The Financial Conduct Authority (FCA) introduced the five Conduct Questions Programme in 2015. Initially, the wholesale banking domain used it as a supervisory tool to enable the firms to enhance their Conduct Risk Management, as with this tool, the firms can adopt cultural changes across the firm. It also aids the FCA as it allows them to observe how firms are dealing with conduct risk management and how they are helping their clients in terms of conduct risk management also. This continuous monitoring has made this programme very successful to date.
Conduct Risk – Definition
Conduct risk is a business form that indicates the potential misconduct of a regulated organisation or individual working for an organisation, or any action that hurts market stability. Some examples of conduct risk include mishandling of trading deals or an employee and a third party sharing material non-public information (MNPI).
The FCA has challenged regulated organisations to build an ideal conduct culture, ultimately to protect investors and the integrity of the markets. Firms must assure the employees that no misconduct will be entertained. It is the organisation’s responsibility to understand the meaning of conduct risk and how it is relevant in the context of their business.
The FCA has deliberately not provided any specific definition for conduct risk. The regulators opine that the organisations need to depend on their understanding of what is good conduct by following the statutory objectives of FCA, such as:
- Consumer protection
- Market Integrity
- Effective Competition
According to the FCA, conduct risk is associated with the activities of an organisation’s employees that could violate consumer protection or market integrity. For instance, The Senior Managers and Certification Regime (SMCR) improves the accountability for senior members of financial services firms for their behaviour. It focuses on:
- Accountability on a fewer number of individuals at the top of the bank
- Assigning senior individuals with more responsibilities
- Facilitating banks and regulators to hold individuals to account
Regulators, across the globe, now make conduct risk an enforcement priority. The Foreign Corrupt Practices Act (FCPA) needs listed companies to maintain the records for reflecting the transactions.
The Securities and Exchange Commission or SEC, Rule 204A-1, commonly known as “Code of Ethics Rule” needs the registrants to develop a standard of business conduct for all senior managers.
5 Conduct Questions
The FCA has incorporated five Conduct Questions regarding supervision, financial sector, and wholesale. These questions are asked to the firms to ensure that they are considering the consumer’s rights and market integrity. Listed below are these five vital queries, (we have tailored them to make them personal to the firm):
- What are the steps that you as an organisation can take to identify the conduct risks inherent inside your business?
- How do you, as an organisation, encourage your employees who work in the field, back office, control, and support functions, so that they can realise their responsibilities associated with conduct risk management?
- What kind of support does your organisation put in place to enable the employees working on the further improvement of business conduct functions?
- How does the Board and ExCo or appropriate senior management achieve the oversight of the business conduct with the organisation, and how does the board consider and analyse the conduct risk implications of a strategic decision made by the organisation?
- Does your organisation assess whether any other activities would undermine strategies for the further improvement of conduct risk management?
A Final Takeaway
The FCA has designed these questions regarding conduct risk to make sure that the organisations are doing the right thing for their consumers and maintaining market integrity. Article by GRC Management Compliance Consulting.