Conduct Risk - A Force for Positive Change?

Corporate Finance & Restructuring

February 25, 2014

In the ‘brave new world’ of the Financial Conduct Authority (FCA), conduct risk is an issue that all financial institutions need to take seriously as they will be required to demonstrate that customers and integrity are a core part of their strategy. Written with board members, senior executives, compliance, risk and legal professionals in retail firms in mind, this article seeks to explain conduct risk, considers the cultural challenges, identifies steps to help address conduct risk and poses questions designed to help firms benchmark their existing conduct risk arrangements against good practice.

Background

The financial services sector 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, rising costs, significantly increased regulation, and high levels of customer dissatisfaction. There are many ‘challenger’ banks emerging to take advantage of the currently tarnished reputation of the established players. Few days pass without news of new, sometimes record level, fines and regulatory changes impacting both the way firms do business today and shaping how they will work in the future. These ever-changing demands are placing a great strain on firms, in particular on board members, senior executives, and the compliance, risk and legal teams that work alongside them. In common with industries, including oil, gas and pharmaceuticals, that have gone through seismic structural and cultural change following serious risk failures, the financial services industry is working hard to tackle the factors that contributed to the crisis. Adjusting employee incentives, reinforcing the second and third lines of defence, clarifying roles and responsibilities, and tightening controls and processes are just some of the actions being taken.

As the FCA focuses on ‘conduct risk’ in its broadest sense, it is driving institutions to address the underlying issues that have led to this serious breakdown in trust across the industry.

Many of our clients have expressed frustration at these changes, particularly those who are unclear about what ‘conduct risk’ means and who don’t understand exactly what this means in practice for their business. For others, the frustration arises from the deeply held belief that they already have their clients at the ‘heart of their business’ but have been unable to evidence this to the satisfaction of the FCA. To others, it simply feels like an on-going and never-ending stream of new regulatory requests.


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