Reduced cost from conduct risk that has crystallised. The cost of conduct issues is significant; while the actual amount of remediation and the enforcement penalties are likely to account for the bulk of costs, other costs such as staff, printing, postage, buildings, etc can also be considerable.
Customer retention. Where a firm has values that place the customer at the core, and where these values can be seen in everything the firm does from the development of new products, to how the products are advertised and the managing of complaints, thus demonstrating that the firm has the customer truly at its heart, the customer is more likely to have an increased confidence in the firm and is more likely to stay with the firm and avail of additional products or services provided by the firm.
Positive reputational impact. Where the firm’s strategy is clear and where it can easily be seen how it fully aligns with the firm’s approach to customer outcomes. In addition to customers being more likely to stay, the firm has an improved relationship with third parties including regulators, policy makers, media, etc increases market confidence.
Simplified product proposition. A truly customer centric firm will support a product proposition that is less complex, easier to understand, with terms that are not designed to create cumbersome conditions that are difficult to understand. Such a firm will also have systems that are likely to support the proper maintenance and servicing of products, and will instill confidence in the market as any likelihood of remediation is reduced or removed.
Less complaints/errors. A firm is likely to have a reduced volume of complaints where conduct risk has been fully embedded. Similarly, where a firm is fully focused on embedding good conduct outcomes, the number of complaints being escalated to the ombudsman are likely to be reduced as the complaint outcome will be fully focused on what is in the best interest for the customer. Consequently, reputational risk will be reduced.
Staff are more likely to be engaged as products are simpler to understand, easier to explain to customers, processes are less complicated and driven primarily by systems rather than manual intervention. Customers are happier with the product proposition and service, and are less likely to complain.
Sustainable long term solutions. The firm’s strategy is more sustainable as it is focused on embedding long term sustainable solutions. Regulators are keen to understand that a firm’s strategic plans are fully aligned to customer values, thus ensuring that the strategy is more sustainable.
In addition to consumer protection, conduct risk can be described as a focus on the corporate culture and the ethical behaviour of employees and management in a firm. To successfully embed an ethical culture across a firm, conduct risk culture must first be supported and implemented by senior management and board members. Regulators have regularly linked the competence and ability of staff to some of the well-known remediation issues. Regulators are looking to firms to evidence the link between appropriate culture, adequate training and managing the risks that a firm’s particular business model represents.
Training is a critically important element of the conduct risk framework. If staff do not understand what or how to embed good customer outcomes, in addition to why it is important to maintain the integrity of the market, behaviours will never change. With this in mind, and as training is particularly important, it is critical that this is right from the outset. Training should consider how to develop staff behaviours in addition to providing technical knowledge in relation to the various components of the conduct risk framework, in particular the conduct risk policies.
“Provider firms will be expected to have robust procedures to assess their target market, perform adequate stress testing, and manage the product risks for consumers. We would expect the sorts of standards that consumers associate with basic vehicle safety or over‑the-counter medicines, for example, to be the norm for widely sold financial products. Firms should also consider making their own pre‑approval processes more transparent; the aim should be to increase the level of trust consumers have in financial products.” Martin Wheatley – Journey to the FCA
When developing products firms should consider:
Regulators encourage innovation in the best interests of consumers. In particular, technology and product innovation can enhance competition and customer choice. There is however a need to focus on fair consumer outcomes, for example when considering provision of financial advice through on-line channels. Where firms are moving more to providing financial advice and recommendations through on-line channels they must ensure that the necessary protections are in place to deliver the right consumer outcomes. Firms must consider the following:
To improve the conduct agenda, it is critically important that firms get buy in from the board and staff. The firms board and senior management can be comfortable that the conduct risk strategy is robust and sustainable and that there are benefits to the firm:
This is an area that I am hugely passionate about. I really believe that when firms are truly customer centric they will reap rewards not only in the context of customer satisfaction, but also in the behaviours and values espoused by staff and senior management across the firm. I believe this message and the meaning of conduct risk has been overly complicated over the last number of years, and I would like to show this is not such a complex risk, and that measures can be easily implemented to reduce the crystallisation of conduct risk issues.
Doing what’s right has always been the expectation for financial institutions. The recent financial crisis reminded us that not all of us were doing right by our customers and other stakeholders, and poor conduct in financial services was blamed. The renewed focus on culture and conduct now means firms have to embed conduct risk in their existing risk management framework. Firms that seek to extract value out of conduct risk management are defining conduct risk strategy, establishing conduct risk appetite and developing appropriate metrics to ensure that conduct agenda is considered throughout the customer lifecycle. Equally, the board and senior management are becoming more vocal on the conduct topic and setting the tone for right conduct, culture and behaviour. In the UK, the Senior Managers Regime further heightened the urgency to ensure conduct risk management permeates throughout financial services institutions.
Setting the tone from the top is key, as employees can look up to set of values and behaviours expected from top management. Also, a safe environment for people to speak up and voice concerns, and even rewarding such behaviours, encourage proactive management of conduct risk. All employees should be encouraged to embrace and demonstrate the concept of good customer outcome. One way to make this concept go viral in an organisation is story telling. It is through story telling that employees can contextualise what good and bad look like.
Delivering better client experience and conduct risk management complement each other. As I mentioned previously, the key to delighting customers and giving them better experiences is to put the customer at the centre of what firms do. From product development to marketing and selling, and then servicing clients, employees should be able to identify conduct risk in the value chain and mitigate any risks associated with conduct.
Digitisation is driving change in the financial services business model, but it is also changing customer behavior and transforming customer experience. Digitisation certainly has an impact on a firm’s conduct risk profile and it is vital for organisations to manage the risks associated with this impact. This is precisely the reason why a firm should strive to establish a robust and resilient conduct risk management framework that is understood and bought in by staff at all levels.
For me, the two most powerful catalysts for improving the conduct risk agenda are first story telling (so people at all levels understand and live and breathe the conduct agenda), and second empowering them with tools and methods for better management of conduct risk. These include training staff regularly on conduct, establishing a robust conduct risk management framework, and encouraging conduct risk dialogue by incorporating the conduct agenda into existing policies and procedures, etc. It is important to recognise that, whilst setting tone at the top is vital, tone in the middle and tone at the bottom is absolutely critical for bringing the conduct agenda to life. Embedding conduct risk management will require everybody in the firm.
Heidi Mosbek, Head of Group Business & Technical Audit, Generali
As in any strategic decision, there is an upfront investment to develop and embed a strong, mature and prudent conduct or compliance culture in a business. If we think about improving risk and compliance culture in a business that used to view risks as something owned and managed in the Risk, Compliance or Audit Functions, a change in that view and operation will be perceived as challenging. Employees and management will be expected to establish a stronger control environment in the business lines, and take effective measures to mitigate identified risks to the business, working closely with the control functions. The control functions also need to improve their understanding of the business and learn to speak the same language – or to translate “risk phases” to explain what can go wrong, or how this issue can harm the business or customers.
A clear tone at the top needs to clearly express “why” we want our staff to change and “what” the expectations are of leaders’ and employees’ behaviours and achievements. It is key that the benefits are explained, e.g. that improving conduct and the effective management of risks is not solely to meet the requirements of the control functions, but that it is a tool to make the business strong and sound, to the benefit of customers and shareholders.
It is important to involve the people who actually work in the specific areas that need to be improved. A pure top down approach with limited possibility to have a say and impact on changes in processes and routines can potentially lead to disengagement and less effective actions. Involve day-to-day operations, and empower people to identify gaps, suggest simple solutions and take actions.
I look forward to meeting a lot of people, who will each bring a different background and experience; and to discussing and sharing views on topics relevant to a day to day operation.
“Thank you for a great day. I enjoyed the programme and had some good take aways for my organisation in Denmark.”