26 January 2010
Published in: Risk governance, Operational risk
Standard Life fine illustrates complexity of op risk
Standard Life's fine of £2.45m by the FSA on 20 January for "serious systems and controls failures" is evidence of a common problem and "illustrates the potential gaps between risk identification and mitigation" in the management of operational risk.
According to operational risk expert Vicky Kubitscheck, partner at strategic governance consultancy firm Independent Audit, the risk of mis-selling financial products is a complex one to manage. "Judging whether or not a financial promotion is misleading is not always simple because it can depend on how information is interpreted, particularly by those who rely on the information or claim to have relied on the information retrospectively," she said.
Standard Life was fined on 20 January for misleading marketing material about its pension sterling fund which resulted in a risk of unexpected capital losses being incurred for customers invested in the fund, according to the FSA. Marketing material referred to the fund as being wholly invested in cash despite the majority of it being invested in floating rate notes by July 2007.
"There were no adequate systems or controls in place to ensure that marketing material issued accurately reflected the investment strategy for the fund," an FSA statement said in relation to the fund's operations between July 2006 and February 2009.
Kubitscheck notes that some reports have suggested that Standard Life was complacent because of their clean reputation which influenced their approach to operational risk management. "We can't say whether Standard Life was complacent or not," she says. But, "managing risk is heavily reliant on sound decision-making and is therefore influenced by the corporate and individual's perception and attitude."
It might be easy to identify a risk "but the importance of follow-through, controls and risk mitigation should not be underestimated," Kubitscheck observes.
In identifying responsibility for such a risk failure, you must look at the "risk and control chain of responsibility", she says. In this case, there should have been links between the design stage of the product, marketing and sales, investment, compliance monitoring and internal audit.
Standard Life was asked to comment and a spokesperson said:"We have learned important lessons from this mistake...We have conducted a full and thorough review of existing literature and put in place an improved process for new literature. We have worked closely with the FSA throughout and co-operated fully with their investigation."