One of the aspects that the Financial Stability Board - which was established to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability - is focussing on is Conduct Risk.

The phrase “conduct risk” comprises a wide variety of activities and types of behavior, which fall outside the other main categories of risk, such as market, credit, liquidity and operational risk. In essence, it refers to risks attached to the way in which a firm, and its staff, conduct themselves. Although there is no definitive definition, it is generally agreed to incorporate matters such as how customers are treated, remuneration of staff and how firms deal with conflicts of interest. Conduct Risk covers all sorts of companies, banks and financial institutions. 

Conduct Risk Report 2013
The Conduct Risk Report 2013 reports on a recent survey by Thomson Reuters Accellus of more than 200 compliance and risk practitioners from financial services firms across the Americas, Europe, Africa, Asia, Australia and the Middle East to find their views on how the industry is defining and dealing with conduct risk. Respondents represented firms from across the financial services sector including banks, insurers and fund managers. 

The key components of Conduct Risk are:

Source & Copyright©2014 - Accelus Thomson Reuters

Main findings from the report include:

• some 84% of respondents did not have a working firm-specific definition of “conduct risk”.
• firms were in broad agreement on what constitutes conduct risk. Culture came out on top (76%), closely followed by corporate governance (74%), then conflicts of interest and reputation (both at 68%).
• firms in Europe and Australasia have done the most work to address conduct risk, while the North America and the Middle East have done the least, according to the survey.
• most of the changes made have been implemented in the last 12 months, suggesting that firms’ awareness of conduct risk is growing and that the emphasis which regulators are placing on consumer protection and having the right corporate culture is beginning to take hold. 
• almost two-thirds of respondents have implemented arrangements to deal with conduct risk while just over 50% of the firms surveyed reported having no, or a partly developed conduct risk appetite in place. 

Next Steps 
The report concludes that there are five main steps for firms to consider: 

• Define Firms need to define what “good” in terms of conduct risk looks like for their particular business. The regulators have repeatedly said that conduct risk is not a one-size-fits-all concept and that boards need to decide for themselves how conduct risk should be managed within their firm.
• Assess Once firms have decided how they wish to consider and manage conduct risk issues a gap analysis needs to be undertaken to highlight any and all areas where current practice is out of step with where the firm wishes to be.
• Reform All areas from the gap analysis need to be considered and prioritized. Resources and, where needed, sponsorship from the very highest levels of the firm should be devoted, and importantly be seen to be devoted, toward bringing the firm’s activities into line with the defined appetite and stance on conduct risk and culture.
• Measure All firms need to be able to measure and report on the qualitative as well as any quantitative elements making up the diverse concept of conduct risk.
• Evidence Clear evidence of all these activities needs to be provided, so that a transparent audit trail is available and all material decisions recorded. This is for the benefit of internal staff and will help with reporting to the board (and elsewhere) and to assure the regulators that a firm has a firm grip on all aspects of its governance and control of conduct risk.  

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CTMfile take: Most of Conduct Risk is just plain commonsense, e.g. on tracking the impact of remuneration they quote Martin Wheatley, chief executive of the UK FCA, at Mansion House, London who said in October 2013, “… if you want to predict how people will behave, you look at their incentives”. The key issue for corporate treasurers is that they need to be prepared for these types of questions and requirements.