Why conduct risk means big culture change for banks

Conduct risk is the latest buzzword in banking. Although there is no standard definition of conduct risk, it is now a regulatory requirement for UK financial services, and it broadly demands that organisations focus on fair customer outcomes and not just shareholder return.

It means operating ethically and responsibly and having the customer’s interests at the heart of the business.

Conduct risk requires moving beyond a box-ticking approach to operational risk. It requires re-alignment of corporate strategy and to these outcomes. It means ensuring that processes are optimised to deliver them. And it means ensuring that the culture of the organisation is directed to achieve them.

Conduct risk covers almost every aspect of the business - everything through planning, product design, operations, marketing and frontline customer service. It requires that employees focus on ‘doing the right thing’, rather than just slavishly following processes if they don’t provide the best outcome for a specific customer.

This is a major shift in mindset for most banks – a recent Thomson Reuters report found that 84% of respondents did not yet have a working, firm-specific definition of “conduct risk”, although most (76%) identified the culture of an organisation as the key component for delivering against the conduct risk requirement.

The FCA has called this out specifically and has identified culture as an essential organisational focus. In a recent speech by Clive Adamson, Director of Supervision at the FCA stated the following elements as key drivers for this:

•  Setting the tone from the top;

• Translating this into easily understood business practices; and

• Supporting the right behaviours through performance management, employee development, and reinforcing through reward programmes.

So what does a focus on conduct risk require from businesses in practice?

I agree with the FCA – it needs to start with leadership and there are four steps to achieving this.

1. Firstly leadership need to understand their own perceptions and biases around money, risk and trust so they can be aware of how these unconscious perceptions shape their business strategy and culture.
2.  They also need to tie back to their company purpose and values and use these to develop the customer outcomes they want to achieve. Understanding of where they fail to deliver currently can be a good starting point for this, as this can help to identify cultural gaps where company values are not being made real.
3.  Once these outcomes are defined, the entire business strategy needs to be viewed in light of these outcomes to see if it is fit for purpose – they should drive product development, operations and process design and service delivery throughout the entire organisation. The organisation should ask at every point – what outcome will this deliver for customers? Where could it fail them?
4.  More importantly, leaders need to provide a mandate for a focus on positive outcomes across the business. This means working to develop and encourage a culture of trust and empowerment that rewards employees who apply judgment, empathy and insight to actively deliver these outcomes.

This is no easy task – it entails a whole company programme – but it is achievable.

And the benefits are huge. Aside from fulfilling regulatory requirements, as Chris Perry, MD of Risk at Thomson Reuters suggests, “Good conduct is good business. The cost of poor conduct is high; not just in terms of enforcement actions, now totalling in the billions of dollars, but also in the reputational damage and the wider erosion in trust that this creates across the industry”

Ultimately a focus on purpose and values combined with the drive of a committed leadership team to deliver fair outcomes can only provide solid reputational benefits.