer outcomes, we must be clear about the key processes
customer service
Continuously seek to
Complaints
Drive sales execution
@ POS
understand client
handling
which will enable us to deliver those outcomes.
needs
“We leverage our data to
“We sell the right
“We align our
Underpinningpositivedelivery of the key processes,the right
the customer
financial and customerappetiteincentivesis
outcomes
deliver
products, to
to our
& desired
outcomes
people, the right time”
behaviours”
the organisational culture.
Information Capital
Cultural Capital
Page  27
Human Capital

27. „Slice‟ the Business Strategy by Customer
Perspective to get a „Conduct Risk‟ view
Page  28

28. Customer related processes and initiatives are
aligned to customer objectives via alignment
matrix‟s
Page  29

29. Learning &
Growth
Internal
Processes
Customer
Financial
The Strategy Map can be used as a starting point in the
definition of risks & controls related to customer
outcomes
Deliver Revenue
Growth
“Their fees are clear
and fair”
Drive sales execution
“We leverage our data to
deliver positive customer
outcomes
Information Capital
Page  30

30. Use the same approach at an operational level to wrap a
risk & controls framework around customer related
processes (and initiatives)
Processes
KPIs
Risk
Appetite
Actions
Key Risks
KRIs
Actions
From a Conduct Risk
perspective, define, manage and monitor key
customer processes, such as New Product
Development, Sales Execution, Customer
service, Complaints handling etc.
Assessment
Events
KCIs
Key Controls
Actions
31
Page  31
Assessment
Certification

31. Apply the RACI model at a Strategy and Operational
level to clarify and embed accountabilities for Customer
outcomes
“The doers”
Those people working on
delivering the objective, managing
the risk or applying the control.
“The buck stops here”
P
“Keep in the picture”
Those with Yes/No authority
related to the objective, risk or
control.
“Keep in the loop”
Position(s) that need to know
about decision or action related to
the objective, risk or control.
Those involved prior to
decisions or action related to
the objective, risk or control.
Page  32

32. Line of Sight Dashboards which require
Accountable sign-off reinforce a culture of
accountability
Page  33

33. Using existing management „tools‟, Conduct Risk
can be embedded within your existing
management approach
What our
Customer
Objectives?
What our Conduct
Risks?
Business Drivers
Strategic
What drives
customer value?
Strategy Map
Strategic Risk Map
Alignment
Are our initiatives
aligned to
customer
outcomes?
Is our Conduct Risk
Appetite aligned to
our Strategy?
Process Alignment
Matrix
Operational
Are our processes
aligned to
customer
outcomes?
Initiative Alignment
Matrix
Appetite Alignment
Matrix
What are our
key BAU
processes?
What are our
key change
initiatives?
What our Conduct
Risks?
Process Architecture
Initiative Portfolio
Operational Risk Map
Page  34

34. Why take a strategic approach to Conduct Risk?
Our experience (with Financial Services and non-Financial
Services firms) shows the benefits of taking a strategic
approach:
 Significant improvements in Board and Senior
Management engagement
 Significant improvements in Management Information
and Insights – shaping the focus on the „vital few‟
 Improved regulatory engagement
 Activities to deliver your Conduct Risk requirements
have the additional pay-off of driving real business value
 Enables the CRO/Risk Team to demonstrate real
business value via enhanced risk management practices
Page  35

35. Integrating Strategy & Risk
Management
an Introduction to Risk-Based Performance Management

36. Risk-Based Performance Management (RBPM) is a holistic
and integrated approach to strategy execution and risk
management
What are we trying to
achieve?
What is our Risk Appetite?
Strategy
Management
Appetite
Are we on track?
Performance
Management
Risk
Management
Governance & Communications
Culture
Page  37
Are we operating
within appetite?

37. The Risk-Based Performance Management (RBPM)
methodology is based on seven management disciplines
Business Drivers
Capital
Income
2. Manage
Performance
1. Set
Strategy
Appetite
Share Price
?
5.Governance
4. Appetite
Alignment
3. Manage
Risk
Shareholder Value
Reputation
Appetite
7.Culture
6.Communications
Economic value
add
Page  38
Profit
?

38. The Risk-Based Performance Management (RBPM)
roadmap can be used to guide the implementation of an
effective response to the Conduct Risk agenda
Execution
Formulation
Define
Strengths &
Weaknesses
Define
Strategic
Goals
Define
Business
Drivers
Define
Strategic
Risks
Define Risk
Appetite
Define
Strategic
Objectives
Define the
Strategy
Define the
Business
Model
Define
Strategic
Controls
Align Risk
Appetite &
Strategy
Define
Indicators
Define
Processes
Define
Initiatives
Define
Operational
Risks
Define
Operational
Controls
Executive
Board
Page  46
Assess Risks
& Controls
Monitor
Appetite
Alignment

39. Contact details
Andrew Smart
CEO
Manigent & StratexSystems
Email: andrew.smart@manigent.com
Blog: www.riskbasedperformance.com
Web: www.manigent.com | www.stratexsystems.com
LinkedIn: http://uk.linkedin.com/in/ajsmart
Twitter:@AndrewJSmart
Page  47