Banking controls are past their sell-by date, warns Detica

18 August 2008

In light of the tougher stance the FSA is taking taken against investment banks found guilty of trading irregularities, Detica Group plc (DCA.L), the specialist business and technology consultancy, has reiterated its call for the industry to refresh its approach to managing risk and controls.

Referring to the imposition this week of a significant fine by the FSA, Tony Clark, Director from Detica’s Investment Banking unit, says that banks need to smarten up their act. “Any bank tempted to view penalties for regulatory malpractice like parking tickets needs to think again”, he says. “The current regime at the FSA is clearly determined to crack down on irregular behaviour and from now on, those found to be in breach of the rules may well start seeing themselves clamped or even towed away”.

Concurring with the FSA’s most recent comments Clark continues, “Investigations of recent instances of market abuse have highlighted the inadequacy of silo-based controls that are further weakened by matrix reporting lines and a culture of deference towards the front office.” To tackle this and other weaknesses in the traditional control model, Detica has developed a Networked Operational Risk Management (Detica NORM™) framework which takes an innovative approach to operational risk by linking together all of a bank’s functional silos holistically.

The challenge for the banks is keeping their multi-faceted operational environments supervised effectively without over-burdening their operations with additional cost and complexity. Understanding the increasingly complex nature of the instruments being traded is one element. This in turn is compounded by organisation structures characterised by matrix reporting lines that straddle product, functional and geographical silos.

Clark continues “Detica NORM™ is a breakthrough because it provides a systematic approach to measuring operational risk whilst linking up disparate silos. It works in a way that is organisationally agnostic and which delivers compliance departments with an objective fact-based, rather than assertion-based, view of trading behaviour. We are seeing increasing interest from the banking community in a framework that offers a resilient cross-silo approach to operational risk management”.

Detica is currently testing its hypothesis at a major bank where it is creating a holistic view of trader risk across the functional silos. “The challenge now is sourcing the data” concludes Clark. “Data experts have long acknowledged the need to maintain more complete and accurate sources across organisations but their protestations often fall on deaf ears. We are now starting to see data quality rise to the top of the business agenda as management accepts that it is critical to building secure and resilient control environments”.

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