Talking Point: Comply - or Face the Consequences
Byline: Piers Townsend
Who is the most important person in an investment bank? The chairman? The chief executive? Neither; it's the head of compliance, who ensures that the bank falls into line with the myriad of international laws and regulations and, at more enlightened institutions, plays a significant role in overall risk management.Sandy Weill, chairman of Citigroup, believes that reputational risk is one of the most pressing concerns in banking. He should know. Citigroup received a public slap on the wrist - to the tune of $400m - in this year's $1.4bn ([euro]1.2bn) global settlement on charges of fraudulent investment banking research. Weill, who has not been charged over the research issue, came in for stinging criticism. Reputational risk often touches the consumer, as it did in the research scandal, which can hurt a bank's stock price.
A survey by PricewaterhouseCoopers (PwC) and the Economist Intelligence Unit has found that financial institutions put reputational risk above traditional worries such as credit, market and operational risk. More tellingly, in light of the renewed focus on banking oversight, reputational risk beat regulatory risk as the biggest worry for 160 senior financial services executives worldwide. With scandals ranging from fraudulent research and unfair stock allocations, to trading disasters such as ING Barings and Allied Irish Banks, financial institutions need to address the problem.
Reputational risk is not an event in itself. It is, as PwC partner Miles Everson puts it, "the impact of other events manifesting themselves adversely". These other events can be mitigated by better compliance, but many banks hold a narrow view that encompasses only regulatory and legal issues. According to PwC, they need to grow compliance from a function to an objective, "to encompass all the requirements that you expect people in the institution to perform". …