In simple terms, Conduct Risk is the level and nature of risks posed to customers from the way in which a business is run. Are decisions made solely for profit rather than the customer’s interests? Or are lazy decisions made to do something “just because the competition do it?” Either of these could constitute Conduct Risk.
First, unlike the Mortgage Market Review which is mortgage sector specific, the concept covers every regulated area.
So the shift in focus to Conduct Risk is the same for banks, building societies, insurance companies and wealth managers as well as mortgage introducers.
However, there is also the matter of proportionality. Whilst the Conduct Risk measure is of equal importance to a branch network division of a national lender as to a sole trader mortgage introducer, the risks and complexity of remedies are clearly of different scales.
Whenever Conduct Risk is mentioned, culture soon follows. The idea of having the right culture is already reasonably well understood by authorised firms in the context of Treating Customers Fairly.
Culture is open to different definitions but the FCA has clarified that it will be looking at four key areas.
These are; how a firm works in practice, how the customer perspective is taken into account on products and services, how the firm uses customer management information to modify its conduct towards them and what a firm does when things go wrong.
These issues go beyond corporate governance and strict compliance with rules or guidance. Fundamentally the FCA is interested in finding out the reality of whether the business is run (conducted) with its customers in mind.
An example might be: “Why has the mix of repayment to interest-only loans changed significantly over a period of time?”
It would not be adequate to state that interest-only products aren’t available any more without considering the type of customers you have experienced over the same period.
Claiming avoidance of these ‘riskier products’ is not sufficient either without considering whether the customer need has genuinely been addressed.
Even though the proportionality principle applies all firms must consider; strategy, business plans, management information, conflicts, people, systems and controls and, not least, complaint management and audit – when assessing Conduct Risk.
Audit may not look relevant for small firms but how can a small firm demonstrate that its conduct is adequate unless it has some sort of external challenge or benchmarking?
For larger and more complex firms, all of the above are true with addition of structure and relationships, board, committees and management.
Summing up, the greatest impact of the focus on Conduct Risk is the need to make sure that the business is aligned to customer interests.
This cannot be delivered as a project it needs to part of everything a firm does.
For me, the most telling change at cut over from FSA to FCA back in April was the introduction of a new threshold condition explicitly about Conduct Risk: it states that a firm’s business model must operate in the interests of its customers.
