The future of conduct risk management will be insights-led and data-driven. A core component is Conduct Analytics, that deliver insights into the risks that the institution is running today and predict the likely risk exposures of tomorrow. This is a key building block of the future state.
Banks are continuing to evolve on their Conduct Analytics journey to be more comprehensive, predictive and advanced in their analytics as well as insights. They face a number of challenges. The development of more sophisticated and robust analytics is hampered by legacy systems that do not easily yield the data required to feed the analytics and underlying behavioural models that generate predictive risk indicators. The need to accommodate remote working has further hindered efforts to develop holistic and insightful risk metrics. Individual behaviours inform culture, therefore Conduct Analytics needs to consider the impact on culture.
In collaboration with The Association for Financial Markets in Europe (AFME), we have developed this paper to create a blueprint for the banking industry that members can leverage as they continue to evolve and refine their Conduct Analytics Frameworks. The framework demonstrates how existing components of Conduct Analytics fit together and refocusses these around an insights-led and data-driven approach.
The paper also provides examples of market and conduct analytics that are industry practice as well as opportunities for banks to continue to evolve their conduct analytics frameworks and considerations to address challenges they face.
Key takeaways
- Identification of patterns and trends
- Conduct Analytics Frameworks need to evolve continuously to be sustainable
- Monitoring of culture
- Engaging the Business
- How to make the best use of technology
- Working together
Identification of patterns and trends
The Conduct Analytics Framework allows banks to identify patterns and trends, which will lead to insights. The current insights may provide weak signals symptomatic of root causes; layering of additional metrics may help in identifying the root causes.
Conduct Analytics Frameworks need to evolve continuously to be sustainable
New emerging risks arise based on how the business is changing. Banks need to continue examining the external environment and be forward-looking to identify emerging risks through means such as horizon scanning and new ways of working. This will allow them to determine periodically whether metrics being used for insights remain appropriate or need to change, e.g. through review of their broader Conduct metric set.
Monitoring of culture
Banks should strengthen efforts to measure and monitor culture. The regulatory focus on individual accountability continues, but regulators are also moving towards examining corporate culture and how this sets the tone for individual behaviours and enables the right client outcomes. This will reduce the focus on additional policing of individuals, which is becoming increasingly difficult due to data privacy and local labour laws.
Engaging the Business
The Conduct Analytics Framework cannot be implemented by Compliance alone. The Business is the First Line of Defence and is responsible for managing Conduct Risk. The Business therefore needs to collaborate with Compliance and with other functions such as Human Resources and Technology to allow the Bank to derive the right insights and actions as required.
How to make the best use of technology
There is no single technology solution that will resolve all considerations relating to Conduct Analytics. The technology architecture blueprint presented in this paper leverages components that are already in place in banks. Technology can be used to facilitate data collection, perform analytics and support more predictive analytics. Obtaining broader, holistic views of individuals (e.g. websites visited, applications used) requires analysis of unstructured data, which can be enabled by the use of Machine Learning and Natural Language Processing.
Working together
To a large extent, banks need to address the considerations outlined in this paper. Nevertheless, members can collaborate with other banks on industry-wide issues, such as sharing good practice. They can also work with AFME to lobby and provide suggestions to regulators e.g. for data privacy and remote and hybrid working.
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