February 09, 2017 - Comments Off on ‘Conduct Risk’, the buzzword for regulators and, soon, recruiters.
The ‘Great Recession’ shook the financial world to its core.
For many years, ingrained culture of recklessness in the world’s largest financial institutions brought the international economy to the brink of catastrophe. Through no fault of their own, millions of consumers were forced to weather unimaginable pain, as unemployment, foreclosures and personal bankruptcies skyrocketed.
Consumer trust in financial institutions imploded, whilst anger towards these same organisations exploded. Rarely has the conduct of an industry been exposed to such public scrutiny as the banking sector in the years after the Great Recession. Furthermore, one can argue that never has an industry been found to have fallen so far below the professional standards expected of it.
The distrust has only been compounded in recent years. In 2011, the payment protection insurance mis-selling scandal broke, costing several financial institutions more than £18 billion provisions; and in 2014, the Libor scandal became public, shattering the last morsel of public trust and resulting in various multi-million pound/dollar fines imposed on offenders in Europe and the United States (US).
In the United Kingdom (UK), the Financial Conduct Authority (FCA) is committed to ensuring that these sorts of situations do not arise again and it has made clear that it will intervene and impose penalties where is sees unacceptable risk to the fair treatment of customers. To date, it has issued fines into the billions of pounds to both large and small institutions. In the US, regulators are acting with the same resolve. No one, it seems, is immune.
Consumers in the UK, US and Europe began to demand change. Regulators made the restoration of good conduct in financial institutions a top priority, one that would require: “an enterprise-wide effort which cannot be achieved simply by treating it as a compliance matter…. It requires banks to face up to their true culture, employee attitudes and beliefs—to enter as well as exit markets, to rethink product and service design, to measure what has never been measured before, to enable as well as prohibit and finally, also to recognise the change will be a long haul”.
To achieve this end, the FCA created a new term: conduct risk. The concept has now risen to the top of firms’ and regulators’ agendas and likely to remain there for the foreseeable future. However, the inherent problem with the concept of conduct risk is its primitivity, there is not yet a mutually accepted definition of its scope and boundaries.
What is Conduct Risk?
Firstly, it is important to point out that not even the FCA has a master definition for conduct risk. This was done on purpose, because… “a firm’s conduct risk profile will be unique… there is no one-size-fits-all framework that can be put in place to assess it”.
In its 2011 Retail Conduct Risk Outlook, the FCA defines it as, “…the risk that firm behaviour will result in poor outcomes for customers”. Good customer outcomes may be defined as customers getting financial services and products that meet their needs.
Conduct risk is commonly associated with regulatory areas of treating consumers fairly, financial crime and market abuse, whistleblowing, bribery and corruption, conflicts of interests and remuneration and incentives. In recent years, however, it has been defined more broadly to include business models, culture, product development and governance, ethics, integrity, sales and marketing practices and competition.
The management of conduct risk is different from other kinds of risk. By its very essence, it is pervasive. It respects no departmental boundary. It touches on activities rarely – if ever – reached by other risk measures, demands deep cultural and behaviour change at the heart of an organisation.
Deloitte states, conduct risk is broader than ‘Treating Customers Fairly’, since it focuses on risks to market integrity and to client outcomes in both the retail and wholesale sectors, and should go bound measuring compliance with conduct of business requirements.
It must not be confused with reputational or operational risk, which are concerned with potential damage to the firm, rather than potential damage to the client or market. Its realigning the focus of financial institutions, forcing a fundamental, cultural change in how firms approach their work and their responsibility to consumers and the market.
What Conduct Risk Means for Recruiters?
Like other areas of risk, conduct risk will likely become a highly lucrative recruitment market. Milburn Lewis has certainly witnessed an increase in our Big 4 clients seeking professionals in this discipline. We predict that over the next two years, we’ll see significant growth within the Big 4 firms globally.
Deloitte, for example, recently published 10 principles of strong conduct risk, which they believe serve as a sound foundation for conduct risk across all financial services. The Big 4 clearly see opportunities in this area and appear to be willing to invest in finding exceptional talent.
It is here that the real opportunity for recruiters lies. Getting ahead of the curve is key, however. We must embrace this new market and learn the needs of our clients. Conduct risk is in a state of flux, one that presents challenges not only for our clients but for us as recruiters as well. And it is going to a cultural change of our own to make the most out of this exciting market.
Gone are the days when we can, “pretend to know what we’re talking about”. Consultants working in conduct risk must sincerely engage with the market, learn its distinctions, challenges and developments. Only by doing this can we predict the future and, therefore, be ahead of our competitors.
Milburn Lewis is taking this serious, responding to market shifts and taking necessary steps to become a market leader in conduct risk. This month, we welcome Hashim Mohammed to the team. He brings a wealth of knowledge on risk recruitment and will lead our development into this area.
If you are interested in exploring conduct risk opportunities in Europe, or elsewhere, please don’t hesitate to reach us at firstname.lastname@example.org.
Published by: Ian James in Blogs