You have three minutes - managing financial crime risks in committee settings

As the complexity of the regulated system grows, we often feel compelled to allow more time for discussions, debate and challenge. But is this really the best approach? Leveraging insights from behavioural economics, Mario Menz challenges this notion, arguing for a 'three-minute rule' to encourage clearer, more focused presentations, and ultimately, better risk management.

Mario Menz (mario.menz@hotmail.co.uk) is Head of Compliance & MLRO for Ghana International Bank (London) and Postdoctoral Researcher in Risk and Decision Theory at the University of Chichester. He teaches financial services law & anti-corruption at London Metropolitan University's Guildhall School of Business and Law.

As the complexity of the regulated system grows, we often feel compelled to allow more time for discussions, debate and challenge. But is this really the best approach? Leveraging insights from behavioural economics, Mario Menz challenges this notion, arguing for a 'three-minute rule' to encourage clearer, more focused presentations, and ultimately, better risk management.

Our world is ruled by data and complexity. Financial crime risk committees, vital to the governance and oversight of financial crime systems and controls, often receive dense packs of management information (MI) to make high-stakes decisions based on lengthy, multifaceted, and sometimes conflicting reports. The quality of these decisions is often compromised by an under-appreciated form of error: noise, which refers to unwanted variability in professional judgments. Many of us have read Daniel Kahneman's 2011 bestseller " Thinking, Fast and Slow". In 2021, Kahneman, together with Olivier Sibony and Cass Sunstein, published " Noise: A Flaw in Human Judgment". Noise, according to Kahneman & co is everywhere. In a financial crime committee for example, noise could manifest as the inconsistency between members' assessments of the same risk. Some level of disagreement can be constructive, evidencing robust discussion, challenge and diverse perspectives. However, unnecessary noise can undermine the effectiveness of decision-making, leading to inconsistent risk assessments, suboptimal risk management decisions, and, ultimately, increased risk exposure. To improve financial crime risk management and decision-making, we can adopt 'decision hygiene' practices. Based on behavioural economics and psychology, these practices aim to reduce noise and bias, and can lead to more accurate, consistent, and effective risk identification and decision-making.

Understanding noise in decision-making

To understand the impact of noise, we must first acknowledge the constraints of human attention and cognitive processing. Our cognitive resources are not infinite. Even the most dedicated listener has a limit to their ability to absorb, process and remember information. This insight is known as cognitive load. [1] It describes the mental effort required to manage the information and tasks at hand. Our cognitive load is limited. When overloaded with information, we are less able to accurately process and recall information, not to mention details. Imagine a scenario where several members of a financial crime committee are asked to independently assess the same hypothetical risk. A high degree of variability in their assessments would indicate a high level of noise.

Noise in committee settings can take several forms. 'System noise' arises from the variability in judgments across different individuals, often due to differing personal experiences, expertise, or cognitive biases. 'Occasion noise' refers to the variability of the same individual's judgments at different times, influenced by transitory factors like mood, fatigue, or recent experiences. 'Evaluation noise' stems from different interpretations of the same information. 'Political noise' shares some similarities with cognitive biases and system noise, but is driven by conscious efforts to pursue individual ambition, often with deliberate intention to influence decisions in one's favour. It involves a strategic game of power, manipulation, and self-interest that can introduce significant distortions into the decision-making process.

Decision hygiene practices

Reducing noise requires awareness, transparent decision-making structures, and robust checks and balances. By breaking down complex decisions into their constituent parts and evaluating each part separately, committees can ensure a systematic and thorough evaluation of each risk factor. This practice is supported by academic research demonstrating the benefits of checklists in medical settings, where the implementation of structured procedures significantly reduced error rates. [2] Sequential evaluation is another decision hygiene practice that can improve the quality of decisions. This involves considering each piece of information one at a time, rather than simultaneously. Sequential evaluation can prevent information overload and ensure that each piece of information is appropriately considered, reducing the likelihood of overweighting certain pieces. [3] A third practice is the encouragement of independent judgements. To mitigate the risk of 'groupthink' or unduly influenced judgements, it is useful for committee members to form their assessments independently before group discussions. This can lead to more diverse perspectives and more accurate group judgements. [4]

Mediating assessments and delaying intuition

Another useful practice is mediating assessments, which involves having each committee member rate the different aspects or criteria of a decision separately. These separate ratings are then combined into a final assessment. Mediating assessments can help ensure a more balanced evaluation and improve the accuracy of group judgements. [5] Intuition, while valuable, should be employed judiciously. It is often more effective to delay intuition until after a systematic evaluation has taken place. This can prevent intuitive judgements from prematurely influencing the decision-making process and is especially important in complex decisions where intuition may lack the requisite experience to draw upon. [6]

Implementing decision hygiene

Implementing decision hygiene practices in financial crime risk committees can lead to more effective decision-making. For instance, a committee should have a standard format for risk reporting, encouraging structured decision-making and sequential evaluation of risk against the firm's risk appetite. A RAG system, presenting risks in terms of Red, Amber and Green, can be helpful:

• Red indicates a major issue or high risk that is currently impacting a process. Immediate attention or intervention is required.

• Amber (or Yellow) indicates a potential issue or medium risk that may impact a process in the future if not addressed. It may require closer monitoring and possibly proactive steps to prevent escalation.

• Green indicates that everything is proceeding as planned or the risk is low. No immediate attention is required, but regular monitoring should continue.

Members should be asked to review these reports independently before meetings, promoting independent judgements and mitigating the risk of groupthink. During meetings, rather than discussing how each risk performs in terms of its RAG status, only Red or Amber-rated risk should be discussed. Adopting this practice can lead to more accurate and consistent decisions, reducing unnecessary noise and enhancing the committee's ability to effectively manage risk. It is important to note, however, that these practices should not be seen as a panacea. While they can help to reduce noise, they cannot eliminate it entirely. Other factors, such as the complexity of the decision, the quality of the available information, and the dynamics of the committee, will also influence the decision-making process.

Consider that your committee is composed of 15 members, each presenting their individual reports - risks related to customer onboarding, transaction monitoring, customer complaints, audit and assurance findings on the performance of various controls, completion rates of training, project performance, etc. If each member were to speak for as long as they wished, the total information presented could easily surpass the cognitive load capacity of other attendees. This leads to the risk that important details could be missed or forgotten. In essence, less can often be more when it comes to information processing.

A three-minute limit encourages each speaker to distil their presentation down to the most critical points. This process requires the presenter to critically analyse their material and focus on the key risks or issues. It can lead to presentations that are concise, clear, and focused on the most salient points, which will be more easily digestible by the attendees. When too much information is presented, decision-makers may start to lose sight of the context of each decision, which can lead to inconsistent or irrational choice. By limiting the amount of information presented, we help ensure that each decision is considered individually and on its own merits. [7]

Additionally, a time limit encourages a more democratic and balanced meeting. In an environment with no time limits, it is possible for certain voices to dominate the conversation - not just by presenting risks and issues, but also by looking to profile their own achievements and importance. This can lead to an imbalance in the information presented and potentially skew the decision-making process of the committee. A three-minute limit ensures each member has an equal opportunity to present their information, helping to create a more balanced and comprehensive view of risks.

Last but not least, consider the principle of scarcity, which suggests that limitations can increase perceived value. When we know we only have a certain amount of time to present, we are likely to carefully prepare and make the most of our allocated time. This can lead to more focused and impactful presentations, and to more productive discussions. However, it's important to note that this three-minute limit is not a one-size-fits-all solution. There will be situations where more time is needed to fully discuss complex issues. It will be for the committee chairman to identify these instances and adjust the time limit as necessary.

Conclusion

In the complex world of financial crime risk management, the quality of decision-making can have far-reaching consequences. Unnecessary noise can lead to inconsistent risk assessments, suboptimal risk mitigation strategies, and increased risk exposure. By implementing decision hygiene practices, financial crime risk committees can mitigate these challenges, fostering more accurate, consistent, and effective decision-making. As the chair of a Compliance & Financial Crime Committee, I wanted to see whether or not this would work. Eighteen months ago I implemented the Three Minutes Rule for my committee. It took 12 months to embed, but the results have been impressive. Members pay attention and ask pertinent questions. The quality of discussions and decision-making has improved, and we all feel that the committee achieves its purpose - to effectively oversee the identification, management and mitigation of compliance and financial crime risks.

For those interested in a deeper understanding of noise and decision hygiene, I recommend reading " Noise: A Flaw in Human Judgment". The book provides a comprehensive exploration of the concept of noise, illuminating its impact on decision-making in various professional contexts, and offers practical strategies to reduce noise and enhance decision quality. As financial services continues to increase in complexity, the need for effective decision-making in risk management committees will only become more critical. By developing a better understanding of noise and the application of decision hygiene practices, we can elevate our decision-making processes, better navigate uncertainty, and steer financial crime risk management towards more effective outcomes.

Notes

1. Cognitive Load Theory - an overview. https://www.sciencedirect.com/topics/psychology/cognitive-load-theory

2. Pronovost P, Needham D, Berenholtz S, Sinopoli D, Chu H, Cosgrove S, Sexton B, Hyzy R, Welsh R, Roth G, Bander J, Kepros J, Goeschel C. (2006). An intervention to decrease catheter-related bloodstream infections in the ICU. The New England Journal of Medicine, 355(26), 2725-32.

3. Russo, J. E., Carlson, K. A., Meloy, M. G., & Yong, K. (2008). The goal of consistency as a cause of information distortion. Journal of Experimental Psychology: General, 137(3), 456-470.

4. Mannes, A. E., Soll, J. B., & Larrick, R. P. (2014). The wisdom of select crowds. Journal of Personality and Social Psychology, 107(2), 276-299.

5. Budescu, D. V., & Chen, E. (2014). Identifying expertise to extract the wisdom of crowds. Management Science, 61(2), 267-280.

6. Dane, E., & Pratt, M. G. (2007). Exploring Intuition and Its Role in Managerial Decision Making. The Academy of Management Review, 32(1), 33-54.

7. Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263-291.