Barclays' record fine puts spotlight on risk psychology
24 September 2014 -
As British bank sustains FCA’s biggest-ever charge for mishandling client assets, psychologist Dr Lynda Shaw warns against the pitfalls of risk-based behaviour
Barclays’ failure to protect client assets has landed the bank a record £38 million fine from the Financial Conduct Authority (FCA). The city regulator found that the bank had failed to keep up to £16.5 billion of client money separate from its own reserves. As a result, clients were exposed to risks of “extra costs, lengthy delays or losing their assets if Barclays had become insolvent”, as the bank breached numerous rules to the contrary by opening 95 custody accounts in 21 countries.
Barclays agreed to settle at an early stage, qualifying for a 30% discount. Without this, the FCA would have imposed a penalty of almost £54m. The operations did not affect retail customers, as it relates to Barclays investment banking division between November 2007 and January 2012. However, Barclays maintained that it did not profit from its actions, and clients did not suffer losses.
FCA director of enforcement and financial crime Tracey McDermott said: “Barclays failed to apply the lessons from our previous enforcement actions or numerous industry-wide warnings, and exposed its clients to unnecessary risk. All firms should be clear after Lehman that there is no excuse for failing to safeguard client assets.”
The punishment reflects the eagerness of City and Wall Street regulators to ensure that banks protecting their customers from risk, and avoid risky behaviour themselves, following the global crash of 2008. One major issue that tested the market six years ago was bankers risking large sums of money on shaky speculation, which played a part in Lehman Brothers folding.
New research this week from cognitive psychologist Dr Lynda Shaw shows that, while women and men are programmed differently in their approach to risk, both are taking increased numbers of calculated risks this year than in the previous decade.
Shaw said: “If risk is the potential of losing something of value, weighed against the potential to gain something of value, then we make those sorts of decisions all the time – whether it be to sell a million pounds of shares, or crossing the road. But most of us have personalities that can be categorised as risk avoiders or risk takers in business.”
Shaw explained: “There are, in addition, gender biases in risk taking – although we have to be mindful of stereotypes as, after all, we are not just products of chemicals and anatomy. Age, culture and environmental factors also come into play. That said, the prefrontal cortex (PFC) is larger in women, and regulates emotional responses. The amygdala is larger in men, and is pivotal in emotions. One could argue therefore, that women are more likely to control risky behaviour.”
The business-improvement expert also suggested that corporate risk is best handled in firms where decision-making tasks are carried out in gender-diverse environments. “When weighing up risk,” she said, “men are more likely to be concerned with hitting objectives, while women tend to be more concerned about the effect the risk will have on people involved. Male risk-taking tends to increase under stress, while female risk taking tends to decrease. It could be argued that, in a stressful business situation, men and women working together would make better risk-taking decisions than either gender alone.”
Increased pressures and scrutiny associated with a recession often drive business leaders and professionals to be more risk averse – but with the British economy growing again, Shaw believes that taking risks with a sense of calculated confidence is now essential. “This means therefore, that broad areas of the brain are involved with the whole process of calculated risk taking, leading to creative thinking, problem solving and decision making,” she said.
Shaw stressed: “Calculated risk should not be considered reckless. Risks to an international enterprise may be concerned with answering to their shareholders, while a small start-up may have risks associated with taking its first office space. With any decision you’ll always have an element of risk, and it demands confidence and belief in yourself. Sometimes the risk won’t go our way, so it becomes something to learn from. There may also be risks which were not accounted for, so always be aware of a possible change in direction.”
Dr Shaw’s five risk-taking tips
1. Show confidence
“Don’t be a satisfied follower. Have the confidence to take charge, to think on your feet and to solve problems effectively. Don’t overanalyse, as you can talk yourself out of anything. Follow your instincts and be bold. Think carefully about risky decisions – but do not procrastinate once you have made your decision.”
2. Don’t think you know it all
“It is best to explore what risks work and what need more planning to optimise the success level. Don’t think you have all the answers. Ask the experts and then make your own decisions.”
3. Learn from risks
“Lessons that are learnt while taking risks within the business may lead you on to an important new path. Learning from mistakes is an opportunity for growth.”
4. Acknowledge multiple opportunities
“Be focused on what you want to achieve from taking risks. If you zoom in on it too much, you may miss opportunities. Zoom out, and the opportunities will come into clearer view.”
5. Review the outcome of the situation
“After the decision has been implemented and all risk has been mitigated, evaluate the success of the outcome and how the risk taking has affected the business.”
For more on knowing what to do in complex situations, check out the details of this forthcoming CMI Mentoring and Coaching Workshop, set to take place in London next month.