In their Risk Outlook 2013, the FCA have looked to address the bad decisions businesses are making as a result of pressures in the market. However, is this just a reaction to bad press in the media?
Conduct Risk is a term used to describe the risk in a firm’s behaviour resulting in poor outcomes for its customers.
There are similarities in the motives of Conduct Risk and Treating Customers Fairly (TCF), as both have an emphasis on customer outcomes. They have also helped establish a need for firms to identify their customer’s wants and needs, referring to these when making decisions.
Behind Conduct Risk
The Financial Conduct Authority (FCA) has highlighted that long term trends, market dynamics and the current environment can lead to pressure on business models and strategies.
Short term fixes may support profitability, but can provoke ‘risky behaviours and poor practices’. An example of this is the realisation that some firms’ cultures, processes and products have been designed to enable them to profit from consumer errors; meaning customers may not be getting what they want/need and that the businesses are not acting in their customers’ best interests. The FCA looks to address these issues in their Conduct Risk Outlook 2013.
The Risk Outlook identifies several key factors that lead consumers and firms to make poor decisions. These are detailed as the key drivers and root causes of Conduct Risk, which could be:
- Inherent (information problems, biases);
- Environmental (economic trends, regulatory changes);
- Structures and behaviours (conflicts of interest, cultures and incentives).
Responses and actions
The FCA has proposed actions to deal with these risks and now requires evidence of good customer outcomes in order to avoid regulatory scrutiny. This will give firms an advantage as customers will consistently receive positive experiences.
However, the FCA still has a considerable amount of work to do in relation to Conduct Risk. Recent scandals, such as the mis-selling of PPI, have been at the forefront of the media and have attracted a lot of negative attention towards financial services institutions, sparking major concerns that customers’ interests are not being considered.
A reaction to this has been a rather public call for attention to be refocused; promoting that this will be the case from now on and that positive customer outcomes are assured in the future.
The Risk Outlook claims that the FCA’s approach to risk enables it to become more proactive and to intervene before bad decisions are made. However, it is questionable as to whether this itself is merely a reaction to negative media attention.
Are these instructions sufficient for banks and other financial institutions to actually change their cultures and policies? Or have they been created merely to encourage the media to publicise that something is being done? Let us know your thoughts in our LinkedIn group.