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Conduct Risk for Financial Services Firms

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Overview

Conduct risk has become a material cost to many financial services firms and increasingly appears as a significant line item in their profit and loss. But the real cost is greater in terms of its impact on the firm and executive and non-executive directors, senior executives, and management. Potential consequences include personal liability, personal reputation damage, possibly disbarment from working in financial services, collapse of customer trust, regulatory sanctions, and monetary fines.

Under the Senior Persons Regime, the burden of proof has been reversed, and under new proposals from the False Claims Act, accountability will be extended to certain roles performed by non-executive directors, including the board chair, chairs of various board committees, and senior independent directors. Conduct-related issues can decimate a board’s ability to focus on strategy execution over a protracted period. Such a distraction may prevent or reduce proactivity, and being proactive is in the best interest of the firm and its stakeholders.

Firms are increasingly recognizing that the FCA is resolute in ensuring both market integrity and good customer outcomes. There is also growing acceptance that conduct risk is here to stay and that many regulators' expectations of boards will continue to increase. Yet research indicates that the majority of boards still do have not a “firm-specific” working definition of conduct risk. As a result, boards may run a major, yet unnecessary and wholly avoidable, risk.

For a board to provide oversight effectively, it must sufficiently and unanimously define what it means by conduct risk and clearly articulate how this should play out in the firm’s dealings with its customers. The absence of a definition, an approach that is insufficiently thought through, and/or a “tick box” approach will result in increasingly uncomfortable conversations with the regulator—with serious consequences in the event of customer detriment.

The firm must evidence appropriate governance and reporting, and boards are also expected to provide constructive challenge to ensure their firms are truly putting customers at the heart of their business at all times. This goes beyond setting a tone at the top and ensuring that tone in the middle and the culture of the firm are aligned. Regulators expect boards to provide concrete evidence that behaviors throughout a firm bear out published claims of good conduct.

BRG works with boards and senior executives to ground conduct risk in the context of their strategy and risk appetite. This includes developing a clear articulation of conduct risk, its implications for their target operating model, and an independent diagnosis of the firm's starting point in terms of tone, cultural norms, behavioral economics, customer experience/outcomes, and opportunities for and responses to misconduct.

BRG provides the behavioral insights and analysis required and advises on robust and actionable plans to address potential gaps in a firm’s management of conduct risk. Our experts work with boards and senior executives to equip and enable dynamic challenge on an ongoing basis.

Visit BRG's International Financial Services blog.

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