Investment
Fatigue and profit-based incentives driving risk culture

Unreasonable levels of work and a need for greater automation of processes could be to blame for heightened risk culture in the financial services sector, according to FINSIA.

The industry body's analyses of a study conducted by Macquarie University shows employees are less able to resist temptation to breach policy if they are tired.

It indicates the industry must take better account of cognitive load by considering automating analysis where possible and designing work patterns in such a way that staff members are not unduly depleted when making key decisions, FINSIA suggested.

In studying this, 300 FINSIA members were placed in a lab environment for one hour and mimicked investment decisions made by bank executives, including buying securities, granting loans and underwriting insurance. Allowed to invest in up to 60 transactions, the participants completed some simple analysis - using a calculator - and decided whether to invest.

Participants were given a risk policy to follow, including terms of the maximum allowable loss on the transaction. Participants were able to choose whether to comply or not, knowing they would be penalised for non-compliance.

While very risky investments were forbidden, even if highly profitable, 20 of the 60 transactions were found to have exceeded the risk limit.

Split into groups, participants who were provided with the value of investments and not required to calculate it for themselves were significantly more compliant than those who had done the additional work. This demonstrates that people are better able to regulate themselves when they are not tired or depleted.

Interestingly, the study showed that employees of the superannuation sector were significantly less likely than others in financial services to comply with risk policy.

"This finding should be treated with caution due to the small sample (10%) but it warrants further investigation. If confirmed, it may mean that additional work is needed to improve risk culture in this sector," FINSIA said.

The study also found that profit-based incentives have an adverse impact on compliance, with rates of compliance with risk management policy falling when staff incentives were linked to profits, while personal attitudes to risk management were a significant determinant of compliance behaviour.

The report reads: "Profit-based incentives are often used in financial services to encourage effort and boost profits. In our study profit-based incentives did not significantly boost the number of profitable investments. Given the significant adverse impact on compliance noted above, the study supports the elimination of profit-based incentives currently being debated within the financial services industry."

"In FINSIA's view this type of research points to the need for professionalism in financial services. Incentives need to be balanced and individuals also need demonstrated competency, a clear and enforced code of conduct and an ethical culture," FINSIA chief executive Chris Whitehead said.

Read more: FINSIAChris WhiteheadMacquarie University
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