Conduct Risk: An Overview
September 7, 2015 by
Filed under: Risk Management
Doesn't it seem odd that we are perceived to need a government organization to oversee institutional conduct in the world of finance? Well no, not really. In light of recent scandals involving the antics of some banks, with their manipulation of the LIBOR rate, mis-selling, golden handshakes (many seen as rewarding failure), huge bonuses and questionable tax avoidance schemes for wealthy clients, is it little wonder that governments have decided to increase their oversight and strengthen their regulatory powers?
Because of the aforementioned debacles the standing of the financial world, and in particular the banks, has in the eyes of the public reached an all time low. In response, the UK government decided to set an example to other countries by kicking the butt of its regulatory body the Financial Conduct Authority (FCA) that had failed dismally in addressing problems over several years. In-depth enquiries, resignations and huge fines have been the result and the scandals are probably not yet over.
Statements from politicians that the banks and the rest of the financial sector were to be brought to heel by the FCA proved very popular with the public. For public you can also of course read voters. With the UK's General Election in May rapidly approaching the government needed to be seen to be protecting the rights of the public in their dealings with financial institutions. Fairness for customers, and the maintaining of market integrity, was to be at the forefront of the future management and conduct of the financial institutions.
How do you define conduct risk?
Conduct risk touches upon many aspects of a risk, governance and compliance structure, including; preventing abuse of the market, ensuring that new conduct risk rules are fully complied with; efficiently dealing with any conflicts of interest and developing adequate audit procedures to oversee the development processes of new products.
Creating and implementing an effective conduct risk structure is essential in improving the risk culture of an organization. To create that it is necessary to define certain goals and actions. These should include measuring and monitoring the most important conduct risk metrics; establishing a conduct risk strategy agreed by the board; the assessment of conduct risk across an entire organization; to communicate fully about and to effectively manage conduct risk, and to consider potential conduct risk results.
Managing a conduct risk structure
The changes in regulation have been fast and somewhat furious. This has made the implementation of a sound risk culture something of a challenge for many businesses. Those that have acted quickly and efficiently will see the benefits coming through in the form of a more positive relationship with the supervising authority under which they operate. Many have also seen a general improvement in the performance of the business. To achieve this it is necessary to ensure a thorough understanding of the regulations relating to products and locations; to manage existing regulatory requirements, and to be aware of and to manage new rules; to assess risk issues and to be properly prepared for regulatory examinations.
If those objectives are achieved then the risk management of conduct compliance issues is made easier. Running a business with best practice at the forefront of policy and a good well-run conduct risk program also helps achieve those aims. Best practice should bring with it an open culture in the business. A program should be created that will allow employees to 'blow the whistle' on practices about which they are uneasy or that they suspect may be non-compliant with regulation. In addition, any potential conflicts of interest should be picked up early and immediately addressed; staff members should be educated about risk and discussion about the subject should be actively encouraged. Being risk aware is very positive and employees bringing matters to the attention of management should be rewarded.
Risk and product development
From the creation of a new product to its eventual replacement or demise conduct risk must be properly managed. It must figure in all new developments and any program of sales incentives must be closely controlled. When new clients sign up for a product the processes must be fully compliant, and the product being sold must be suitable for that client in every respect. Staff education is the key here - well-informed staff members will not mis-sell.
Corporate governance of a business of any size operating in the financial sector should ensure an awareness of compliance issues and must take steps to ensure that the rules are never bent, or indeed broken. Failure to do so can cause irreparable reputational damage and could result in a hefty fine. Every responsible management should look for potential regulation breaches in their operation, analyzing the risk factor carefully.
Conduct risk is now a vital element of running a highly regulated business - companies that attach little importance to it do so at their peril! For more information please visit the website or download one of the brochures about risk management. For more information please download one of the brochures about risk management or watch the video "A Glimpse into Risk Management".