Who understands "Conduct Risk"?

Conduct risk seems to be the focus of every regulator this year and not unrelatedly the opportunity of choice for many management consultancies.

As a term it was something I became aware of in late 2013 and I am still trying to work out what it really means. Maybe I shouldn't say that, but it is true and if there is one thing that annoys me, it is something I don't understand.

I am not sure who coined the term first, but it is something that the Financial Conduct Authority adopted early on - probably not surprising when you think about it. It is also some the OECD is urging its members to bake into their regulation and most recently I have seem the Bank of England / Prudential Regulation Authority also make a play.

Googling the term does not bring out a clear definition, at least not one I can find. There is the "FCA Risk Outlook 2013" which contains many references to conduct risk , but does not seem to define the term other than indirectly when referring to

"A range of inherent factors (that) interact to produce poor choices and outcomes in financial markets."

The factors are then illutrated as

A quick look shows this to be anything, but a simple topic in the eyes of the FCA.

The FCA has also referred to conduct risk in the context of “consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products”.

This feels like something that benefits hugely from hindsight. It reminds me of the Official Secrets Act that I signed many years ago and am still covered by! It was put to me simply that it meant that "they" could "get" me if at some point in the future they chose to do so and I didn't need to read all the detail.

My search then expanded to include the OECD and found the following

Principle 6: Responsible Business Conduct of Financial Services Providers and their Authorised Agents

Underlying assumptions

1. The principle of responsible business conduct is important in order to ensure that financial services providers and authorised agents act fairly, honestly, professionally and with due skill, care and diligence when dealing with consumers. Duty of care is necessary in addition to improved transparency because consumers have bounded rationality and therefore cannot be expected to always make decisions that are in their own best interest.

2. Responsible business conduct entails the following elements, where financial services providers and authorised agents:

a. avoid as far as possible or adequately manage conflicts of interest, in order to prevent detriment to the consumer.

b. have the necessary resources and procedures in place for safeguarding the best interests and ensuring equitable and fair treatment of their consumers.

c. communicate with the consumer in a timely and accurate manner, and their language used is clear and comprehensible to the consumer.

d. have appropriately qualified and trained staff to sell the products concerned and/or provide advice to consumers and execute the contract/transaction.

e. have remuneration designed in a way which encourages responsible business conduct.

3. Financial services providers and authorised agents have a duty to be responsible for the actions of their staff and agents acting on their behalf and therefore ensure that their staff and agents maintain appropriate standards for conduct of business to ensure compliance with laws and regulations and fair treatment of customers.

The items listed under (2) feel like something I can work with. Points (d) and (e) also explain why in the organisations where this is already a major issue it is HR that seems to be running point, but it is clear there is much more.

I can see why the consultancies are keen on this. Just tweaking the current norm is almost certainly not enough. I have heard of firms who are addressing a lot of this through systems ie IT, but that seems to miss the point. This really needs to be business-led, and not sidelined or delegated because it is too difficult. It seems that to be effective a leader in this field will have to demonstrate that they understand:-

• how the business currently works now and have a vision of how it should work
• the dark arts of delivering people-centric change (and that is not necessarily HR!)
• how to manage a diverse and difficult set of stakeholders
• how to navigate complexity with resilience, agility and creativity

Does anyone else have a better definition, understanding or point of view that can be shared?