Financial services firms increase focus on building sound risk culture

• Financial services firms increase focus on building sound risk culture
• Majority of banks are planning changes to performance management programmes
• Many are changing employee value propositions to attract a new breed of graduates and retain millennials

Mercer’s latest Global Financial Services Executive Compensation Snapshot Survey* found that most financial services companies are taking significant steps towards fostering a sound risk culture amongst their staff. Of the companies surveyed, 62% have carried out initiatives to penalise misconduct and non-compliance to a ‘great degree’; 60% can show evidence of setting the right tone at the top and 58% are communicating clear (risk) culture objectives.

“It’s encouraging to see companies engaging senior leaders to set an example when it comes to risk taking and compliance behaviours,” said Vicki Elliott, Senior Partner and Financial Services Talent Leader at Mercer. ”The best way to foster a sound risk culture and combat excessive risk taking is with strong, authentic leadership who are willing to manage consequences for good and bad behaviour.”

Mercer research showed that rewarding positive risk behavior continues to be challenging with only a few organisations having taken these steps “to a great degree” (only 11%). “Proactively rewarding positive risk behaviour can be tricky but it is likely to have a more positive impact on culture in the long term compared to punitive measures,” said Elliott.

Mercer’s survey reviewed the practices of 68 financial services companies globally – banks, insurers and other financial services companies – based in 20 countries in Europe, North America, and Asia. The report provides an update on key changes in talent management and rewards practices in financial services

Experience with bonus malus**

Over 90% of banks and 72% of insurance organisations have malus policies in place largely due to regulation which requires that all or a portion of deferred or unvested awards can be reduced or wiped out. Such policies are mostly triggered by individual misconduct (89%), individual breach in compliance (89%) and negative business performance (74%). About half of banks have applied malus for individual performance reasons. However, approximately 60% of them do not retain individuals involved in malus cases, which may call into question their overall effectiveness.

Performance management changes

“Establishing an effective employee performance management system continues to be a highly challenging task for financial services organisations,” said Dirk Vink, Principal in Mercer’s Talent business. “However when done right it can have a greater impact on behaviour and performance than just changing compensation plans. Performance management reform is a key lever to help manage toward desired culture change.”

In Mercer’s study, more than half responded that their performance management approach works well, though only a small proportion indicated that it delivers exceptional value. Mercer’s survey finds that change is on the horizon, with half of all banks planning to make changes to their performance management processes in the next 12 months, this compares to just 16% of insurers. However, 32% of insurers want to change their processes but are unsure when. Almost half of respondents indicate that their feedback process and performance management linkage to development needs work. Most banks are increasingly involving their risk management function in selecting performance measures, goal setting and performance evaluation, which is a significant development for aligning performance with sound risk-taking.

Employee value proposition beyond pay

Mercer’s report found that many financial services companies have made or are making changes to their employee value proposition (EVP) beyond pay in order to better attract and retain talent who might otherwise choose not to work for them. The most prevalent initiatives planned, or already in place, are learning and development programmes (47%) and remote working programmes (43%). Other popular changes include implementing career frameworks (37%), introducing flexible working (37%) and non-monetary recognition programmes (34%).

“Following the financial crisis, the reputation of traditional financial services firms suffered badly. Esteem turned to stigma as a new generation of graduates started rejecting a culture they viewed as aggressive and lacking in integrity,” said Mark Quinn, Partner and Head of Mercer’s UK Talent business. “Banks, in particular, who have since been struggling to attract and retain the best new talent, are realising that these so-called millennials are not just in it for the money. They look for a sense of pride and purpose in their work, as well as flexibility and career support. To attract them, companies need to develop a strong and genuine purpose-led employee value proposition.”

Source: Mercer. Steps taken towards fostering a strong risk culture.

*This edition of the survey looks at changes in annual, deferred and long-term incentives, pay mix and role-based allowances. Forty-seven percent of companies are based in Europe, 32% in North America and 21% in Asia. Fifty percent of companies are in banking, 28% in insurance and 22% in other financial sectors (asset managers, for example).

***Bonus Malus refers to the part of the deferred bonus that has not yet been paid out and can be ‘reclaimed’ because, for example, an acquisition’s due diligence is not carried out thoroughly.

Labuan IBFC emphasises focus on compliance and transparency for business activities

In the wake of the Panama Papers expose, the Labuan International Business and Financial Centre (Labuan IBFC) has emphasised that it continues to play a facilitative role for cross-border trades and investments, particularly in the ASEAN region, but also ensures rigorous transparency and high regulatory requirements for the business activities undertaken by players.

The centre has continuously enhanced its regulatory framework and supervisory regime in conformity with international standards and practices on transparency and regulatory compliance, said the organisation in a statement.

“The current issue relating to the information leakage has heightened the demands for greater transparency and effective exchange of information across all international financial centres,” said Danial Mah, CEO, Labuan IBFC, the marketing arm for Labuan Financial Services Authority (Labuan FSA).

Considering that Labuan has attractive value propositions and is strategically located to investors to establish their businesses in this region, there is a need to ensure that the laws and regulations are robust to govern the centre and ensure that it operates in a sound, prudent and transparent manner.

He added that “the business activities in Labuan IBFC are conducted under a strong set of rules and regulations that ensure the orderly establishment and operations of Labuan business entities including the licensing of financial institutions”. 

Labuan FSA, as the regulatory authority, supervises and regulates the various financial institutions including trust companies which are responsible for the registration of Labuan entities. They are required by regulations to have proper due diligence process in place when dealing with potential customers and maintain records and accounts of their clients in Labuan.

Labuan IBFC as part of Malaysia is committed to the global standards and requirements on transparency and exchange of information. In the area of taxation, Labuan IBFC’s tax laws are in compliance with the internationally agreed tax standards under the OECD Global Forum on Tax Transparency and Effective Exchange of Information.

Malaysia including Labuan have been cooperating with other countries in exchange of information under the various multilateral and bilateral agreements including the Double Tax Agreements signed by Malaysia with more than 75 countries. The Labuan Business Activity Tax Act 1990 was amended in 2010 to provide for accessing and sharing of information with other regulatory and competent authorities. Labuan IBFC is also committed to the reporting requirements under the Foreign Account Tax Compliance Tax Act and Common Reporting Standards for Automatic Exchange of Information (CRS-AEOI).

Mah reiterates “in fact, Malaysia (including Labuan) is among the countries that made early commitment to adopt the OECD standards on exchange of information”. Furthermore, Labuan is a full signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (MOU) that enhances regulatory cooperation with other Securities Commissions on capital market activities. It has also signed bilateral MOUs with other regulatory authorities to further reinforce cross-border cooperation on regulatory and supervisory activities.

In addition, the jurisdiction requires its players and service providers to be in compliance with the laws and guidelines pertaining to Anti Money Laundering and Combating Financing of Terrorism (AML/CFT). Malaysia (including Labuan) was one of the early jurisdictions to undergo the international mutual evaluation exercise under the new methodology in 2014 and the admission of Malaysia as a member of the FATF in February 2016 is a testament of the commitment to standards and practices in AML/CFT.

Mah concluded that Labuan IBFC will continue to play a positive role in providing the synergy and connectivity for financial linkages and businesses in the region, particularly among the ASEAN countries. “We welcome legitimate and genuine businesses and players that want to operate in Labuan IBFC’s cost-efficient and well-regulated environment.” he said.