No rest for Financial Services as the FSA ups the ante with new Conduct Risk guidance

Following in the much appreciated grand tradition of Guest Blogs, this blog is courtesy of Sandra Quinn - Associate Director of Conduct Risk at Capgemini.  Sandra has a very insightful view on Conduct Risk having worked both for the FSA and a major UK Retail Bank as a Risk Director.   

Now, if you are an FS industry watcher you are going to love this.  For everyone else, take note, other regulators are watching with interest how a revamped FSA takes on its responsibilities. This blog focuses on the implications for FS firms following the recent publication of the latest set of guidance from the FSA

With the publication of its second Retail Conduct Risk Outlook, the FSA has set out the priority consumer risks for its attention in 2012/13.

http://www.fsa.gov.uk/static/pubs/other/rcro12.pdf

Conduct Risk – the risk that a financial services firm’s behaviour leads to poor customer outcomes – is high on the FSA’s agenda. And will be higher on the Financial Conduct Authority’s agenda. The clue being in the name.

What the Risk Outlook means for firms is that those looking to stay out of the FSA’s Enforcement Division will need to treat this as their marching orders on conduct and customer risk for the next year and demonstrably get onto seriously examining the risks in their firms and unequivically doing something about them.

The problem for them is that the report highlights 48 risks, with 16 risks new since 2011, covering just about all financial services firms and businesses. Only 3 risks from last year have been relegated, but the FSA says that does not mean they are no longer concerned about them or that firms can now ignore them.

So firms who thought they might look at the list and decide it didn’t apply to them should be disappointed.

And the content and the message is clear - FSA expects all financial services firms to get serious about ensuring they are not creating poor customer results through how they behave.

The RCRO focuses on risks extending from the complexity of products such as structured investment products, through reward and business models, via how firms are responding to regulatory and legal change such as RDR and Solvency II, to cost cutting and how the firms search for business in wealth management and private banking. Packaged accounts and PPI feature, much as expected, with investment risk profiling, investor compensation, general insurance concerns (add ons, PPI, limited value products, initial premia) , governance in life offices, projections and systems weaknesses in network models. 

 It’s a heavy duty list. And as if the list of 48 issues isn’t enough, the RCRO implicitly presents three strategic challenges for firms:

The regulator is increasingly focusing on business models.  This is largely about getting conduct risk prevention embedded in firms. But what the FSA and the RCRO do not sufficiently acknowledge is that a top risk for a firm is now how, in a market of shrinking margins, they make the kind of returns they have built their budgets, business models and shareholder expectations on, in a way which is fair to customers. Or put another way, the risk that firms want to offer the products in the first place.

Some firms are trying to address this by improving efficiency and customer reach through digital transformation. But they need to build management of conduct risk into any proposition to avoid transforming themselves into just being more efficient at making old mistakes – at least from the regulator’s point of view.

And most fundamentally, the FSA’s definition of ‘conduct risk’ means a risk to the FSA’s statutory objective of consumer protection. That’s not the same as a risk for a firm which traditionally focuses on commercial risk and risks arising from the effectiveness of policies and controls. So, firms have to figure out how to align their approach with the FSA’s more strategic and consumer centric approach.

That’s why any firm tackling conduct risk has to bring together compliance, policy, control framework, product and process development, risk identification and regulatory relationship management with self challenging governance, insightful management information, conduct risk informed reward and HR and a more strategic and outward looking risk and customer management capability.

The sooner a firm actions these together, the sooner they will make real inroads on the conduct risks that the FSA is highlighting in firms and for customers and on which it has thrown down the gauntlet.