NEW YORK(Thomson Reuters Regulatory Intelligence) - BNP Paribas put its front-line businesses in charge of overseeing conduct within the bank, by embedding “chief conduct and control officers” who are responsible for spotting behavior that could put the institution at risk, according to Eric Young, chief compliance officer for the French lender’s operations in the Americas.
In a wide-ranging interview with Regulatory Intelligence, Young, who oversees a compliance staff of around 600 across the United States, Canada and Latin America, outlined numerous changes the bank has implemented to tackle conduct and culture, including putting greater responsibility on the business, and using behavior as key criteria in the firm’s executive review and promotion process. Young joined the bank in 2015 after serving as chief compliance officer at S&P Global, the ratings agency.
BNP Paribas is nearing completion of a remediation plan under a 2014 agreement with the U.S Department of Justice over U.S. sanctions violations, which it paid $8.9 billion to settle. It is also taking measures to strengthen foreign-exchange compliance after the New York Department of Financial Services in 2017 fined the bank $350 million for illegal foreign exchange related conduct.
“What we’ve done at BNP on the wholesale side over the past four years is to roll out a conduct program owned by the first-line businesses, which is a bit still unique to the rest of the banking industry because conduct often is associated with the second-line compliance department,” said Young.
“The first line businesses own and are accountable for misbehavior, particularly relating to the client,” added the executive.
Young’s past experience includes senior roles at JPMorgan, the Federal Reserve Bank of New York and General Electric.
“For example, on an end-to-end deal, meaning: before the deal, during the deal and after the deal, BNP has built conduct ‘toll gates.’ And that’s part of our decision process whether it’s in pricing committees, deal committees, governance committees at the top of the house, conduct is front and center about what we consider the impact is on our client,” said Young.
The “toll gates” essentially serve as check points that the business has to go through when considering various stages of a deal or transaction. The question that is asked at each toll gate -- whether in the formulation or marketing stage, structuring the terms of the deal, or completion -- is whether the customer’s interests are being served, and if not, what needs to be done to ensure that those interests are protected.
Having business heads play a more active role in managing conduct and culture in the financial industry has been an emerging theme over the past few years, as regulators such as Federal Reserve Bank of New York seek new ways of tackling what many see as an enduring issue, particularly for the largest banks.
CHIEF CONDUCT AND CONTROL OFFICERS
As part of its “front-line” program, BNP Paribas has created new roles, specifically, a network of “chief conduct and control officers” who are not revenue producers but are paid by the businesses they work for.
“They walk the trading floor; they walk the different parts of the business because they are either ex-traders, ex-sales people, and so they know an issue when they see one or hear one,” said Young. “For example, they might hear a trader or sales person on their phone and it just doesn’t sound right. Prevention is in some ways often more important than detection.”
The need to mitigate behavioral risk quickly has also gained traction among other European institutions. For example, RBS in London created a behavioral risk team within its internal audit function several years ago, which includes professionals trained in organization psychology. The objective of the group is to identify “hot spots” within the organization that might require a deeper review, particularly in terms of behaviors that could put the firm at risk.
To prevent such behavioral risks from mushrooming into a much larger problem, the team works alongside compliance, human resources and other functions in the bank to identify businesses where it should perhaps have a closer look.
CODE OF CONDUCT AND PROMOTION
As many have argued, financial incentives are often seen at the root of misconduct, particularly if those incentives are combined with pressure from managers to achieve performance targets. The Wells Fargo phantom account scandal is perhaps the most egregious in recent memory, but numerous other examples have demonstrated the importance of taking compensation and bonuses into account when trying to curb misbehavior and instilling stronger ethics and culture across the organization.
In its cultural revamp, Young noted that the bank has implemented conceptual frameworks for protecting their customers and keeping their best interests in focus.
“We have certain pillars (or what we call ‘domains’) around protecting our customers, knowing our customers, having market integrity; preventing the proceeds of crime and terrorist financing (financial security); having professional ethics and cutting across all of these is about respecting our own colleagues,” said Young. “And that is something that all employees are expected to be measured against and is included in our annual review process.” The pillars or domains are a high-level element of the company’s code of conduct which filter down across the organization, with the various businesses ultimately in charge of ensuring that employees adhere to the code.
Employees in line for a promotion, particularly at the director and managing director level, face a comprehensive assessment that includes not only delivering on expected business results, but also behavior and conduct.
“We also include conduct when we are considering candidates for promotion. Particularly for managing director and director. One of the questions that we ask during interviews of these candidates, and whereby the management committee ultimately votes on whether a person should be made a managing director or director, is whether they are behaving (i.e., conducting themselves) the way they should,” said Young.
“We also have a committee, we call it the permanent control committee, which twice a year assesses, particularly for senior executive and what we call material risk takers, whether they are behaving appropriately. And there are different ways to define behavior,” he added.
Some of the behavioral criteria include whether the employee is completing compliance training on time, reviewing emails in a timely fashion, pre-clearing trades and signing off on trade blotters. Young said there is a whole host of criteria that not only compliance uses to assess each employee, but also metrics used by risk management and human resources. In some cases, bonuses have been cut for those who have not made the grade, said Young.
Compliance function has evolved
Compliance officers need to adapt to an evolving environment, said Young. One of the biggest challenges is in applying and evaluating the ever-growing mountains of data and analytics that are at their disposal, and balancing the information with the more qualitative aspects of the job.
“The difficulty with compliance is that it’s not just quantitative, as with the risk management function ... With compliance it can be much more qualitative. Data is important, it’s a tool, but ultimately it still boils down to human judgement, and that’s where the skill set becomes all the more important,” said Young.
Perhaps nowhere is this more difficult to do than with behavior.
“Behavior is something that is not easy, if at all, to quantify. But that’s the challenge; that’s the evolving frontier that regulators recognize, and banks and the industry certainly recognize as the next area to try to get our arms around; to try to monitor and surveil in a way that ultimately management and the board of directors understands whether its high, medium or low risk,” Young said.
“It’s trying to quantify an intangible and trying to balance science and art, if you will. This is an area where compliance, risk and the businesses need to work even more closely together – without compromising our independence.”
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(Henry Engler is a North American Regulatory Intelligence Editor for Thomson Reuters Regulatory Intelligence. email@example.com)
This article was produced by Thomson Reuters Regulatory Intelligence - bit.ly/TR-RegIntel - and initially posted on Mar. 22. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters
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