Using Behavioural Economics to mitigate the liability of Senior Managers for Conduct Risk.
Given recent scandals in financial services the focus of global regulators on conduct has never been greater, and research shows that 98% of operational losses by value are due to misconduct. The introduction of the Senior Managers Regime (SMR) in the UK makes Senior Managers personally accountable for managing conduct risk in their business.
Failure to put appropriate controls in place to manage conduct risk will be a breach of the SMR, but you must properly understand the root causes of misconduct before you can design controls to counter them.
Behavioural economics provides insights into why people misconduct themselves – put simply, humans behave ‘intuitively’ rather than ‘rationally’ when making many decisions. Studies have shown how that intuitive but irrational behaviour is predictable, and these insights can be used to help optimise the design of conduct controls and detection mechanisms.