Measuring conduct risk in South African banks

Abstract

Purpose This paper aims to examine the problem of conduct-risk measurement for banks, using South Africa as an example of a developing market. Conduct risk is a new and complex phenomenon in global financial services and could negatively impact various stakeholders. There are concerns about new regulations and potential misconduct fines affecting profitability and sustainability for banks. While presenting a serious problem, especially in developing markets, with the added challenge of financial inclusion, conduct risk and its measurement have not been researched sufficiently. If the measurement problem could be solved, the management could be facilitated. Design/methodology/approach Based on a literature review, existing surveys and new interviews, a best-practice proposal for measuring conduct risk was developed. The approach was exploratory and inductive and added primary insights. Findings Measuring concepts like conduct is a global challenge. This aside, South African banking customers are concerned about fraud and safety and administrative service hassles, rather than conduct in the regulatory sense. Best-practice measurement must account for these findings by working with a scoring for behavioural, organisational/procedural and perception indicators and with suggestions for specific surveys. Research limitations/implications Analysing the data measured and deciding what action should be taken if conduct risk is detected could be considered for additional research. Practical implications South African banks are guided in measuring a difficult and unique concept at a time of regulatory change, stakeholder pressures and limited existing knowledge. Originality/value The authors believe this is the first study on a critical and new challenge in banking risk measurement in a developing market.

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“…, 2021) and facilitating compliance with privacy and security regulations (Kuzmenko et al. , 2021), prevent complex fraud and increase coverage (Antje and Gary, 2019). Several qualitative and quantitative methods have historically been applied to mapping the two streams.…”

“…A recent study found that delayed response led to Effective response system for internal-led cyber frauds major-value fraud in European, American and Southeast Asian banks (Bendob, 2015;Chen et al, 2021;Haynes and Robinson, 2015;Kuzmenko et al, 2021;Zheng, 2017). Banks lose the time between cyber fraud occurrence and detection; thus, any measure intended to curb cyber fraud must emphasize timeliness, which was overlooked in the previous system (Nawaf et al, 2022;Antje and Gary, 2019). Hence a suitable risk response system should be the one that detects fraud early and takes action promptly (Shin and Benjamin, 2020).…”