Asset manager of the year: Federated Hermes

OpRisk Awards 2020: Ethics pledge helps firm build culture of accountability

Leon Kamhi, Federated Hermes

Back in 2014, Leon Kamhi, head of responsibility at Federated Hermes International, attended a testy meeting at the UK’s Investment Association, along with around 30 other asset management firms. The trade body was trying to get its members to sign up to a 10-point code of practice that would commit them to always putting the client first and making more fees transparent. But the move was controversial. Many asset managers in the room felt the statement of principles went too far and would tie them up in unnecessary red tape.

Kamhi recalls: “There was some real pushback from the industry at the time. We and one other fund manager were the lone voices saying: ‘We must put the beneficiary first.’ We signed up to the principles, but also thought we want to go further.”

That meeting led Kamhi and his team to draw up their own ethical promise. One that would be voluntarily signed by staff and commit staff to acting in the best interests of clients and beneficiaries as well as acting ethically, responsibly and with integrity.

The ‘pledge’, as it came to be known, flew through the asset manager’s board and executive committee in a week. And five years on, it is now signed by about 99% of the firm’s staff.

Head of responsibility Leon Kamhi and his team drew up their own ethical promise, which would be voluntarily signed by staff and commit staff to acting in the best interests of clients and beneficiaries as well as acting ethically, responsibly and with integrity

Since the pledge was introduced, the firm has also encouraged senior managers, including international chief executive Saker Nusseibeh and international head of investment Eoin Murray, to talk about values and culture in an effort to embed the pledge more broadly into the firm.

The pledge has dovetailed with the UK Financial Conduct Authority’s focus on improving corporate culture. Under the Senior Managers and Certification Regime (SMCR), which came into force for asset managers in December 2019, the regulator requires that firms have clear lines of responsibility and senior staff take responsibility for their actions when things go wrong.

Many at the firm credit the pledge with helping to change the firm’s risk culture ahead of the introduction of the SMCR, improve its risk management systems and be better equipped to deal with the coronavirus pandemic. So much so that Hermes’s new owner, $390 billion US asset manager Federated Investors, decided late last year to roll out a nearly identical pledge to its own staff (numbering around 1,900).

Nigel Smith, Federated Hermes

Nigel Smith, Federated Hermes International’s UK group head of operational risk, thinks that the pledge has been a boon to his department and is one reason why the number of errors and near misses reported to the risk team has risen year on year, by 62% from 2013 to 2019. Assets under management grew by a more modest 41% over the same period.

While that might not sound like a good development, he explains that whistleblowing can help firms prevent emerging risks from turning into crises.

“Some might run to the hills to hear a large number of errors and breaches reported to the risk team,” says Smith. “Actually, what it indicates is that our staff have understood what we mean by having the pledge and what their role is in ensuring we do the right thing.”

Part of the reason that the team is confident the pledge is having an impact is because Hermes has started to quantify how well the pledge and the company’s core values are being embedded within the business. Late last year, Hermes Fund Management introduced a new separate conduct risk register for its Irish business. Senior managers now have to fill in a register every quarter saying whether the business is hitting its goals on governance and culture over six categories: product oversight; client servicing; distribution oversight; outsourcing; human resources; and investment governance. The managers score these categories on a red, amber or green basis, with the data then analysed by the risk management team and senior management.

Sarahann Duff, Federated Hermes

Sarahann Duff, head of risk for Ireland at Federated Hermes, says this provides an invaluable insight into what is happening at a grassroots level within the business, and provides data that helps her team understand where reporting risks may lie and where more work needs to be done. She credits the culture instilled in the business with helping avert a “near miss” in March this year, with regard to an important risk limit.

“It is to quantify and roll up our values, to see where the pledge and accountability lies within the entire business,” says Duff. “We can step back and we can say: ‘Right, it’s not just me filling out a conduct risk register every quarter – the entire business is coming back to me individually with what they see.’”

The focus on culture and managing risk in conjunction with the pledge has been reassuring during the coronavirus pandemic.

Like most firms, Federated Hermes had contingency plans for around 10–20% of its workforce to work remotely for a few weeks in the event of an emergency, but had never envisaged the entirety of its staff having to work offsite for months at a time.

Some financial firms have struggled with how to monitor the behaviour of staff and ensure they do the right thing when they are working from home with less direct oversight. But despite some early teething problems, the risk team is relatively relaxed because the firm has not had to change its processes or control points.

Smith says: “We are not concerned that we have much additional risk as a consequence of remote working.”