Feike Brouwers, Chief Risk Officer for Coventry Building Society, discusses the challenges behind running a successful risk function in a constantly evolving business environment.
CG: Today I’m joined by Feike Brouwers, Chief Risk Officer at Coventry Building Society, one of England’s largest member owned building societies. Thank you for joining me today Feike.
CG: Feike, last time we spoke you were the CFO at ING Direct UK, can you tell me a bit more about your current role compared to your days at ING?
FB: My current role is Chief Risk Officer at Coventry Building Society. It is, of course, a completely different focus from the CFO role. As CFO I was very focused on driving the business growth, I kept a close eye on margins and generally the bottom-line. In my new role, I’m looking more at risk indicators, governance around the business, compliance, capital position, liquidity position etc. So it’s a completely different focus. It’s like I have to flip a switch in my brain because I can’t help but look at margins, growth and cost developments. So I occasionally walk into the office of the CFO to get my fix of the numbers!(laughs).
CG: Do you find that in a risk management position your focus has become more short term, in terms of responding to events and operational activities?
FB: No, actually quite the contrary – my focus is very proactive and forward looking. Just to give you one example, and it’s only one of many, at the moment we’re in a very low interest rate environment. This affects the affordability of mortgages. One of the things that the risk function has to look at is what will happen to interest rates in the future. It seems inevitable that at some point they will start to increase and we need to be prepared for this. Our corporate plan is quite detailed and looks five years ahead. The risk plan must complement this.
CG: Could you tell me a little bit more about the financial services sector as you see it today?
FB: There have clearly been issues in the financial services sector – leading to things such as the mis-selling of certain products like Payment Protection Insurance (PPI) and other scandals such as LIBOR rigging. But I think post-crisis the sector has made a lot of progress – with better governance and risk management being brought to the heart of most FS businesses today. The industry must work hard to regain the trust of the public, and there’s certainly more work to be done.
CG: So what are some of the key challenges Coventry Building Society faces going into 2014?
FB: I think one of the biggest challenges, facing the industry as a whole in fact, is dealing with regulatory change – for example like the new Mortgage Market Regulations, which come into force on 26 April 2014. The second part of that same challenge, is dealing with unexpected regulatory change, or unexpected interpretation of regulatory change. There are still some regulations out there where the final interpretation of it by regulators is not completely finalised yet, and so the goal posts are still moving. It’s incredibly difficult to plan for that - this means we have to remain flexible, which makes the risk management element even more difficult. As more details around the final interpretation of the regulations become available we will adapt to that.
From an internal perspective we must continue to do what we’re good at and not make any mistakes - to stick to our programme. Not to be distracted from our objective to protect our members’ interests and grow the business in a secure and sustainable way.
CG: What are some of the key risk areas you identify both in a supply chain perspective and a wider business perspective?
FB: The first step is to define who are the key suppliers. Those who support the service we offer members. We have to ensure that we are managing those suppliers proactively. Our procurement function undertakes a lot of work managing service level agreements and key performance indicators. We’ve also appointed managers in the business that will manage those suppliers on a regular basis and develop the relationship.
I have also invested time with the executive team to focus on potential risks and issues in the supply chain.
The new Head of Procurement and Supplier Management has been tasked with structuring a programme for managing suppliers; categorising them, deciding which suppliers are core suppliers, which are the ones that are less important, which are the ones we just keep an eye on. But it’s also up to department heads to manage many of these relationships. So, for example, the Head of Credit Risk is managing the relationship with our credit reference agency and the head of new lending is managing the relationship with the surveyors.
CG: How do you then manage risk with each of these business heads?
FB: Once we have determined who the key suppliers are, and once we have all of the systems and SLA’s in place we agree KPIs and develop a dashboard to monitor progress. I rely on this management information to monitor the risks around those suppliers.
CG: How do you know, and how do you communicate, that what you’re doing is having the right effect?
FB: I think if there are no incidents or risk events and the business remains quite stable, then that’s good from a risk perspective - that means we’ve done a good job. But once we start to see incidents then we know we’ve failed.
However, having said that, sometimes incidents are inevitable. It could be a fraud for example. It’s always disappointing, but maybe it’s something that has been very cleverly done. You have to take it on the chin, learn from it and make sure it isn’t repeated. So I guess the primary measure of success is to not have incidents in the same area happening a number of times!
CG: Say, for example, one of these risky areas happens to be a major revenue driver for your business and your members always benefit from it, how do you manage the risk agenda?
FB: I’m very fortunate to work for an organisation where our growth agenda is secondary to providing great products, services and rates to our members. We don’t need to produce huge profits to pay dividends to large investment groups or shareholders. We want to produce profits to generate enough capital so that we continue to grow the business and provide mortgages to members so that they can buy houses to live in. Taking this into account, the trade-off between risk and profit is well balanced here at the Coventry. We’re not listed on the Stock Exchange, so we don’t have short term strategies to produce quarterly results. There’s more of a long term view here. Overall managing the balance between risk and profit should be easier to manage in a building society, I think, than in a corporate or in a PLC.
CG: Does this holistic view of being member owned also flow over into your supplier base so that you are looking at suppliers who fit, not only the culture of the business, but those who will also enhance the experience with your members?
FB: Absolutely, we will always go for the supplier that provides the best service and value for our members, with cost being only one part of that consideration. We also take account of other things including the reputation of the supplier in the context of the wider community we are serving. We’re very much trying to do the right thing by the community and that means we want to do business with the right suppliers.
CG: What about the next level down? The non-core suppliers the caterers, the facilities managers, the IT providers etc. How do you manage those suppliers?
FB: Maybe not with the same degree of scrutiny, but, to stay with the example of the caterer - if I’m hearing on the morning news that the caterer is engaged in a labour dispute because they use a lot of zero hour contracts, or that they are mistreating their employees, I’ll definitely bring it up with the team. Then we will engage the supplier and bring up specific questions around these topics. It’s difficult, of course, because there are hundreds of suppliers and you can’t provide the same level of oversight for all of them. However, we do keep an eye on the smaller ones and if there’s anything that comes to our attention that we think is not in line with our own values then we will certainly address that.
CG: One final question. What are your predictions for both Coventry and the financial services sector in 2014?
FB: Predictions are always difficult, especially if you’re in the risk profession. So I won’t talk about the possibilities for the industry as a whole.
It is, of course, encouraging to see signs of a sustained recovery in the UK and US economies. I hope this will continue. Not least because, greater public confidence is likely to lead to increased volumes of activity in the housing market.
However, Coventry Building Society has grown consistently throughout the worst of the credit crisis and subsequent economic downturn. Our focus on doing the right things for our members has kept the Society strong and financially secure and enabled us to deliver good value products to an increasing membership. These are values we will hold as the economy improves.
In fact I think that this is even more important as the potential for an increase in interest rates comes closer. It may not happen this year or next, but we need to protect members from the risk of taking on too much debt.
Finally the important regulatory changes that we’ve seen over the last year will continue in 2014. So we’ll continue to be very busy with those.
All in all a busy time for the Society and it's risk function!