The FCA and Conduct
The Financial Conduct Authority (FCA) has identified corporate conduct as a key issue that straddles all risks. The main risks to a financial institution of not getting its conduct and culture piece correct are regulatory and reputational — and both have a potential financial impact. It can also affect the financial institution's ability to attract and retain investment, customers, staff, and counterparties.
As part of its ongoing supervisory processes, the FCA has embedded its "5 Conduct Questions" programme [1: pdf] into its Approach to Supervision. In August 2019, the FCA warned of 'significant weaknesses' in firms' implementation of the conduct rules [2]. It has also warned that during the next economic downturn, there is a danger that banks could return to the kind of bad conduct that led to the PPI-mis-selling scandal [3].
For this reason, the conduct of financial institutions is under substantial scrutiny.
What is Conduct Risk?
At a fundamental level, the FCA has three operational objectives: consumer protection, market integrity, and effective competition. A conduct event is any event that breaches any of these objectives — so any action that has the potential to cause harm to consumers or market integrity is a conduct issue. The FCA expects firms to identify and understand their conduct issues. A financial institution must consider the conduct implications of all its activities, and be able to provide evidence that it recognises both behavioural risks and poor practices — and mitigates them.
Corporate culture — the "tone from above" — is seen as the main driver of conduct, through the company’s and the individual’s values, attitudes, standards, and beliefs. As such, a firm's risk culture is seen as being closely linked to the wider corporate culture. A successful approach to addressing conduct risk and culture would see conduct discussions occurring as part of "business as usual" and as part of the appropriate management meetings, rather than after-the-fact or in secondary forums.
Key Considerations for Financial Institutions
So, what should financial institutions be thinking about when it comes to their conduct? Issues that need to be considered include the following:
- Are your conduct goals defined as clearly and as precisely as possible?
- Are you properly considering your potential conduct risks and how they could be affecting clients and staff?
- Are those considerations part of your day-to-day management of the business, or are they an afterthought?
- Are the incentive structures helping to create the desired behaviours and remove conflict of interests?
- Does an increased focus on conduct create an increased personal liability risk for senior management? Is this being identified, assessed, mitigated, and monitored?
Commentators have noted a direct link between the quality of a firm's management of conduct and the quality of its risk management framework. In the transitioning insurance market, demonstrating the conduct and culture of a financial institution during the insurance renewal process will become increasingly important.
