Conduct Agenda
An Introductory Overview
GRANT THORNTON FINANCIAL SERVICES GROUP
“The FCA’s overall objective is
to ensure financial markets function well.
For the FCA this means:
•Consumers get financial services and products
that meet their needs from firms they can trust.
•Markets and financial systems are sound, stable
and resilient with transparent pricing information.
•Firms compete effectively, with the interests of
their customers and the integrity of markets
at the heart of how they run their business.”
FCA Risk
Outlook 2013
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CONDUCT AGENDA – AN INTRODUCTORY OVERVIEW
Introduction
The Financial Conduct Authority’s (FCA)
conduct agenda is neither new, nor unprecedented.
Indeed, a raft of customer-centric regulation is a
very natural consequence of the systemic failure
of the global financial system in which so many
customers were adversely affected.
Not only are the regulators seeking to protect
customers in future, but they also face the
challenge of rebuilding trust within an industry in
which it has broken down in such prolific fashion.
The term ‘Conduct Risk’ was prevalent in
the FSA’s Retail Conduct Risk Outlook of
2011, in which it was defined as ‘the risk that
firm behaviour will result in poor outcomes for
customers’1. Conduct has long been a feature
of the regulator’s agenda, for example with the
FSA’s Consultation paper ‘Reforming Conduct
of Business Regulation’ (CP06/19) in 2006, later
manifesting itself as the Conduct of Business
Sourcebook (COBS) and, subsequently, focusing
on Treating Customers Fairly (TCF).
However, with the arrival of the FCA,
conduct has returned firmly to the top of the
regulator’s agenda. While previous initiatives
had concentrated on reporting tangible values,
the FCA’s conduct agenda is more behaviourally
1
focused and less perceptible; driven by a desire to
ensure solutions are not ‘tick box’ in nature.
Consequentially, firms face a much greater
challenge, both interpreting the requirements of
the conduct agenda and articulating the measures
they have in place to demonstrate compliance. By
nature, elements of a successful framework must
be more symbiotic. Defining and designing such
a programme will, for many, require significant
changes in strategic business models.
Firms must combine core elements of a conduct
framework, such as strategy, appetite, governance,
and reporting, across the product lifecycle, from
product design to post-sales service. Those that are
able to implement a holistic top-down approach,
driven by strong leadership and direction, will
be best equipped to satisfy the complexities of an
intangible and dynamic agenda.
FSA Retail Conduct Risk Outlook 2011
CONDUCT AGENDA – AN INTRODUCTORY OVERVIEW
3
Getting to grips with the Conduct Agenda
Ensuring firms put customers’ interests at the very
heart of their business is the primary objective of
the FCA’s Conduct Agenda.
In recent times, financial institutions have focused
on addressing the conduct-related risks associated
with providing customers with services and
products that meet their needs.
While there is no ‘one size fits all’ solution,
a firm-wide understanding of the dimensions
of the Conduct Agenda and their intrinsic
interrelatedness, is of paramount importance.
Moreover, it is critical that institutions and their
advisors have an intricate understanding of how
the Conduct Agenda can manifest itself in different
industries and business areas. Each organisation will
likely have adopted a contrasting approach to the
Conduct Agenda; some acting proactively, while
others await further guidance.
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CONDUCT AGENDA – AN INTRODUCTORY OVERVIEW
In light of the FCA’s increased focus on the
Conduct Agenda, firms are more compelled to
adopt a proactive approach. It is imperative
that, in these circumstances, frameworks are
designed to support firms through the conduct
journey and deliver, not just well managed
conduct risk, but also better customer conduct and
engagement across their business.
A holistic framework will incorporate all the
key elements that comprise the conduct agenda,
culminating in the delivery of much improved
customer outcomes. Central to this, is the ability to
evaluate and measure quantitative and qualitative
conduct-related risks, both retrospectively
and prospectively, within an environment that
engenders a customer-centric culture.
Core components of the Conduct Agenda
Leadership
and Management
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.
en t risk
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As
ms that
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ech zon planning
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i
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and the hi
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Co
Putting in p
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ro
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ls
n
nan
ce trols
of
co t
o
Ensuring management
information is focused on
understanding and
demonstrating conduct
management.
ance
sur
Busin
ess
Founding the necessary
management and ownership
to support the objectives of
the conduct agenda.
Evidence
Pr
ev
E
ens stab
ure
lis
Cu
s
sto m er F o cu
De
ted
f
cia t the
th inin g t
h e a c ti v i t i e s a s s o
a e.
he ens
e
r
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a rt
g c u s t o e r n e e d s a e r vi c
of
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a
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e si g n , s al e s
wi
Pr
od
uct
Fi na
S ale s
nci a l
M o d e l l i ng a n d Pr i c i n
e
vic
Ser
g
Culture
Instilling the behaviours
needed to ensure and embed
customer-focused conduct.
Customer Outcomes
The outcomes which indicate the degree of customer fairness.
Firms need to ensure they are putting the customer and the integrity of markets at the heart of their business models
and strategies. This includes making cultural changes that promote good conduct outcomes through the business; establishing
appropriate oversight and governance around the design and innovation of products and services; and ensuring they are
transparent in their dealings with consumers.
FCA Risk Outlook 2013
CONDUCT AGENDA – AN INTRODUCTORY OVERVIEW
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Why the challenges are different
Across the Financial Services spectrum, the
manner in which firms have reacted to the
Conduct Agenda has been varied. While there is
no one settled method, history will testify that
those acting proactively will obtain a greater
ability to affect the evolution of what remains a
dynamic agenda.
Approaches to Change
Typically, firms have preferred to adopt
a reactionary approach; either awaiting
further direction from the regulator
or simply revisiting previous similar
initiatives. However, the nature of
the Conduct Agenda will render such
approaches unsuitable.
Firms will benefit from a proactive
approach that addresses key elements of
the agenda; either following a focussed
review or a strategic ambition to instigate
more holistic conduct-related change.
Wait and
see
Review
TCF
Change
structure
Point
project
Rounded
programme
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CONDUCT AGENDA – AN INTRODUCTORY OVERVIEW
See what the FCA will require and
react accordingly
Review current TCF policies and
look to refresh them
Appoint a role to champion
conduct risk
Review a high risk conduct area.
For example in flight products
Address all related areas of
conduct risk
Factors of the Conduct Agenda
Evidence
Prevention/
Assurance
Business
Controls
Customer
Focus
Culture
Factors
Leadership and
Management
Those firms which rose to the challenges presented by the FSA’s TCF initiative, engaging with the
regulator early, were intimately engaged throughout the TCF journey. Adopting a similar approach where
the Conduct Agenda is concerned, will ensure firms are able to develop their consumer conduct and risk
strategies in close association with the FCA’s requirements. The initial areas of focus for firms will differ
based on a number of variable factors:
The degree of customer conduct ownership exhibited by the
board and wider business
The risk framework’s ability to define and accommodate conduct
risks and deliver customer focused mitigations
The strength of the new product development process to target
specific customer needs
The degree of ‘fragmentation’ in the supply chain and the use of
other parties to distribute, sell and service products
The volume and complexity of ‘in flight’ and new products offered
to customers
The degree of contact and understanding the product
manufacturer has with the end users
The level of FCA concern with the current application of conduct
risk within the business sector or specific firm
The ability of the current MI suite (and customer feedback) to
show, direct and influence conduct related matters
The ability of the firm to apply root cause analysis and generate a
climate of prevention and continuous improvement
Customer Outcomes
CONDUCT AGENDA – AN INTRODUCTORY OVERVIEW
7
Questions to ask
Getting to grips with the Conduct Agenda first requires an honest
evaluation of a firm’s current behavioural and cultural environment.
Asking direct and poignant questions in relation to each core
component of the Conduct Agenda is a prerequisite for Boards and
Heads of Compliance and Conduct.
“The FCA’s focus on
conduct regulation means
there is much greater
regulatory emphasis on
integrity and ethics in the
UK markets today.”
Martin Wheatley
Chief Executive, FCA
8
Evidence
• Do your KRIs and risk registers cover the full scope of conduct risk?
• How do you balance quantitative and qualitative measures as part of your MI monitoring and
reporting of conduct?
• Can you demonstrate that preventative actions relating to conduct risk are in place, how these are tested,
and whether they have been successful?
Culture
• How do you demonstrate that your firm has an embedded conduct culture?
• In what way will your conduct initiatives deliver holistic change to customer outcomes?
• To what extent are you prepared to forgo profit to embed a conduct-aware culture that prioritises
customers’ interests?
Customer
Focus
• Do your new product development activities robustly support the FCA’s conduct requirements?
• Are you clear on your conduct obligations where your products are sold by third parties?
• Does your complaints handling process identify and address future root causes of problems?
Business
Control
• How is your risk framework evolving to accommodate the conduct risk obligations?
• Do your risk mitigations adequately manage down customer impacts?
• How have your TCF controls evolved to support conduct management?
Prevention/
Assurance
• What policies and guidelines do you have in place to ensure the business fulfils its conduct obligations?
• What customer feedback do you gather, and how does it support your conduct risk management
framework performance?
• How does your audit function view and assess conduct matters?
Leadership/
Management
• How have you defined your conduct risk appetite?
• In what way will your conduct initiatives deliver a holistic change to the outcomes?
• Through your existing governance structures, how does conduct risk get managed down within the
organisation?
CONDUCT AGENDA – AN INTRODUCTORY OVERVIEW
How Grant Thornton can help
“We will examine the
key conduct risks in a
firm and identify the
causes of those risks.”
Through a combination of our knowledge of the UK Financial
Services sectors and a detailed understanding of the risk and
regulatory environment, we are able to assist firms in delivering
practical solutions to meet specific conduct-related challenges. We
provide guidance and assurance that these changes not only satisfy the
requirements of the regulator, but are also delivered holistically, in line
with the firm’s overarching business ambitions, incorporating both
risk and customer strategies.
Remediate
Fix past
problems
FCA Business Plan
2013/14
Design
Major
Change
New
challenges
Assure
compliance
Conduct Risk Health Check
Examples of where we can assist
Conduct Risk Cultural Assessment
Product Governance Review
New Product Development
Control and Governance Reviews
Enterprise Risk Management
Complaint Handling & Dispute Management
Conduct Risk MI and Evidencing
Complaints Benchmarking
Horizon Scanning
Customer Feedback
Past Business Reviews
Business Model Analysis and Design
Prudential and Capital Requirements Assessments
CONDUCT AGENDA – AN INTRODUCTORY OVERVIEW
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Why Grant Thornton
This is what we do:
As one of the UK’s largest financial services advisory firms, we have conducted a wide range of
engagements across the financial services and consulting spectrum.
We have relevant experience
We have deep and relevant experience across the
entirety of the financial services sector. We already
work for many of the world’s largest financial
institutions, providing a wide range of consulting
and advisory services. We understand this market
and the challenges facing financial institutions
today, and will bring this experience to deliver the
outcomes and assurance you require.
We know how to apply the rules
Financial institutions are facing increasing scrutiny,
both internally and from the Regulators. We
help our clients interpret the rules published by
local Regulators. We therefore know the relevant
rules and requirements better than most and, by
understanding what sits behind them, are able to
take a proportionate and pragmatic view of how to
apply them.
We have strong brand values
We pride ourselves on our independence and ‘telling
it like it is’. We will provide you with robust advice
and opinions, backed up by strong evidence. Where
appropriate, we will make practical and workable
recommendations to help you strengthen and
develop your business. We always seek to work
together with our clients to overcome business and
IT challenges, delivering value-add solutions that
provide long-term benefits.
We are credible
We are credible and respected within the Financial
Services industry, both by our clients and by the
Regulators.
We have highly experienced, industry-leading
experts across the sector and an excellent track
record. As a result, most clients return for advice
and support, knowing they will receive insightful,
unbiased and valued solutions.
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CONDUCT AGENDA – AN INTRODUCTORY OVERVIEW
We have the capacity to deliver. With over 35,000
employees globally and over 4,500 in the UK.
We are flexible and adaptable.
Our core competencies are aligned to
established industry challenges.
Our people are market-leading,
industry experts.
Our scale and reputation ensures we
have access to the best talent.
Our track record is proven.
We count over 200 financial institutions
as our clients, which is testament to our
delivery capability.
CONDUCT AGENDA – AN INTRODUCTORY OVERVIEW
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Contact us
Jonathan Sperrin
Partner
T 020 7728 2561
E [email protected]
Ewen Fleming
Partner
T 0131 659 8538
E [email protected]
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