Conduct Risk – Protecting your brand

Financial Services

October 9, 2013

This article is for Board members, senior executives, compliance, risk and legal professionals of wholesale firms, to help them further develop their understanding and management of conduct risk. In this brief article we set out a high-level definition of conduct risk, discuss a number of conduct risk “hot topics” and finally, pose questions designed to help firms benchmark their existing conduct risk arrangements against good practice.

Background

The financial services industry is slowly emerging from its most serious crisis in living memory. It is doing so against a hostile environment of public, political and regulatory mistrust, reduced buy-side demand, rising costs, significantly increased regulation, and high levels of risk and volatility. Few days pass without news of new, sometimes record fines, and new regulatory changes affecting the way firms do business today, and in the future. These changing demands are placing a great strain on firms and, in particular, on Board members, senior executives, and the compliance, risk and legal teams that work alongside them. Just as other industries that have gone through seismic structural and cultural change following serious risk failures – oil and gas, pharmaceuticals and aviation – the financial services industry is working hard to tackle the contributing factors that led to the crisis, including adjusting short-term incentives and tightening controls and processes.

“Boards will need to engage with and empower, senior management to take the lead in defining and managing a firm’s conduct and conduct risk arrangements.”

In the UK, a meaningful outcome of the substantial reorganisation of the regulatory framework has been the creation of a regulatory body specifically tasked with the regulation and supervision of conduct – the Financial Conduct Authority (FCA). The FCA’s work to date has focused primarily on the retail sector and on conduct relating to retail customers, but the FCA has made it very clear that it will not ignore the wholesale sector1.

The final report from the Parliamentary Commission on Banking Standards (PCBS), published in June of this year, has drawn very similar conclusions as the FCA, regarding its focus on bankers’ conduct and the related responsibilities of the Board and senior management. The PCBS proposes an overhaul of changes to the Approved Person Regime (APER) designed to reinforce individual responsibility, and recommends a more targeted and tougher penalties regime, at the same time encouraging shareholders to take a more active role in ensuring better behaviours in firms.

Boards should not be surprised that so much attention is being focussed on the requirement for them to have credible arrangements to manage conduct risk. Failing to do so creates the possibility of undetected future risks and damaging, expensive remedial action, both for individuals and firms.


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