An enhanced regulatory discipline recalibrated almost two years ago, conduct risk has served as a point of confusion for firms due to the lack of prescriptive guidelines provided by the regulator. However, this is no excuse for ignoring the issue.

Imagine there’s a knock at the front door. “Good morning,” says the seemingly mild-mannered regulator you were introduced to in April 2013.

“I just have a couple of questions about your conduct risk agenda," the regulator continues. "Have you identified and measured your emerging conduct risks by business area? Do you have a holistic approach focusing on client and market outcomes? Have you at least started designing a framework with all three lines of defence engaged and with clear roles, sponsorship, milestones and timelines?”

You panic slightly as you realise that you have no precise notion of what is expected of your firm with regards to conduct risk, a regulatory topic that has somewhat taken a backseat to others.

Indeed, many firms have struggled to define what is expected of them with regards to conduct risk, which has, over the past year, come further to the forefront against other prudential standards such as capital adequacy. And thus far, this lack of understanding has largely translated into a lack of action.

It has now been almost two years since, in its 2013 Risk Outlook, the UK Financial Conduct Authority (FCA) made clear what it thinks results from poorly managed conduct risk. In this report, the FCA intentionally avoided providing a laundry list of requirements, for fear that firms would simply try to tick relevant items off.

The willingness to digest a set menu of regulatory requirements has characterised post-crisis attempts to restore trust in financial services. But that is not the way conduct risk works. Conduct risk frameworks are not generic. They are unique to each and every firm and must be developed as a function of your own business model and the activities your entire enterprise undertakes on a daily basis. Senior leaders must take time to consider those risks as individual to their business lines, not as a buffet covering an entire industry.

No excuses

However, this ambiguity is no excuse for firms to ignore the issue. Two years after the fact, firms should no longer be mulling over what conduct risk is or be complaining that it is an unmeasurable subject. Firms should already be demonstrating that the activities and emerging conduct-related risks of their business models have been adequately considered to establish effective safeguards.

So what action should firms take? The first step is to establish a set of conduct risk fundamentals relevant to your business. These are the policies, procedures and, most importantly, ingrained habits designed, learnt and proliferated to reduce the chance of customers or the market being adversely impacted by something you do.

Second, regulators and politicians have made their targets very clear – they will ‘follow the money’ and will hold individuals accountable for their misconduct. Thus, front-line management must accept personal accountabilities and ensure that everyone in their charge share their goal of a customer-focused, market-leading, best-practice-sharing modern institution.

But good conduct has to become embedded in the firm. The challenge is to spread this new-found awareness throughout the organisation, translating it into behaviours that are shared by all personnel at all levels – not just a chosen few.

Are the behaviours you want to promote also those you reward and share with your employees as examples of good conduct? Education is key, so time must be taken to walk every member of your organisation – regardless of age, tenure or task – through what is expected of them and how they can satisfy that expectation.

Ultimately, review all business activities; identify the likely risks arising; and start building a map of what your organisation looks like when seen through the lens of conduct risk. This map is a blueprint to which everyone contributes. Supported by risk, compliance and audit, the map is ultimately owned by the firm’s front-office teams and their management. Around these people’s necks the regulatory yoke will hang.

Conduct should be less of a buzzword, more of a second nature. Top marks will only be achieved by those who can provide evidence of a change in culture and behaviour. ‘Conduct’ as a discipline is here to stay. The regulator is clear and resolute. The interests of the customer must be protected at all cost.

The next time the regulator comes knocking at your door, a holistic approach and well-documented examples will give them the comfort they need to move on to the house down the road. 

Simone Meloni is director of markets and regulatory strategy at financial services consultancy Parker Fitzgerald.

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