Personal Liability Fears Deter Financial Firms' Bosses From Pursuing Profitable Business - Study

Tom Burroughes Group Editor 5 May 2017

Personal Liability Fears Deter Financial Firms' Bosses From Pursuing Profitable Business - Study

Fear of being held personally liable for regulatory and other failings is discouraging executives at financial firms such as banks from going after profitable business.

Bosses of financial organisations are worried that they are personally liable for business decisions they take, with a significant number declining profitable ideas to protect themselves, according to a survey by Thomson Reuters.

The news and information service, in its recent Conduct Risk survey, said there is a direct link between an organisation's culture and conduct risk.

About a third of executives said they have turned down a potentially profitable business opportunity because of fears of becoming personally liable for compliance failings.

“The frank concerns and views shared by participants reinforce challenges their peers face in all financial services sectors. Neither culture nor conduct risk are new concepts but this year’s survey emphasises how both remain at the top of firms’ and regulator priorities, directly impacting strategy as they face greater prospects of personal liability," Stacey English, head of Regulatory Intelligence, Thomson Reuters and co-author of the study, said.

For this year’s survey, which concluded in the fourth-quarter of 2016, Thomson Reuters Regulatory Intelligence surveyed compliance practitioners at over 750 financial services firms including banks, brokers, asset managers and insurers and including most of the largest G-SIFIs, in Africa, the Americas, Asia, Australia, Europe and the Middle East.

Around the world, regulators have sought to impose more duties - and potential penalities - on executives at banks and other bodies in a bid to prevent the kind of excessive risk-taking and lax practices associated with the 2008 financial markets crash. In the UK in 2016, for example, the Senior Managers & Certification Regime went live. This regime is designed, its framers say, to improve how financial organisations are run, make senior managers take more direct responsibility for what their firms do - with potential penalties. The system is enforced by the UK’s Financial Conduct Authority and the Prudential Regulation Authority of the Bank of England. The US Dodd-Frank legislation's whistleblower provisons are also designed in part to hold managers to tighter account, although there remains debate on how effective that legislation will be in practice.

The study, Thomson Reuters Culture and Conduct Risk 2017 survey report, suggests that increased actions by regulators worldwide are beginning to change behaviors of decision makers at banks, brokerage and asset management firms, and insurance companies. The 2017 survey was expanded specifically to cover culture, as well as conduct risk, to reflect evolving regulatory expectations.

Some 29 per rcent of firms have declined potentially profitable business opportunities due to culture and/or conduct risk concerns, compared with 37 per cent of respondents at global systemically important financial institutions (G-SIFIs). A clear majority, 77 per cent, said they took conduct risk factors into consideration when determining business strategy.

Most executives (87 per cent) at G-SIFIs agreed that continued focus on culture and conduct risk will increase personal liability, compared with 73 per cent at other firms. The disparity is potentially the result of a lack of consistent definition for culture and conduct risk.

Respondents ranked culture, ethics and integrity (59 per cent) as their top three concerns of conduct risk, followed by corporate governance and tone from the top (52 per cent), and conflicts of interest (49 per cent).


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