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Welcome 27 September 2017

Belfast Region Committee

"Conduct & Consumer Protection Risk"

Helena MitchellHead of Consumer Protection: Supervision Division Central Bank of Ireland

Conduct & Consumer Protection RiskInstitute of Banking, Sligo Event

27 September 2017

Helena Mitchell – Head of Consumer Protection: Supervision DivisionCentral Bank of Ireland - UNRESTRICTED

Introduction

Overview of the Central Bank’s role in protecting consumers

Central Bank Act, 1942 Delivering on our consumer protection mandate

Conduct / Consumer Protection Risk

Thomson Reuters fourth annual survey – Culture and Conduct Risk 2017 Central Bank definitions

Consumer Protection Risk Assessment (CPRA) Model

Why we introduced the CPRA Model What this means for you

Modules of the CPRA / risks we are seeking to assess and mitigate

Governance and Controls People and Culture Product Development Sales Post Sales

Conclusion

Contents

Central Bank of Ireland - UNRESTRICTED

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“…the proper and effective regulation of financial service providers and markets, while ensuring that the best interests of

consumers of financial services are protected”

(S6A (2)(b) Central Bank Act, 1942 (as amended))


“…the function of monitoring the provision of financial services to consumers of those

services to the extent that the Bank considers appropriate, for the purposes of protecting

the public interest and the interests of consumers.”

(S5A (1)(f) Central Bank Act, 1942 (as amended))


Statutory Objective Statutory Function

The Central Bank Act, 1942 (as amended)

6Central Bank of Ireland - UNRESTRICTED

Safeguarding Stability

Gatekeeper/ Prudential Supervisor

Policy-Maker/ Influencer Conduct Supervisor Enforcer

Delivering on our consumer protection mandate

Conduct and Consumer Protection Risk




Fourth annual survey by Thomson Reuters

Some key points:

750 firms participated

21% reported having a separate working definition of conduct risk (down from 39% the previous year)

Practical difficulties in defining conduct risk

Failure to define may result in failure to recognise emerging risks in the business

PRISM 2011: Conduct Risk Assessment

CPRA 2016: Enhanced Conduct/ Consumer

Protection Risk Assessment



“The risk a firm poses to its customers from its direct interaction with them”

“Risks to consumers from a firm’s strategy, business model, culture, governance and other internal structures, its systems

and processes or the behaviours of individuals at any level within the firm”

Consumer Protection Risk Assessment Model


Governor Philip R. LaneExtract from a speech entitled “The Role of Financial Regulation in Protecting

Consumers”, University College Cork, 23 February 2017

“The fast pace of financial innovation has created a complex world for consumers, where the range of available financial products is broad, and the consequences of financial choices are

significant.

Coupled with this, the typical household tends to have a limited personal track record in making financial decisions, since the purchase of financial products happens only infrequently.

This is problematic, since the demands for financial sophistication and knowledge are sizeable if a consumer is to navigate safely through the options put forward by

providers of financial services.

Financial decisions often require consumers to assess risk and uncertainty, for example, and to consider trade-offs between the near term and the long term.

A growing body of academic literature shows that, among the general population, the level of financial knowledge, skills and ability to consider such

complexities is low.”


Context - Why we introduced the CPRA Model?

Three key points –

Financial products and services can be complex and are quickly becoming even more complex

Financial decisions require an assessment of risk and uncertainty Many consumers are not experienced in making these assessments, yet the consequences

of their decisions can be significant

So ... Consumers therefore need help and protection when making financial decisions They must be able to trust that you, as the professionals who are designing and selling

these products, will have their best interests at the centre of all that you do


Governor Philip R. LaneExtract from a speech entitled “The Role of Financial Regulation in Protecting

Consumers”, University College Cork, 23 February 2017

Modules of the CPRA /risks we are seeking to assess and mitigate


Module 3: Product Development

Module 1: Governance & Controls

Product Life Cycle

Module 5:Post Sales Handling

Module 4:Sales / Transaction Process

M1.1 – Organisation Structure

M1.2 – Board & Board Committees and Management & Management Committees

M1.3 – Control Functions / Consumer Monitoring

M1.4 – Strategy and Risk Appetite

M1.5 – Consumer Protection Risk Management

M1.6 – Consumer Reporting

• M3.5 – Product Management Information

• M3.4 – Distribution Arrangements

• M3.3 – Product Monitoring / Existing Product Reviews

• M3.2 – New Product Development

• M3.1 – Product Governance Arrangements

• M4.3 – Quality Assurance

• M4.2 – Operation of The Sales / Transactions Processes

• M4.1 – Sales / Transactions Governance Arrangements

• M4.4 – Management Information • M5.4 – Management Information


• M5.2 – Operation of the Post Sales Process

• M5.1 – Post Sales Governance Arrangements

Module 2: People & Culture

M2.1 – Firm’s Values & Behaviours

M2.2 – Leadership & Tone from the Top

M2.3 – Internal Communication

M2.5 – People Practices

M2.6 – Training

M2.7 – Performance Management, Reward & Incentives

M2.4 – Speak Up, Challenge & Escalation M2.8 – External Environment & Communication

• M3.6 – Marketing and Advertisement

CPRA Model


Module 3: Product Development

Module 1: Governance & Controls

Product Life Cycle

Module 5:Post Sales Handling

Module 4:Sales / Transaction Process

M1.1 – Organisation Structure

M1.2 – Board & Board Committees and Management & Management Committees

M1.3 – Control Functions / Consumer Monitoring

M1.4 – Strategy and Risk Appetite

M1.5 – Consumer Protection Risk Management

M1.6 – Consumer Reporting

• M3.5 – Product Management Information

• M3.4 – Distribution Arrangements

• M3.3 – Product Monitoring / Existing Product Reviews

• M3.2 – New Product Development

• M3.1 – Product Governance Arrangements


• M4.2 – Operation of The Sales / Transactions Processes

• M4.1 – Sales / Transactions Governance Arrangements

• M4.4 – Management Information • M5.4 – Management Information


• M5.2 – Operation of the Post Sales Process

• M5.1 – Post Sales Governance Arrangements

Module 2: People & Culture

M2.1 – Firm’s Values & Behaviours

M2.2 – Leadership & Tone from the Top

M2.3 – Internal Communication

M2.5 – People Practices

M2.6 – Training

M2.7 – Performance Management, Reward & Incentives

M2.4 – Speak Up, Challenge & Escalation M2.8 – External Environment & Communication

• M3.6 – Marketing and Advertisement

Targeted CPRAs


CPRAs will be intrusive in nature

Once we assess the design of a control, we will then seek concrete evidence of how effective the control actually is

We will review policies and procedures (including HR policies, such as recruitment, induction, performance management and reward);

We will observe at board and key committee meetings; ‘walk-through’ systems and conduct substantive testing on the consistency of application of the controls;

We will interview a selection of staff from various levels in the firm - board level, compliance and risk functions, HR, product development, marketing and sales staff – potentially including all of you sitting here today.

What this means for you


3. ProductDevelopment

1. Governance & Controls

2. People & Culture

Product Life Cycle

5. Post SalesHandling

4. Sales / Transaction Process

1. Governance & Controls

3

1

2

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Decisions that impact on customer outcomes occur at every level in the firm

Objective of Module 1 is to determine the extent to which a firm has put in place effective governance and control measures that enable the identification, management and effective mitigation of consumer protection risk

Examples of Risks: The firm has not considered consumer protection risk when developing its strategy or risk appetite Business and control functions do not support the identification, monitoring and management of risk Ownership for identification, assessment, mitigation and monitoring of risk is not clear

Module 1 – Governance & Controls


Extent to which the firm designs and reviews all consumer products to meet customers’ reasonable needs and expectations

Are marketing and distribution arrangements delivering adequate safeguards to protect consumers?

3. Product Development

Product Life Cycle

5. Post Sales Handling4. Sales / Transaction Process

3

1

2

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Modules 3, 4 & 5 – Product Lifecycle

Extent to which a firm ensures that a consumer understands the products s/he is being offered and that it meets her/his needs

Are products sold in the right way to the right people?

Extent to which the firm designs and reviews post-sales processes to meet customers’ needs and expectations

Are systems and controls posing unreasonable post-sales barriers?


What does a positive consumer-focused culture look like?

Consumers can be confident that firms are acting in their best interests at every point in their relationship with the firm

Boards and senior management set and own the ‘consumer tone’ through their commitment to fair consumer outcomes

Firms design and test products, specifically with consumers’ interests in mind Firms communicate clearly with consumers and help them to make informed decisions Firms engage constructively with consumers who have queries or complaints and deal with

claims and appeals fairly Staff are incentivised to sell suitable products to the consumers, for whom they were

designed

Module 2 – People & Culture

2. People & Culture

3

1

2

54


Module 2 focuses on a firm’s ‘intended culture’ Is there evidence of clear values in place, underpinned by behavioural expectations that

support consumer protection? Sufficiency of ownership of and commitment (tone from the top)? Communication of values and expected behaviours throughout the firm? How does the firm reinforce its expected behaviours in key stages of the employee lifecycle?

Recruitment Induction Promotion

How effective are the firm’s speak-up and escalation channels? Does the firm encourage staff to report behaviour that is not aligned to, or does not support

consumer protection? How does the firm incentivise staff (financial and non-financial) to deliver fair consumer

outcomes?

2. People & Culture

3

1

2

54

Module 2 – People & Culture


Conclusion


A firm must be able to demonstrate with concrete evidence that it understands the risks it poses to consumers from its Strategy Business model Internal structures and processes Employees’ behaviour

Many well-publicised systemic conduct failings Significant financial and reputational cost to firms More importantly, significant detriment to those people who keep firms in business

Genuine errors will occur and risks will crystallise, but you can and must do more to protect consumers Proactive and pre-emptive risk identification and mitigation is a must Risk management frameworks that strive for minimum compliance with the letter of the law are no

longer tolerable

Conclusion


THANK YOU

Useful Links

OECD/G20 High Level Principles on Financial Consumer Protection

Speech by Governor Philip R. Lane, University College Cork – “The Role of Financial Regulation in Protecting Consumers”, 23 February 2017

Guide to Consumer Protection Risk Assessment, 28 March 2017

Address by Helena Mitchell, Head of Consumer Protection: Supervision Division, to the Society of Actuaries in Ireland, ERM Forum – “A regulatory perspective on consumer risk”, 10 May 2016

Thomson Reuters Culture and Conduct Risk Report 2017

Conclusion


https://www.oecd.org/g20/topics/financial-sector-reform/48892010.pdf

https://access.centralbank.ie/Citrix/Untrusted/site/default.jsp



https://risk.thomsonreuters.com/content/dam/openweb/documents/pdf/risk/report/culture-and-conduct-risk-report-2017.pdf

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