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Most will be thinking about what they need to do to get a license so they can continue to operate. That means sorting out a Fair Conduct Programme that has effective policy, processes, systems and controls that meet the minimum expectations required of a licensee.
Understandably, their attention is on the immediate task at hand. However, it won’t be long until these financial institutions are licensed and working with the ongoing requirements that CoFI places on them. My view is that this should bring about some changes in the funding and delivery decisions that these institutions make across both the short term and long term.
When deficiencies are identified - and the pragmatist knows that some deficiencies are a part of being in business - institutions will be required to address these in a reasonable time. These could range from discrete pieces that can be managed within BAU through to larger scale uplift that requires specific investment. Previously financial institutions had more time (or at least, took more time) to address the deficiencies, had other priorities or would risk accept them. The greater emphasis on speedy resolution means that when institutions are undertaking business planning it will be sensible to consider allocation of resource and investment to respond in a timely manner. The clear expectation is that Fair Conduct Programmes need to be adequately resourced and funded to make this happen.
Pushing systems and processes to the very end of their life is a familiar way to maximise the return on investment. However, this comes with risk. As these systems start to strain under the weight of customers and other system demands, rivets start to pop. The manual processes, work arounds or system weaknesses can flow through to customer outcomes. The FMA has highlighted that failures in creaky systems have been a source for conduct issues. Looking ahead at long term funding, institutions will need to weigh up the risks associated with sweating assets, regulator expectations, and seek to bring forward upgrades, automation and integration.
Everyone doing projects has come into contact with these terms. As a project progresses towards delivery, decisions on modifing scope are often made, generally to accommodate unforeseen cost or delay. Consequently, it’s not unusual that something the organisation agrees it needs or wants to do, will end up on a back log or in the “day 2” delivery pipeline with a “temporary”, and often manual, workaround.
The challenge with this is that project funding often finishes at day 1 with delivery of the bulk of the business benefits. The items that the project wanted to deliver, but were moved to day 2, are often handed over to the business to be executed through BAU or a latter project to be initiated. The problem here is that they quickly lose momentum to deliver as the business focuses on the next top priority, which is not the backlog, or the project business case just doesn’t stack up on the reduced business benefits after the main delivery is done.
Backlog becomes code for “not likely to happen any time soon”. The challenge is that manual workarounds, the undelivered customer value adds and unimplemented integrations impact customer outcomes. Once again, the requirement to remedy deficiencies, as well as deliver on enhancements or improvements, is a requirement of CoFI that financial institutions will have to lean in to.
CoFI is going to push organisations to ultimately bring another dimension to business planning, funding, prioritisation and delivery. If the total funding remains consistent then in order to meet conduct expectations and adhere with their Fair Conduct Programme, it may come at the expense of other initiatives or distribution options for available capital. Given financial institutions already have a sleugh of “must dos” it is likely to be the growth initiatives that get deprioritised or short run shareholder returns will be reduced. Obviously, institutions could continue with the status quo, but the stakes have gone up with CoFI when it comes to conduct risk.
And there is the rub...without sacrificing previous growth plans or shareholder returns it will likely come with increasing conduct risks.
This might be a tough pill to swallow, particular for boards and shareholders. However, it is important to consider that bringing forward investment can mitigate risks materialising down the road. Across the industry financial institutions know how costly, disruptive and time consuming it is to fix and remediate. Add to this reputational damage that comes with having your name on the front page of the newspaper (or some kind of social media platform to bring the adage into the modern era). CoFI may be the best nudge to remind us that investing today can be the best investment to avoid the emergence of capital craters in the future.
