Understanding Conduct Risk and How Organizations are Managing It
The Risk of Misconduct
Over the last few years, the cost of misconduct has increased significantly. The most notable has been the payment protection insurance (PPI) scandal that has already cost banks more than £18 billion* in fines in the U.K. Scandals such as this not only affect the bank’s financial stability but also its reputation, brand value, and customer confidence. The U.K. financial regulator, the Financial Conduct Authority (FCA), intervenes and imposes penalties where it sees unacceptable risk to the fair treatment of customers. According to the FCA, senior management must drive conduct risk mitigation and emphasize on a culture of keeping consumers "at heart of business." The FCA recently said it will impose a deadline for making new PPI complaints and is launching a consumer communications campaign to raise PPI issue awareness and the deadline.
The increased level of scrutiny is not just a U.K. phenomenon. Around the world, regulators are taking measures to protect banking customers from unethical or unlawful practices. Asia Pacific regulators like those in Singapore (Monetary Authority of Singapore) and Australia (Australian Securities and Investments Commission) are introducing strict parameters to ensure responsible lending and insurance practices; and the Consumer Financial Protection Bureau (CFPB) of the U.S. is laying down new rules and stricter monitoring against malpractice in areas such as fair lending, mortgage servicing, insurance, debt collection, and the sale of ancillary products in connection with credit cards. While in the U.S., the Dodd-Frank Act focuses on internal business conduct requirements through a robust compliance and risk policy and external business conduct requirements (onboarding and pre-trade measures), the Market Abuse Directive contains provisions on insider information and market manipulation and the Financial Industry Regulatory Authority (FINRA) focuses on assessment of suitability of products for customers.
In addition to imposing fines, regulators have also introduced frameworks to monitor how banks and financial services organizations’ manage conduct risks and related exposures.
Apart from the regulatory pressures, customer satisfaction is also driving banks and financial organizations to look at conduct risk governance as an important area to monitor and control. Hence, organizations worldwide have created strategies and internal standards to ensure fair treatment of customers in order to meet regulatory requirements and achieve strategic competitive advantage by driving customer loyalty.
