Human factors and cognitive psychology offer a solution to APRA's recent risk culture survey insights.
Background
Between October and December 2021, APRA rolled-out 31 survey questions to 18 of Australia’s major authorised deposit-taking institutions on their organisation’s risk management practices. The high response rate (up to 59%) suggests that governance, risk culture, remuneration and accountability (GCRA) is a high priority for these organisations.
APRA’s five key insights
APRA’s findings are described in their published article No room for complacency on bank risk culture [1]. In the article, APRA makes five key observations (outlined below) based on the survey results. Cortexia have shown how Human Factors interventions, which have already been proven at a leading Australian bank, are aligned with APRA’s recommendations. This approach is shown in the 2 minute video below:
For a copy of our Case Study applying these methods to one of Australia's leading Banks, please contact us at accomplish@cortexia.com.au.
Let’s now take a quick look how Human Factors and Cognitive Psychology can specifically address the findings in the APRA research:
APRA finding #1 Executives are overconfident regarding their entity’s risk management capabilities.
Human Factors, using tailored investigation methods builds risk intelligence across teams responsible for end-to-end processes. Coupled with an improved ability to identify systemic contributors to errors, this allows executives to gain a more realistic picture of the risk the organisation is shouldering.
APRA finding #2 Risk management practices vary widely.
Human Factors builds organisational risk resilience and improves individual employees’ capacity to manage risk. This is achieved by embedding a tailored contributing factors taxonomy permitting industry wide comparison, cross-learning and standardised identification of systemic and organisational contributors to error [2].
APRA finding #3 Executives are prone to blind spots.
By building a Just Culture [3], we measurably increase psychological safety, where employees feel safe to report near misses and speak up when they make an honest mistake. Human Factors training tools and train-the-trainer academy also help legal, risk and compliance employees to measurably achieve new levels of threat and error management [4].
APRA finding #4. Risk management roles and responsibilities require further clarity.
Standard Operating Procedures (SOPs) designed with Human Factors principles can be deployed across end-to-end process, including third party vendors, so risk management responsibilities are uniformly understood. Our focus moves to work as done, rather than work as imagined.
APRA finding #5. Executives and individual contributors experience decision-making and constructive challenge differently.
By enhancing Just Culture we improve performance through better execution (performance today) and innovation (performance tomorrow) [3, 5]. Psychologically safe employees use constructive challenge to be included, collaborative and innovative across diverse multi-disciplinary teams [6]. Such a culture permits a more standardised and beneficial approach to decision making and constructive challenge.
Conclusion
APRA’s research serves as a timely reminder that improvements are still needed in the Australian financial sector. Building risk resilience through Human Factors and Cognitive Psychology can measurably improve a financial services organisation’s response to external forces such as changing regulations and consumer demands. It is also shown to align with internal needs, such as flexible working conditions, greater diversity, increased innovation, and team performance.
References
[1] Australian Prudential Regulation Authority (APRA). (2022). Insight: No room for complacency on bank risk culture. https://www.apra.gov.au/news-and-publications/no-room-for-complacency-on-bank-risk-culture
[2] Niskanen, T. (2018). A Resilience Engineering-related approach applying a taxonomy analysis to a survey examining the prevention of risks. Safety science, 101, 108-120.
[3] Dekker, S. (2016). Just culture: Balancing safety and accountability. crc Press.
[4] Dekker, S. W., & Lundstrom, J. (2006). From threat and error management (TEM) to resilience. Human Factors and Aerospace Safety, 6(3), 261.
[5] Clark, T. (2020). The 4 stages of psychological safety: Defining the path to inclusion and innovation. Berrett-Koehler Publishers.
[6] Edmondson, A. (2018). The fearless organization: Creating psychological safety in the workplace for learning, innovation, and growth. John Wiley & Sons.