Categories
Notes Old site

The FSA and operational risk

The FSA has produced several documents that are concerned with operational risk, and others that are concerned with systems and controls.

The FSA sometimes distinguishes between operational risk (as part of business risk) and control risk and sometimes doesn’t. For example, the guidance was originally intended to be part of a separate module, PROR, and was presented as such in CP97. However, the guidance was completely rewritten, and moved into the systems and controls module (SYSC), in CP142.

Further guidance on operational risk is contained in PS97_115, a policy statement issued after feedback on CP97 and CP115, and in PS140, a policy statement issued after feedback on CP140. PS140 applies to insurers, friendly societies, and Lloyd’s.

Operational risk is also mentioned in several of the documents in the “Building a New Regulator” series. These documents set out the overall approach of the FSA, and describe their risk framework and regulatory processes.

A report on how firms are going about the business of introducing operational risk management systems, “Building a framework for operational risk management: the FSA’s observations”, was published in July 2003. It contains useful information on good practices.

The FSA’s new structure for capital requirements, based on the calculated ECR (Enhanced Capital Requirement) which is then modified by the ICG (Individual Capital Guidance), as discussed in CP190 and CP195, means that operational risk will affect the capital that firms need. This will be through the ICG, which although it takes the ECR into account is also influenced by the systems and controls that firms have in place. The FSA say:

The more firms are able to demonstrate that their risk assessment processes capture and quantify all of the issues in our guidance, then the lower we are likely to assess their ICG (and vice versa). This provides an incentive for good risk management.

Resources

The following external links are relevant:

Categories
Newsletter Old site

Newsletter Jan 2003

News update 030120: January 2003
==================

A monthly newsletter on risk management in financial services,
operational risk and user-developed software from Louise Pryor
(http://www.louisepryor.com). Comments and feedback to
news-admin@louisepryor.com. Unsubscribe by sending an email to
news-unsubscribe@louisepryor.com. Newsletter archived at
http://www.louisepryor.com/newsArchive.do.

In this issue:
1. Corporate risk management
2. Crime 1: fraud
3. Crime 2: logic bomb
4. FSA update
5. Outsourcing
6. Newsletter information

===============
1. Corporate risk management

“Managing Risk to Enhance Stakeholder Value” is a report out from
the International Federation of Accountants and the Chartered
Institute of Management Accountants. It consists of articles by and
interviews with senior corporate executives (and a few consultants)
on a variety of topics related to risk management. The interviews
(about half the total number of articles) are very readable, and
provide some interesting quotes:

“Corporate governance has made risk management very topical, but
you cannot go through the risk management process for those
reasons. You have to do it because it helps the business.”
Bill Connell, BOC.

“Businesses now get killed off because of reputation risk. They
don’t get killed off because the fixed assets are wrong.”
James Duckworth, Unilever.

From the operational risk point of view, the interest lies mainly
in an interview with Kevin Hayes of Lehman Brothers on managing
business interruption, and an article by Robin Mathieson on dealing
with information risk. Overall, the emphasis is very much on large
corporations, but unlike many publications it really doesn’t have a
banking bias.

There is also a very comprehensive list of references and further
reading.

Report available at:
http://www.cimaglobal.com/downloads/risk_management.pdf

===============
2. Crime 1: fraud

John Rusnak, the fraudster at Allied Irish Banks’ former US
subsidiary, Allfirst Financial, has been sentenced to seven and a
half years in prison and a $60,000 fine ($1,000 a month for five
years after his release). This sentence is longer than Nick
Leeson’s, and some commentators have said that this reflects a
tougher attitude to white collar crime. However, given that the two
rogue traders were sentenced under different jurisdictions (USA and
Singapore), it’s difficult to draw any conclusions on this one.

Moreover, it seems unlikely that the threat of longer prison
sentences is actually going to deter any potential
fraudsters. After all, how many of them carry out a rigorous risk
analysis in advance, weighing up the potential profits against the
probability and impact of getting caught?

As you may recall, the Ludwig report on the whole episode, released
back in March 2002, concluded that Rusnak planned the fraud
carefully and implemented it meticulously, but that Allfirst had
weak controls and poor risk management practices, in this area at
least. The net result was a loss of $691m to Allfirst. Some of this
may be genuine trading loss, but a large portion of it is surely a
loss due to operational risk.

The Ludwig report is available from:
http://www.aibgroup.com/servlet/ContentServer?pagename=AIB_InvestorRelations/AIB_Download/aib_ir_d_download&c=AIB_Download&cid=1015597173380

FT report on the sentencing:
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1042490887860&p=1012571727239

(If your mailer has broken these ridiculously long URLs into
several pieces, you may need to paste them back together again in
your browser address bar.)

===============
3. Crime 2: logic bomb

On 17th December Roger Duronio, an ex-employee of UBS PaineWebber
in New Jersey, was charged with using a logic bomb to destroy files
on the financial services company’s network. The story goes that
Duronio, a systems administrator, was unhappy with his salary and
bonuses. He resigned from the company on February 22nd, and on
March 4th files on over 1,000 of PaineWebber’s computers were
destroyed. The total cost to the company was apparently over $3
million. Duronio is also accused of buying put options on the
parent company’s shares, expecting to make a profit when the news
of the computer problems became known, causing the share price to
fall. Apparently this bit didn’t work.

There are some interesting points about this story from an
operational risk point of view. First, as the Information Week
article referenced below points out, there comes a point where you
just have to trust people. Systems administrators are nearly always
beyond that point. It’s very rare for all the changes they make to
be checked by another person. There is a case to be made that this
shouldn’t be the case, at least for some of the things they do.

Second, the scale of the logic bomb (affecting 1,000 machines) was
probably due to the fact that Duronio was a systems administrator,
and had privileged access to servers and the network. However, a
spreadsheet user could easily wreak havoc on a smaller scale simply
by using VB code. I won’t go into the details for obvious reasons!
On the other hand, it is easy to put good control mechanisms in for
end user computing, such as spreadsheets or personal databases,
through standard development processes. It is good practice to have
all changes reviewed by somebody else anyway, in order to reduce
the chance of bugs.

Third, as I mentioned in the context of the Rusnak story in item 1,
the threat of a prison sentence probably isn’t going to deter this
sort of behaviour. Good risk management controls can make it a lot
less likely, though.

Information Week article:
http://www.informationweek.com/story/IWK20021220S0007

Press release:
http://www.cybercrime.gov/duronioIndict.htm

===============
4. FSA update

There’s a new Occasional Paper: Managing Risk: Practical lessons
from recent “failures” of EU insurers, available at
http://www.fsa.gov.uk/pubs/occpapers/op20.pdf. It’s a fascinating
read. Although first impressions are usually that the causes of
failure are underwriting or reserving risk, deeper study almost
always implicates management failures, and often operational
risk. Big problems are caused by complex interactions between
risks, including causal links between different types of risk and
unexpected correlations.

The feedback to CP140 has been published, available at
http://www.fsa.gov.uk/pubs/policy/ps140.pdf. There are no material
changes to the text in CP140, but some drafting changes were made
in response to specific comments. The guidance will take effect
from 1st February 2003. For insurers, the effect is to add a new
guidance note, P.3, to the interim sourcebook. For Friendly
Societies and Lloyd’s, the effect is to add requirements to have
regard to the provisions of P.3.

P.3 covers systems and controls, including:
– High level controls
– Risk management
– Risk assessment function
– Legal risk
– Internal audit
– Management information
– Outsourcing
– Group risk

New consultation and discussion papers out this month:
—————————————————–
CP161 Consultation on funding the Financial Ombudsman Service in
2003/2004 and exemptions from DISP
CP162 Financial Services Compensation Scheme Management Expenses
Levy Limit – Period: 1 April 2003 to 31 March 2004
CP163 The UCITS Management Directive – A Joint Consultation
CP164 Investment companies (including Investment trusts) –
Proposed changes to the Listing Rules and the Conduct of
Business Rules Changes to the Model Code
CP165 Miscellaneous amendments to the Handbook (No.6)

DP19 Options for regulating the sale of “simplified investment
products”

Feedback published this month:
—————————–
CP140 The Interim Prudential sourcebooks for Insurers and
Friendly Societies and the Lloyd’s sourcebook: Guidance
on Systems and controls
CP144 A new regulatory approach to insurance firms’ use of
financial engineering – proposed changes to the regulatory
returns for life insurers

DP11 Cross-sector risk transfers

Current consultations, with dates by which responses should be
received by the FSA, are listed at
http://www.fsa.gov.uk/pubs/2_consultations.html

===============
5. Outsourcing

You may be able to outsource a function, but you can’t outsource
the responsibility. I outsourced the supply of my Christmas
presents this year; I fulfilled my side of the bargain, by ordering
before the last date specified on the web site (well, on the last
date to be strictly accurate), and made use of my outsourcer’s
information systems to track delivery. Imagine my surprise when I
was told that although the books hadn’t been dispatched yet, the
expected delivery date was two days in the past. I know Amazon is
technically advanced, but time travel is something else.

The moral of the story: you need to be able to trust all aspects of
the outsourcer’s services, including their information systems.

(And, luckily for me, the books did arrive on Christmas Eve, and
all my family are still speaking to me).

===============
6. Newsletter information

This newsletter is issued approximately monthly by Louise Pryor
(http://www.louisepryor.com). Copyright (c) Louise Pryor 2003. You
may distribute it in whole or in part as long as this notice is
included. To subscribe, email news-subscribe@louisepryor.com. To
unsubscribe, email news-unsubscribe@louisepryor.com. All comments,
feedback and other queries to news-admin@louisepryor.com. Archives
at http://www.louisepryor.com/newsArchive.do.

Categories
Newsletter Old site

Newsletter Dec 2002

News update 021219: December 2002
===================

A monthly newsletter on risk management in financial services,
operational risk and user-developed software from Louise Pryor
(http://www.louisepryor.com). Comments and feedback to
news-admin@louisepryor.com. Stop receiving this newsletter by sending
an e-mail to news-unsubscribe@louisepryor.com. Newsletter archived at
http://www.louisepryor.com/newsArchive.do.

In this issue:
1. Welcome to this newsletter
2. FSA briefing: The future regulation of insurance
3. The true significance of bugs in spreadsheets
4. FSA update
5. Seasonal risks
6. Newsletter information

===============
1. Welcome to this newsletter

This is the first issue of a monthly newsletter on risk management
in financial services, operational risk and user-developed
software. It will contain brief articles, often with more detailed
reports available on the web site. Its coverage won’t be
exhaustive, but will reflect my own interests and expertise: mainly
risk management processes and frameworks rather than capital
adequacy, and the application of software engineering techniques to
spreadsheet development as part of managing operational risk. I’m
always interested in your comments and feedback: just e-mail
news-admin@louisepryor.com.

===============
2. FSA briefing: The future regulation of insurance

The FSA held a half-day briefing on “The future regulation of
insurance” on 4th December 2002. Nearly 200 people attended, from a
variety of organizations: insurance companies, banks, building
societies, solicitors, accountants and other consultants. There
were surprisingly few consulting actuaries present.

The emphasis throughout the briefing from the FSA speakers was on
risk management frameworks, and the importance of regulated firms
having good systems and controls. The risk management framework
should be comprehensive, integrated throughout the firm, and well
documented. Senior management are ultimately responsible regardless
of outsourcing or other arrangements. Good controls, together with
a compliance culture, should lead to less crystallization of risk
and hence less regulatory intervention. None of this was new, but
there is clearly some concern that the risk-based approach has not
been fully taken on board throughout the industry.

Both Richard Harvey of Aviva and Mary Francis of the ABI,
representing those who are regulated, expressed some concerns about
the burdens being placed on many insurance companies by the new way
of doing things. Would better systems and controls really lead to a
lighter touch from the supervisor? Is the emphasis on high impact
firms ignoring the risk to the FSA’s objectives posed by the
simultaneous failure or shortcomings of several smaller firms? It
is important that regulatory creep is minimized: the FSA shouldn’t
go too far towards protecting people from risk rather than
educating them to understand it and take responsibility for
themselves.

A fuller report on the briefing is available at
http://www.louisepryor.showTopic.do?code=fsa021204.
The presentations and transcripts are on the FSA web site at
http://www.fsa.gov.uk/industry/ftr_regl_ins-dec02.html.

===============
3. The true significance of bugs in spreadsheets

There are many reports of extremely high occurrence rates for bugs
in spreadsheets. From reading them, you might think that very few
spreadsheets are error-free.

However, many people who are aware of the likelihood of errors in
spreadsheets go to great lengths to find and remove them. I have
found few significant errors in the often large and complex
spreadsheets I have reviewed (mainly in the insurance industry).

I believe that the true significance of bugs lies not in their
existence, which can lead to spreadsheets producing erroneous
results, but in the enormous amount of time and effort that goes
into preventing them. Spreadsheets are usually built and maintained
by people who have little or no software engineering
expertise. These people often:

– Do not have good software development processes;

– Are not aware of the characteristics of good software and how
they apply to spreadsheets;

– Do not know good methods of testing and reviewing software;

– Do not know how to design software (especially spreadsheets) so
as to reduce the likelihood of bugs;

The use of simple software engineering techniques can help. Some of
these techniques are described, somewhat briefly, in notes on my
web site. A good starting point is:
http://www.louisepryor.com/showTopic.do?code=sseng.
I have written about this topic at greater length in a workshop
paper for GIRO 2002: Managing the operational risks of
user-developed software, available from
http://www.louisepryor.com/articles.jsp.

===============
4. FSA update

Howard Davies is to leave the FSA to become director of the London
School of Economics. As an ex-academic myself, though not at that
exalted level, I am not convinced that his life will be much
easier. General opinion is that the change at the top won’t lead to
any major changes in the way the FSA operates: risk-based
regulation is clearly here to stay. However, the view has been
voiced from several quarters that now might be a good time to split
the roles of chairman and chief executive. After all, people say,
principles of good governance should surely apply to the FSA, of
all organizations.

Two major fines have been announced so far this month, compared to
three in the first eleven months of the year. In both cases (Abbey
Life and RBS) a major factor was stated to be weaknesses in
internal controls. Will these fines be counted as operational
losses for the purposes of risk monitoring?

New consultation papers out this month:
CP158 Mortgage endowment complaints – Changes to time limits for
making a complaint
CP159 Appointed Representatives – extending the current regime
CP160 Insurance selling and administration – the FSA’s high-level
approach to regulation

Feedback published this month:
CP147 Implementation of the Fourth Motor Insurance Directive

Current consultations, with dates by which responses should be
received by the FSA, are listed at
http://www.fsa.gov.uk/pubs/2_consultations.html

===============
5. Seasonal risks

If you want to stay sane, don’t even think about doing an
operational risk assessment of the holiday season. On top of the
basic health and safety issues, such as carrying large and
extremely hot objects around the kitchen without the appropriate
equipment, what about your systems and controls on the admin side?
Who was left off the Christmas card list and will never forgive
you? Who has been given the same book two years in a row? (Believe
me, it has happened!)

Best wishes for a relaxed Christmas and New Year.

===============
6. Newsletter information

This newsletter is issued approximately monthly by Louise Pryor
(http://www.louisepryor.com). Copyright (c) Louise Pryor 2002. You
may distribute it in whole or in part as long as this notice is
included. To subscribe, e-mail news-subscribe@louisepryor.com. To
unsubscribe, e-mail news-unsubscribe@louisepryor.com. All comments,
feedback and other queries to news-admin@louisepryor.com. Archives
at http://www.louisepryor.com/newsArchive.do.

Categories
Notes Old site

Future regulation of insurance briefing

The FSA held a half-day briefing on The future regulation of insurance on 4th December 2002. Nearly 200 people attended, from a variety of organisations: insurance companies, banks, building societies, solicitors, accountants and other consultants.

The main points concerning risk management to emerge from the briefing were:

  • Risk Management Framework
  • Senior Management Responsibility
  • Proportionality

See below for further details.

The briefing was chaired by John Tiner, recovering from a bout of flu. Instead of giving a presentation, he confined himself to introducing the speakers and responding to points made by them and from the floor. There were five speakers, whose topics and main points were:

David Strachan
Director of the Insurance Firms Division at the FSA
What does the Tiner Project mean for you?
If insurance firms have not yet done so, they should urgently review their operations, systems and controls. Proportionality is important: although their risk management processes and framework should be comprehensive, their complexity should depend on the size and complexity of the firm and the risks it faces. The ultimate responsibility of senior management cannot be delegated, whether within the firm or through outsourcing arrangements.
Richard Harvey
Group Chief Executive, Aviva plc
An insurer’s perspective
Things have changed a lot since pre-FSA days. There is a big learning curve for both the regulated and the regulator. There are enormous demands on management time: about 70 or 80 senior management meetings a year. The hope is that the confidence and trust built up will lead to a lower level of intervention in the future. There are a number of issues about the relationship between the FSA and the regulated firms that must be resolved.
Bill Lowe
Prudential Standards Division, FSA
The Role of the Risk Review Team
The risk review department supports all the regulatory and supervisory teams in the FSA. In particular it is heavily involved in visits to regulated firms, both the general discovery (ARROW) visits and themed visits. Several areas of concern have been identified from the visits undertaken so far, including outsourcing, documentation, delegation by senior management, business continuity planning and stress and scenario testing.
Andrew Campbell-Hart
Grey Panther, FSA
Emerging risks in the industry
Grey panthers are apparently not predators, but are there to build bridges between industry and the FSA, and between the promulgation and application of policy. They also support the line supervisors, and provide international contacts and experience. There are four economic drivers that will result in major challenges of the next decade, and appropriate regulation can help to balance the forces.
Mary Francis
Director General, ABI
The future regulation of insurance: considerations for firms
The FSA has a huge task, integrating nine regulators and their rulebooks during the worst market conditions for a quarter of a century and as international developments are changing rapidly (Basel, IAS, EU). It is important that regulatory creep is minimised: don’t go too far towards protecting people from risk rather than educating them to understand it and take responsibility for themselves.

Risk Management Framework

Strachan
• If insurance firms haven’t started already, they should urgently review their operations.
• However elaborate the risk management framework (see proportionality), it must be comprehensive. It must cover the full range of risks in an integrated manner, not just insurance risk.
• The risk assessments that have been performed so far have shown some examples of good practice, but overall there are some significant question marks. Risk management frameworks have not always been integrated over the whole firm, or presented a coherenct picture, even when some risks have been identified.
• Good controls and compliance culture should lead to less crystalisation of risk and hence less regulatory intervention.
Lowe
• Risk assessment should be integrated over the whole firm. Operational risk are currently handled poorly, with not enough data collection.
Tiner
• There is a definite trade-off: good controls will lead to less intrusive regulation, but firms must deliver on their side of the bargain.

Senior Management Responsibility

Strachan
• Senior management must take responsibility for risk management.
• Boards and senior management should read the report, The future regulation of insurance: A progress report, which sets out the regulatory agenda for the next few years.
• Management responsibilities should be clearly defined and documented, not only for risk issues but for other responsibilities too. There should be a clear view of the risk appetite of the firm, which should be communicated to all levels.
• Outsourcing is a key issue. Senior management remains responsible and should ensure that they get the requisite information from the outsourcer.
• In the risk assessment exercise, the FSA can tell a great deal by looking at the risk pack that goes to members of the board: Is there one? Does it cover key risks in an accessible manner?
Lowe
• The inability to demonstrate proper control of outsourcing, and poor disciplines over delegation, are major areas of concern. Senior management cannot opt out of their regulatory obligations.

Proportionality

Strachan
• Insurance firms themselves must implement a more efficient approach to managing risk. Costs must outweigh benefits.
• Firms needn’t necessarily have an elaborate framework for risk management. It should depend on the size and complexity of the firm and the risks they face.
• There should be a genuinely risk-based approach to internal audit: higher risk areas should be looked at more frequently.
Categories
Notes Old site

Financial Services Authority

The Financial Services Authority is the single statutory regulator in the UK responsible for regulating deposit-taking, insurance and investment business. It assumed its full powers on 2nd December 2001 (N2).

The FSA practices risk-based regulation. It has four statutory objectives, and tries to manage the risk to those objectives. The objectives are:

Market confidence
Maintaining confidence in the financial system;
Public awareness
Promoting public understanding of the financial system;
Consumer protection
Securing the appropriate degree of protection for consumers;
Reduction of financial crime
Reducing the extent to which it is possible for a business carried on by a regulated person to be used for a purpose connected with financial crime.

Regulated firms are expected to have frameworks in place to manage the risks to the FSA’s objectives. They may manage other risks too, of course, such as risks to shareholder value.

The FSA assesses the risk category of its regulated firms by looking at impact (essentially measured by the size of the firm) and the probability of a risk crystalising, based on its risk management framework, compliance culture, and systems and controls. The level of supervision depends on a combination of these two factors, of which impact appears to have the greater effect: the smallest firms will not receive heavy supervision however bad their practices.

The FSA emphasises that the aim is not a zero-failure regime. The belief is that a small number of low impact failures will not materially affect the statutory objectives: a single high impact failure would be much more significant.

Resources

The following external links are relevant:

Categories
Notes Old site

Risk classification

There have been many different attempts to classify risks, from the simple to the extremely complex. At the simple end of the spectrum is the basic breakdown of banking risk into credit risk, market risk and operational risk. More complex classification systems are intended for use as the basis of Enterprise Risk Management or other comprehensive risk management exercises.

The rationale for attempting to classify risks is that in order to manage your risks effectively you have to know what they are, and a risk classification system is necessary in order to do this. It can provide a basis for both identification and control, two essential parts of the risk management process.

A comprehensive risk classification system can provide an overall framework for risk identification: simply go through each risk, one by one, and work out where and how it can arise in your organisation. Sometimes there are problems of definition, in that it is not clear exactly how to classify a particular risk that you identify, but having a comprehensive system helps to ensure that you don’t double count any risks.

Control and mitigation can also be helped because risks that are classified in the same way are often susceptible to similar control and mitigation techniques.

Categories
Notes Old site

The true significance of bugs in spreadsheets

There are many reports of extremely high occurrence rates for bugs in spreadsheets. From reading them, you might think that very few spreadsheets are error-free.

However, many people who are aware of the likelihood of errors in spreadsheets go to great lengths to find and remove them. I have found few significant errors in the often large and complex spreadsheets I have reviewed (mainly in the insurance industry).

In my view the true significance of bugs lies not in their existence, which can lead to spreadsheets producing erroneous results, but in the enormous amount of time and effort that goes into preventing them. Spreadsheets are usually built and maintained by people who have little or no software engineering expertise. These people often:

  • Do not have good software development processes
  • Are not aware of the characteristics of good software and how they apply to spreadsheets
  • Do not know good methods of testing and reviewing software
  • Do not know how to design software (especially spreadsheets) so as to reduce the likelihood of bugs

I believe that the use of simple software engineering techniques can help. Some of these techniques are described, somewhat briefly, in other notes on this site.

Categories
Notes Old site

Risk management process

Risk management processes are receiving greater emphasis now than ever before, for a number of reasons.

There is a new regulatory emphasis on risk management, as evidenced by the Turnbull report, the Basel 2 regulations for banks, and, especially, the risk-based approach to regulation adopted by the FSA. Both Turnbull and the FSA are particularly strong on the process of risk management, while Basel perhaps places more emphasis on measurement (after all, Basel is all about risk-based capital requirements).

In addition there is a trend towards Enterprise Risk Management as an overall management technique, an example of the fact that risk management is currently very fashionable in management circles. Of course, this and the regulatory emphasis are probably not disconnected.

A good risk management process is typically a control cycle, including at least the following stages:

  • Establishing context
  • Identification
  • Assessment
  • Control and mitigation
  • Monitoring
  • Review
Categories
Notes Old site

Enterprise risk management

The Casualty Actuarial Society defines Enterprise Risk Management (ERM) as "the process by which organizations in all industries assess, control, exploit, finance, and monitor risks from all sources for the purpose of increasing the organization’s short and long term value to its shareholders". This seems to be as useful a definition as any. ERM is essentially a risk management perspective on management.

ERM is very fashionable as a management technique at the moment. It provides a framework based on analysing risks and opportunities, with an ultimate objective of creating value for the shareholders. It is sometime linked with Total Quality Management.

Note that ERM is not entirely consistent with the FSA’s view of risk. The FSA wants the firms that it regulates to have good processes in place to handle the risks to its (ie, the FSA’s) statutory objectives. ERM concentrates on risks to shareholder value.

Categories
Notes Old site

Usability

One of the criteria for good software is that the software is usable. If it is difficult to use, it will meet one of several fates: either it won’t be used, or it will take much longer to use than it should, or it will be used in the wrong way and will produce invalid results. None of these outcomes is desirable.

When looking at usability, it is important to consider all the possible users, their goals in using the software, and the context in which they use it. For instance, technical terms that are second nature to one group of users might be totally meaningless to others. This is particularly important for user-developed software, such as spreadsheets, where the developers often have a very different outlook to other users.

Usability means making it easy for the user to do the right thing, and difficult for them to do the wrong thing. It can be affected by the physical layout of the interface (whether graphical or text based), the wording of any text, the order in which operations must be performed, and many other factors. One of the trickiest aspects of achieving good usability is that it is often difficult to predict how users will react, especially if you are not a typical user yourself. The only way to get it right is to test the software with real users, and take note of what they say.