Boards urged to create 'social risk officers' in banks

Australian Financial Review Apr 9, 2019 12.05am

James Eyers

Banks boards have been urged to appoint "social risk officers" as senior executives to help directors deal with exposure to a growing list of non-financial risks that have emerged as they struggle to manage relationships with customers, regulators and employees.

A report by the Actuaries Institute, to be released on Tuesday, could help boards and management teams quantify and respond to “non-financial risks”, after the Hayne royal commission called for financial institutions to assess culture regularly, deal with problems, and determine whether changes were effective.

Ian Laughlin, a former deputy chairman of the Australian Prudential Regulation Authority, co-wrote the discussion paper, which suggests compiling a "social condition report" will help boards measure and control “relationships and associated risks”.

“This can generate rich information that does not exist at the moment, which you can turn to your advantage,” Mr Laughlin said.

“We believe that the social condition of a financial services business is no less important to its long-term success than its financial condition,” says the paper, also written by Hadyn Bernau, a former chief actuary for the private health regulator now folded into APRA.

The new social risks that boards should be attuned to include: "true values risk", where actual behaviour is not the same as espoused values in banks' statements of principles; "patronism risk", where banks become blind to community expectations; "self-awareness risk", where banks condone poor behaviour without recognising how it is perceived; and "revenge risk", where scorned customers wage social media campaigns to create adverse publicity.

Mr Laughlin proposes new measurement techniques, using a combination of what he terms "relational analytics" and "signal analysis". These will allow banks to examine the closeness of relationships with "key social groups", including customers, employees, shareholders, politicians, regulators, the media and the public. By assigning strategic significance to each relationship, the process creates a "social goodwill measure" to allow boards to monitor progress and indicate where improvements can be made.

Financial services entities must now accept that financial risks are not the only risks that matter.

— Banking royal commissioner Kenneth Hayne in his final report

The measure could also feed into "balanced scorecards" used to determine remuneration.  APRA chairman Wayne Byres told the The Australian Financial Review Banking & Wealth Summit last month boards should reduce the influence of shareholder returns when determining banker pay.

The "social condition report" would be based on the financial conditions report APRA requires to be used in the insurance sector. These are created by an independent actuary to give boards risk advice separate from the management team.

The proposal comes after the summit revealed the financial services sector was struggling to determine how non-financial risk should be measured.  The uncertainty comes despite banking royal commissioner Kenneth Hayne saying in his final report: “Financial services entities must now accept that financial risks are not the only risks that matter. The prudent management of non-financial risks is equally important. Financial services entities must give sufficient attention, and devote sufficient resources, to the effective management of non-financial risks.”

The Actuaries Institute says this approach would help businesses address areas of concern identified by APRA in its prudential inquiry into the Commonwealth Bank. All APRA-regulated entities have audited themselves against the CBA recommendations. APRA would soon release a report on those assessments, My Byres told the summit.

Boards are grappling with how to document their efforts to implement Hayne recommendations. At the same time, the Australian Securities and Investments Commission is increasing its scrutiny of boardroom deliberations about conduct, including an investigation into CBA’s disclosure and adherence to director duties.

The Actuaries Institute report suggests existing measurements of customer satisfaction are insufficient, and that staff surveys must be improved using technology. Mr Laughlin proposes artificial intelligence technology could be run over a broad range of new data sets to find new insights.

Mr Laughlin, who is also chairman of the board of ANZ’s insurance companies, is chairman of the advisory board of Blackhall & Pearl, whose AI technology could be used for the "signal analysis". Mr Bernau is a principal at Finity Consulting, which could benefit from the system being adopted: the company is a licensee of the relational analytics tool used in the model.

The Actuaries Institute also published a mock social-condition report to show directors how the new information could be presented similarly to reports on operational risk.

The plan comes a week after Britain's Banking Standards Board showed the largest banks in the UK are struggling to implement culture reforms despite a five-year head start on Australia's banks.