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Conduct Risk

Conduct Risk is viewed by some as a rather recent discipline within Risk Management. In the past, this topic was in many cases overseen by the Compliance department, sometimes not even in a formal manner. With the emergence of recent fraud scandals and some regulators taking steps towards a more conduct approach, Conduct Risk started to be addressed as an increasingly important topic. An example of such regulators is the UK’s Financial Conduct Authority (FCA), which was created in the 1st April 2013, having replaced the Financial Services Authority (FSA). At this time, the Prudential Regulation Authority (PRA) was also created, specifically to deal with matters of prudential regulation for banks, building societies, credit unions, insurers and major investment firms.

In recent years the FCA has levied several billion pounds in fines for financial services firms who were involved in serious conduct failures, reinforcing this regulator’s serious stance in what regards conduct regulation in retail, wholesale, financial markets and the infrastructure that supports those markets.

There is no formal definition for Conduct Risk. The FCA challenges firms to define themselves this category of Risk, while they embrace and start living and breathing Conduct Risk. Conduct Risk can be defined as “the risk that the firm’s behaviour results in poor outcomes for clients“.

Conduct Risk will be a direct consequence of poor risk culture, where a firm might enrich itself at the expense of its customers, rather than in pursuit of good customer outcomes. The big concern if that, left to their own devices, a firm’s structures, processes, controls and management culture and incentives will move away from putting the clients first and towards putting profit first, even at the expense of sub-optimal customer outcomes.

In its Business Plan for 2016-2017, the FCA expressed that

Culture remains a key driver of significant risks in every sector and the root cause of high-profile and significant failings. It impacts on individual behaviours which in turn affect day-to-day decisions and practices in the firms we regulate. Culture is therefore both a driver, and potential mitigator, of conduct risk.

Our recent articles about Conduct Risk