9th February 2014

Compliance Consultant: So What Is This Conduct Risk All About?

Conduct Risk is the buzz phrase in the financial services world today; but seems a great deal of confusion and many people want to know what this involves.

There is obviously a great deal of information available including reasons for failure and fines that point you in the right direction, however, try to enter a Boolean search (containing the search term in inverted commas) for "Conduct Risk" into the handbook search box and you will find that it is not specifically defined by the regulator and nothing can be found between “COND” and “Conflicts of Interest Policy” in the Glossary.

The FCA provided a "Top 5 Risks" in their Outlook document last year, stating;

1. Products / services

–       customer needs & interests

1. Distribution channels

–       transparency for consumers

1. Payment and product technologies

–       over reliance, oversight

1. Funding strategies / structures

–       innovative, complex or risky

1. Understanding of risk and return

–       customers taking too much risk

From the various speeches and publications, a number of focus areas become evident and include;

• Aligning business models to fair treatment of customers
• Complaints handling
• Product development and governance
• Incentives, Remuneration and reward policies
• Financial Promotion withdrawal and prohibition
• Conflicts of interest
• Wholesale business
• Business Continuity
• Outsourcing and procurement

A Conduct Risk Framework will help in identifying the elements and areas impacted. From this adequate and proportionate measurements can be made for reporting. Overlaid with a rationally decided appetite the data can provide an exception report for Senior Management to consider. This framework can be achieved with Level 2 & 3 governance depending on the size of firm.

The three phases of good management are definition and measurement, management followed by activity. Running any business is typically conducted this way but the skill of management is actually created and enhanced as a result or product of the activity, therefore there is no definitive answer on how best to manage. The key to these phases is providing accurate and usable data to the second phase. Unfortunately many people when defining the Management Information do this the wrong way round.

Summary

Conduct Risk is not only here to stay as an extension of the TCF Initiative requiring evidence of fair customer outcomes, but is seeking to change the culture. One thing for sure is that it is going to ramp up as the FCA get a deeper and fuller understanding of what is missing in the retail distribution world. Focusing on your exposure and level of risk is critical to your firm’s survival and escaping close regulatory scrutiny, supervision or worse, and it is vital to get it right.

What measures have you taken to prove mitigation of Conduct Risk?

HOW to Effectively Manage Conduct Risk is what everyone is talking about. I have a complete Do-it-Yourself Guide which will tell you how to manage your own framework and be ready for the hard years to come. Download your 20 Page FREE copy here http://bit.ly/1cYl41H  

FSA/FCA, Regulation