This note explains what conduct risk is and what the United Kingdom Financial Conduct Authority’s (‘FCA’) expectations are for financial institutions.

Compliance Tyler
Jan 31 · 4 min read

Conduct risk is the risk that the conduct, acts or omissions of the firm, or individuals within the firm, will:

a) deliver poor or unfair outcomes for the customer (retail or wholesale), or

b) adversely affect market integrity

The emergence of scandals around the world coupled with the resulting consumer mistrust towards financial institutions has prompted regulators worldwide to closely examine the root causes of ‘bad behaviours’ in regulated firms, as well as the potential drivers, consequences and remediation requirements that such scandals encompass.

Just in case you forgot, ‘Google’ some of these scandals:

  1. Subprime Mortgage Crisis (2005–2008)
  2. Lehman Brothers Collapse (2008)
  3. UK Payment Protection Insurance Scandal (2006 — ongoing)
  4. Société Générale Fraud (2008)
  5. Madoff Ponzi Scheme (2008)
  6. Manipulation Of Interbank Offered Rates (2008)
  7. HSBC Tax Evasion And Money Laundering Scandal (2008)
  8. Collapse Of Spain’s Bankia Group (2012)
  9. London Whale Scandal (2011–2013)
  10. Foreign-exchange Rigging (2013–2015)
  11. Wells Fargo Unauthorised Account Openings (2015–2017)

Regulatory Agenda

Since the inception of the Financial Conduct Authority (’FCA’) in April 2013, the work of the FCA has been underpinned by the concept of Conduct Risk. Conduct Risk has been defined by the FCA as, “the risk that firms’ behaviours may result in poor outcomes for the consumer”. Conduct Risk takes forward the principle and expected outcomes of Treating a Customer Fairly (‘TCF’) as prescribed by the FCA.

TCF is still relevant

TCF remains important to the FCA and it continues to look at firms’ compliance with the TCF Outcomes as these impact on the conduct of firms at each stage of a products life-cycle. There are six outcomes expected from TCF:

  1. Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.
  2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
  3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
  4. Where consumers receive advice, the advice is suitable and takes account of their circumstances.
  5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.
  6. Consumers do not face unreasonable post-sale barriers imposed by firms to change the product, switch provider, submit a claim or make a complaint.

There is ‘no one size fits all’ approach and the regulator is worried that firms are not treating conduct risk in the same way as they would any other risk to their business that could affect their balance sheet.

Seven core components

It’s really important that firms, if they haven’t already, look at the issue of conduct risk.

  1. Defining Conduct Risk — what Conduct Risk means to your firm and how you ensure all staff understand this at their induction and on an ongoing basis thereafter.
  2. Conducting a Conduct Risk Assessment — what the risks are and what controls you have in place.
  3. Aligning Business Model and Strategy to Conduct Risk — having a clear relationship between Conduct Risk and your business model and strategy.
  4. Considering the firm’s Conduct Risk Appetite Statement — do you regularly review the firms Conduct Risk Appetite against any outcomes from this, or related, policy.
  5. Governance Controls and Behaviours — senior management and staff are held to account where they share responsibility for conduct failings.
  6. Implementing Conduct Risk Reporting — having regular meaningful management information reporting on Conduct Risk.
  7. Embedding Conduct Risk — having a process in place to ensure Conduct Risk is fully embedded at the firm by everyone.

Final thoughts…

So conduct risk is essentially the FCA trying to get firms to do the right thing. In that way, what the FCA is trying to do is to focus firms’ minds on how they act and behave, and to try and reduce the risk of, for example, loss or poor outcomes to customers, financial loss to their business or reputational damage, and also the fact that they might not be acting with the right amount of market integrity. All due to the decisions made by that business or the behaviour of their staff.

Learn more over a coffee

I created ‘Coffee Break Compliance‘ to democratise compliance knowledge.

The Medium link is below

Conduct Mind

A publication looking at regulatory issues within financial services

Compliance Tyler

Written by

Tyler Woollard is the founder and MD of The Conduct Mind Limited, a compliance consultancy specialising in Conduct Risk. www.theconductmind.com

Conduct Mind

A publication looking at regulatory issues within financial services

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