WSJ

PwC Report Shows Insurers Focusing on Compliance

A January 8, 2015 article by Ben DiPietro in the Risk and Compliance section of the Wall Street Journal reported on a PwC survey of compliance in the insurance industry. 86% of insurance executives responding to the survey reported having a chief compliance officer and 88% indicated that they expect to increase spending on compliance in the short term. The article specifically points to products that are increasingly complex as one of the reasons that there is a need for more compliance resources and attention.

I am a process person – one of those people who thinks how one does something is as important as what someone does. So I pay a lot of attention to where compliance lives within insurance organizations and on what that means for the compliance role and compliance outcomes. The PwC survey itself says:

Somewhat surprisingly, the stature of the CCO/HoC in the insurance sector lags behind that of the overall population. Only 20% of those in the insurance sector said their CCO/HoC was a C-suite-level position, compared with 26% overall. In line with overall respondents, 79% of insurance companies indicated that the position was a vice president or higher-level position. Contrary to what we’re seeing in many other highly regulated industries, CCOs in the insurance sector are still reporting predominantly to the general counsel (49%); only 34% report directly to the CEO or board of directors. To continue elevating the influence of CCO/HoC as environments keep on increasing in complexity, insurance companies may wish to reconsider the position’s level and its reporting relationship (Page 2).

Another important “process” issue is that 65% of responding organizations report that they have a compliance committee, up from 52% in 2013 (PwC, Page 9). There is a fairly wide range of members of the compliance committees and it is worth looking at the breakdown on page 10 for the details. Some notable changes from 2013 to 2014 include: Internal audit representation on compliance committees increased from 52% in 2013 to 69% in 2014; sales and marketing representation decreased from 35% in 2013 all the way down to 18% a year later; investor relations dropped from 13% to 4% between the two years; and, finally, information technology, not surprisingly, increased. But what I found very interesting is that even after the increase in 2014, only 33% of companies reported that IT sits on the Compliance Committee. In 2013, 26% of companies reporting said that IT had a seat at the compliance committee table. I believe we will see a dramatic increase in 2015. If I had to guess I would think that the jump for the current year would bring that figure to well over the 50% mark.

The issues that are of concern to respondents appear to be bunching up a bit with what may be more issues competing for compliance attention (PwC, Page 15). In 2013, 71% of respondents cited insurance-industry specific regulations as one of their three top concerns as perceived level of risk to their business, while that number was down to 48% in 2014. That seems like a huge drop. Privacy and confidentiality also fell out of the top three for some respondents, being at 59% in 2013 and only 48% in 2014 (note, however, that in 2014, privacy and confidentiality was the most frequently cited for a top three compliance concern). The increases in 2014 appear to represent new risk concerns. Risk areas in 2014 that did not make the list at all in 2013 include: social media, supplier compliance, ethical sourcing and import-export.

Punish Bad Behavior?

In an article (subscription required) by Corrie Driebusch, posted in the Risk and Compliance Journal section of the Wall Street Journal on February 12, 2014, a new compensation model at Barclays Advisers is discussed. Barclays Advisers’ New Performance Metric: Their Behavior: Bank Could Dock Compensation in U.S. Wealth-Management Unit for Misconduct. Compensation can now be reduced for misconduct.

I applaud Barclays for taking a stand that conduct does matter. However, I am a strong believer that carrots generally work better than sticks. In my experience, positive incentives are simply more effective than negative consequences for actually making behavioral changes. I would have recommended that compensation be higher based on good conduct rather than being reduced for bad.

“The change is a small part of a global reshaping of London-based Barclays’s business and practices, with the aim of polishing a reputation tainted in recent years by scandals, including involvement in efforts to rig benchmark interest rates and improper sales of insurance and other financial products. It also follows regulatory and internal criticism of the U.S. wealth-management unit’s culture for allegedly putting boosting profits ahead of following the rules.”

While Barclays says the change has been well received by its advisers, it seems hard to imagine that it would be. Imagine the difference if these advisers had been told they had the chance to make more by following the best practices for sales, particularly with vulnerable consumers. That type of incentive seems much more likely to improve morale and result in those sought after sales practices. In addition, some advisers who might be at more risk for reductions in their pay due to their poor conduct in the field may leave Barclays and show up at another firm. That means the overall risk of misconduct in the industry doesn’t change, even if there is a bit of a clean up at Barclays.

The article concludes “Deep pay cuts for anything less than serious misconduct wouldn’t make sense, Mr. Smith [an analyst at research firm Cerulli Associates] said. ‘I don’t think anyone’s going to be docked 20% of their pay because grandma had a complaint.’” That may be true, but if it is, how successful will the change in compensation be? And if pay isn’t docked in some significant way “because grandma had a complaint” does the policy do any real good for Barclays, in its apparent attempt to show a culture of compliance that is reflected in its compensation program? If having a year with no complaints (from grandma or otherwise) meant a bonus, those advisers might be very interested in treating each and every grandma the way they would want their own grandma treated. And that would create a culture of compliance that could make a real difference.

Only time will tell what this change in compensation means for sales practices at Barclays. I hope it succeeds, but I suspect that it will have only a marginal impact. Perhaps others looking at the same issues will decide to pursue a carrot approach and reward those who demonstrate a real commitment to best practices. That is what I hope to see.