Online Exclusives Logan Wamsley Aug 26, 2022
Amid the "Great Resignation," the loss of knowledgeable, experienced employees is contributing to higher compliance and operational risks for financial services firms. As banks compete to hire and retain qualified employees, internal audit can help by identifying patterns that may be causing staffing challenges.
The financial services industry was hit hard by the "Great Resignation," and it is putting them at risk. In its Semi Annual Risk Perspectives report for Spring 2022, the U.S. Office of the Comptroller of the Currency notes, "Across key risk areas, banks are experiencing challenges retaining and replacing staff, especially those with specialized experience, due to increasing turnover. During this period of increasing volatility, these staffing challenges present increased risks."
The report says changes to banks' staffing is contributing to elevated operational risks involving cyber threats. The report's section on third-party and other operational risks points out that challenges hiring and retaining employees are exacerbated by early retirements and employees wanting remote work, as well as normal resignations and retirements. "When combined with strong competition from both banks and nonbanks, retaining and attracting talent with the appropriate expertise is driving up bank personnel costs," it notes.
The financial services industry is not alone in facing these risks. In a survey of workers in six countries, 40% say they might leave their jobs in the near future, according to a July McKinsey Quarterly article, "The Great Attrition Is Making Hiring Harder. Are You Searching the Right Talent Pools?" In India, an incredible 66% of respondents say they are considering leaving, while the U.K. has the lowest figure at 33%.
"Respondents across the six countries showed a consistently high desire for work that is better paying, more satisfying, or both, as well as a conviction that they can find better jobs elsewhere," the article notes. "As our research has shown, some workers are leaving their jobs and the workforce, ready for a break and confident in their ability to find another job when they want to."
These sentiments, combined with the inherent skill and experience needed for financial services work, has created a perfect storm of staffing-related risks that will not be easy to overcome. Indeed, the seeds of these issues have been brewing for several years, according to a 2021 Investopedia article, "How the 2008 Financial Crisis Affected the Banking Sector." That article traces the risk to the "Great Recession" and the introduction of new capital and liquidity standards from the international Basel Committee. The Basel III standards were only proposals, and the committee left the task of implementing them to individual countries, which led to a slew of financial regulatory legislation around the world.
Although most of this legislation has protected consumers, the laws come with risks. The U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act added more than $24 billion in regulatory costs and over 61 million paperwork burden hours, according to research from the American Action Forum, a center-right policy institute in Washington, D.C. The added responsibilities placed on financial firms led to increased costs, which stagnated job growth within the industry while increasing demand for more educated and experienced employees.
This situation is compounded by employees seeking new opportunities, increased pay, and greater job flexibility, creating substantial organizational risk for an industry that is not always equipped to meet these expectations. "This talent drain exacerbates other conditions caused by the pandemic where people are rethinking work-life balance, the need for hours-long commutes, and now are seeking fully remote or hybrid work or just greater freedom to choose their schedules," says Uday Gulvadi, director of global investment bank Stout, based in New York. "These often run contrary to the demands of some more traditional employers in the financial sector that value more in-person work arrangements to be able to work with younger associates, groom them, and teach essential collaboration and interpersonal skills."
These issues have been particularly prevalent within compliance departments. According to the OCC report's section on consumer compliance, "a lack of access to subject matter expertise may result in increased compliance and operational risks, particularly if existing compliance processes, controls, testing, and training become subject to funding cutbacks or limitations, or if future compliance management program enhancements and maintenance are delayed." The loss of experience and expertise within a compliance department, or any department, is something that cannot be overcome easily regardless of the quality of new-hire training.
Both retaining and replacing staff come with their own respective risks, but they are linked in several ways. For example, finding replacements timely is easier said than done, and rushing the process can carry substantial long-term consequences.
However, banks don't always have the time needed to find the right hire, which places greater responsibilities on existing staff and impacts retention. "If you're losing some of the folks who are taking on these other functions, firms are scrambling to try and shift staff around and spread the work and move people into maybe what's a new position for them," said Molly Bryson, managing director, business development at Oyster Consulting, in the company's "The Great Resignation — What It Means for Compliance" podcast. "It's absolutely impacting people's ability to complete these [hires] in a timely manner." Shifting work to employees who already have full workloads can decrease engagement and lead to more turnover.
As daunting as staffing challenges appear in financial services, internal audit can partner with human resources functions to improve these vital areas. For example, internal audit can help home in on where in the organization talent management is of greatest concern. "Due to talent management's close ties with other risks such as culture, crisis management, and even the diversity and inclusion elements of ESG," said a 2021 IIA Global Knowledge Brief, "seemingly unrelated audits can … give CAEs a good indicator of when and where an explicit talent management-based audit may be necessary."
"It always comes back to people," says Colin Shaw, senior vice president and global head of internal audit at OMERS in Toronto. "If we are doing audit after audit and seeing the same people-related themes, that is a pretty good indicator that something is amiss, that something critical to our risk landscape is not being addressed. These patterns and themes have a way of floating their way up to our desks for us to notice."
For example, Shaw notes that if the same theme arises in 10 previous audits, internal auditors should discuss it with the HR manager. "We notice it from the top down, but that collaboration gives us the needed bottoms-up perspective," he says.
In addition to identifying the issue in patterns, internal audit also can play a more direct role in addressing it through assessments. "In our capacity as internal auditors to some banks," Gulvadi says, "we have performed staffing assessments for key functions like compliance, as well as assessed risks and provided recommendations related to management succession planning/transitions when faced with rapid employee turnover or relocations."
Internal audit also has a keen interest in tracking the pulse of the risk environment, including the impact of workplace and cultural trends, from movements such as #BlackLivesMatter and #MeToo, to shifts in workforce expectations. By interacting with the audit committee and the board, internal audit can help guide the tone at the top so that these attitudes are considered in organizational recruiting and retention efforts. "Overall, internal audit is ideally positioned to assess overall talent management practices and culture, recognizing that a strong inclusive culture can be a great tool for retaining talent," Gulvadi says.
The workforce environment is changing rapidly. Internal audit will need to help their organizations change along with it so they are not left behind as qualified talent moves outward and onward.