Cultural factors
An organisation’s culture, its shared behaviours, beliefs and values, is a fundamental enabling factor in rogue trading incidents. From working with firms affected by rogue trading, we have identified five common cultural shortcomings:
- Inconsistent view on risk management importance
Senior executives tended to have a balanced view of income and risk, and believed they were well-controlled. However, a lack of escalation from middle management meant executives often relied on incomplete or sugar-coated information.
- Unclear roles and responsibilities
Ineffective supervision within the front office was commonplace, especially where activities were conducted across borders and legal jurisdictions, or where the business had undergone recent changes. Where control functions were clearly defined, such asRisk, they often just provided data, rather than insight into how the business was run.
- Disjointed processes and controls
A lack of appropriate supervisory tools, and managers unduly focused on process efficiency rather than control, meant organisations lacked a the complete overview of front to back processes and controls needed to detect rogue trading activity.
- Lack of appropriate challenge
Front office supervisors failed to challenge traders when the numbers were good, even when they were unexpectedly good. Control functions also provided insufficient challenge to the front office, due to lack of business and product understanding.
- Performance management lacks teeth
Revenue performance was prioritised over wider risk- and control-based metrics. As long as a trader generated significant income, policy breaches were often ignored and formal sanctions rarely levied.
Rectifying problems
To tackle these cultural problems, organisations need to address some critical people issues:
- Ensure managers manage – Implement effective supervisory spans of control, and ensure managers are properly trained to carry out their risk management responsibilities.
- Create a challenge culture – Managers must be close to the numbers and unexplained results should be challenged.
- Capture the ‘noise’ – Small indicators frequently suggest patterns of behaviour e.g. untaken holiday leave, incomplete compliance training, abuse of personal dealing policies and breaches of intraday limits. Taken together they can indicate where serious conduct and capability issues are emerging.
Culture- and people-related factors – rather than systems failings or control weaknesses – are almost always the root cause of rogue trading incidents. The onus for organisations, therefore, should be on creating an environment that fosters the ‘right’, rather than ‘rogue’, behaviours.
