Over the last few months the financial services industry – and banking in particular – has been beset by a regular stream of scandals that have had a very significant impact on the reputation and standing of banks. These scandals have arisen after a period of years in which banks have done much to try to repair their battered reputations resulting from the 2008 financial crisis, which had reduced the reputation of the banking industry to its lowest ebb.
The financial crisis and all that has gone on since has only served to remind us that in banking and financial services more generally, any activity can give rise to significant reputational risk. Reputational risk arises from any aspect of an institution’s activities that may lead to negative publicity or public opinion, ultimately impacting current and prospective future earnings as well as shareholder value. This may manifest itself through, for example, loss of customers, talent or litigation.
Raising the stakes
To add to the challenging environment, regulators and authorities have developed a greater appetite to name and shame institutions and air dirty laundry for all to see. For instance, take the New York State Department of Financial Services and Senate Permanent Subcommittee on Investigations’ recent reports, or the FSA increase in enforcement activity. This simply raises the stakes still further for institutions and shows how important specific consideration of reputational risk must now be.
Where reputation risk has been identified in the past, financial rewards have typically been prioritised over potential reputational damage. This balance needs to be reconsidered. Today it is vital for banks to consider reputation as a specific risk in all that they do. This requires development of a more holistic view of risk, such that the nature of their activities and the potential for damage to their brands and reputation can be fully assessed. One of the true tests of an effective reputation risk framework will be measured by what business an institution decides not to do.
The FSA and other regulatory authorities in recent reviews and actions have placed strong emphasis on the importance of an appropriate risk culture supporting an organisation’s aims and objectives. The bedrock of any control environment is having an embedded culture of sound decision making, ethics and integrity to support the control infrastructure in place. While being the bedrock, a strong culture can also provide a competitive advantage.
Future framework
Whilst reward structures and the lack of change in remuneration levels at banks has continued to be a key factor in damaging their reputations; with an appropriate framework in place the reward structure can provide strong motivation to drive the desired behaviours.
Warren Buffett said that it takes 20 years to build a reputation and five minutes to destroy it. Recent experience shows this is not far from the truth. Financial institutions must take note to ensure they have the right risk-intelligent culture and risk management framework fully aligned with an organisation’s objectives and values and thereby mitigate the potential for further damage to reputations.
For further information visit www.deloitte.com; email jcolborne-baber@deloitte.co.uk or ncarrington@deloitte.co.uk