Gaming the system

I wonder what lessons Financial Services companies will take from the recent LIBOR shenanigans in RBS, Barclays et al.

It’s a good idea to learn from others’ mistakes and any organisation that doesn’t is failing its staff and shareholders. Smart people in switched on organisations might ask ‘what does this mean for us?’. In this scenario Chief Risk Officers might task their Risk functions with exploring their own LIBOR processes – if they have them – to ensure similar weaknesses don’t exist.

That would be a start – but we can go further.

The lessons that can be taken from this latest financial services scandal are not just about the LIBOR rate setting processes. If we want to be really smart about this we need to look at the underlying issue. When we boil it down, it looks like this:

People behaved inappropriately.

When it comes to operational risks, root causes, more often than not, have to do with human behaviours. If organisations are going to ‘do risk’ well they need to do so from the basis of a realistic appraisal of those behaviours.

Such an assessment might suggest that a fundamental part of human nature is to look for ways to game the system. When there’s a benefit to be had, someone, somewhere will look to take advantage sooner or later. The moral boundary will stop most of us from transgressing but, when it comes to a major prize, it’s not enough to simply trust that we’ll all behave ourselves.

Is this overly cynical? A bit too Theory X for comfort? Perhaps. But let’s not get carried away – I’m not suggesting that workplaces are populated with entirely untrustworthy scallywags who all need to be watched. At all times. Forever. Big Brother is to be avoided, I’m sure we all agree, and an enlightened management approach to empowerment in the workplace is no bad idea. But that enlightenment should extend to an adult conversation about human behaviour, temptation and the practical limitations of ‘trust’ as a control.

So, talking of trust, here’s an idea for a sort of litmus test to gauge the level of control required in a process: assess the work from the perspective of trust – what are we trusting our people to do and what happens if that trust is broken?

An uncomfortable conversation? Possibly, but it comes with the territory and if risks flow from human behaviours then the Risk discipline must find ways to meet that head on. If it means difficult conversations, so be it. The alternative is a future of mopping up.

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