Control functions in the front office have necessarily grown in recent times. But how much is too much?
Any supervisor of a markets business at a bank, large or small, these days has to deal with a whole range of control functions that their recent predecessors would have thought both irksome and a waste of valuable time. Those days have, for better or worse, gone for good. But how much time should be spent on these supervisory duties is still very much a vexed and undecided question.
Many heads of front office supervision who sit in the first line of defence are unwilling to be drawn into giving precise and discrete answers to this question and, in fairness, there are a lot of variables to be considered.
Big, complex, irregular
A key differentiating factor is the size and complexity of the business being supervised. The bigger the business, the more complex the risks, and the more time a supervisor is likely to be spending on controls. In, for example, a large rates business there is likely to be a government bond desk, a forward desk, a structured products desk, an options desk and perhaps an inflation desk.
Within those various product lines, a flow desk would expect to see a relatively low percentage of cancelled trades and amended trades while a less vanilla business, like options, might expect to see more irregular trading patterns. These irregularities do not automatically suggest anything untoward; they are more often than not simply a function of the complexity of the product. But they must all be investigated and a bank that has more labyrinthine products will have to do more of this than a bank that doesn’t.
Moreover, there is no one uniform model adopted by all. Banks define risk and what supervision should entail idiosyncratically. This will affect how much time a supervisor spends dealing with these issues. The more egregious breaches in conduct are unquestionably within the purview of a supervisor, but elsewhere it can get a little murky. The wider the bank throws the net, then the greater the time and energy it requires from the supervisor.
Of crucial importance in determining the amount of time the supervisor spends on control – and the usefulness of that time – is the quality of systems that can be brought to bear. Banks have thrown a lot of money at this in the past few years, but some have spent more than others and some systems are therefore much more comprehensive. The more sophisticated systems not only aggregate data but describe the connections between anomalies.
Who has time for that?
Until a year or two ago, it was quite common for supervisors to receive a 30–40 page PowerPoint deck at the end of each month, in addition to hundreds of emails and lengthy reports on cancelled, amended or late trades. There would be literally thousands of pages to look through and this simply couldn’t be done with any degree of effectiveness. Now, the better banks are able to produce more granular data and join up the dots more.
“We can pinpoint the issues far better these days. We can tell a supervisor that the same person who missed training is the same person who booked late trades and is the same person who had expenses violations, for example,” says Chris Palmer, global head of front office supervision at JP Morgan in London.
Things will also depend on how long a supervisor has been in the job. If it’s a new role, and the attestation forms have just been signed, then clearly it will behove him or her to spend longer on control tasks than it might do several weeks down the line. Getting one’s head around what is required in any new job is not a matter of hours, and this is even more the case when something as potentially calamitous as conduct risk is concerned.
Finally, supervisors will spend longer on control on some days or during some periods than others. During market volatility, for example, risk limits will be breached more than during periods of stability.
Let’s put a number on it
So, there are a lot of variables to be taken into account when pinpointing how much time should be spent. Nonetheless, some observers and front office specialists do feel confident enough to come up with a number. Unsurprisingly, consultants were the most forthright of all. Edward Sankey, head of operational risk at Larocourt Risk Management, feels that no more than 20% or so of a manager’s time should be taken up with supervision.
Any more than this, adds Sankey, and there’s something wrong with the business and something wrong with the people in it. “Everyone in the business should know what makes for good and compliant business and what makes for improper business. I would say that if it takes more than 25% of your time then something is wrong and controls aren’t embedded enough, and in fact I would say that a person at the top of a business unit should have to spend only 10%–15% of their time doing supervisory work,” he says.
Colin Lawrence, who is director of the consultancy Lawrence Risk and Financial, agrees that supervision should not take up more than 10%–20% of a manager’s time, though he adds the important rider that it all depends on the size of the team in question, the complexity of the institution and the jurisdiction.
Ian Mason, a legal director in the financial services regulatory team at law firm DLA Piper, who previously worked at the Financial Services Authority (FSA), the predecessor regulator to the FCA, suggests an average might be 30%, though on some weeks it could be less than 30% and on others it could be as high as 100% when a regulatory risk has crystallised.
For JP Morgan’s Chris Palmer, a figure of 20% also seems reasonable, given the level of automation of processes and intelligent automation that the big banks enjoy. Three or four years ago, the figure would have been much higher, he adds.
Mandy DeFilippo, head of risk management for fixed income and commodities EMEA at Morgan Stanley, says that, on any given day or week, a trading supervisor could spend considerable time focusing on conduct and related issues. But this reflects a broader point that, in the current environment, many more situations are flagged for supervisors to review, as part of ongoing monitoring in the ordinary course, and also from day-to-day trading business.
“For example, in the past, certain situations used to be dealt with as pure client relationship issues,” DeFilippo says. “In the current regulatory environment, with the focus on first line supervision and conduct, these same instances may be viewed internally as potential conduct-related situations, which a supervisor will need to know about and review in real time.”
We ask the audience
At the 1LoD conference in London in November, delegates were asked how much time supervisors should be spending on supervisory tasks. Some 48.4% said that it should be between 10% and 30%, while 34.4% said it should be between 30% and 50%. Just 7.5% said it should be more than half their time, while 9.7% said it should be under 10%.
Meanwhile, at the 1LoD New York conference in April, the audience poll conducted during the event showed that a little more – 61.5% of delegates – agreed that between 10% and 25% of a supervisor’s time should be spent on control duties. Just over 26% said less than 10%, 6.6% said 25%–50% and 5.5% said over half their time.
Only a minority believe more than 50% of time should be spent supervising, and though it is difficult to achieve a consensus, most people seem to believe that something in the region of 25%–30% of time should be spent supervising. In a 60-hour week, that looks like around 15 hours a week.
But it is important to stress that a great deal depends on the variables. As Ruth Kemmer, global head of front office supervision at Nomura in London says: “At this point, helping supervisors to understand their responsibilities is a lot more beneficial than saying ‘you must spend X amount of time per day on this task.’ We need to avoid the notion that supervision is just about completing a set of tasks on a list. The idea that you’re done because you’ve ticked every box is not the right approach.”