Conduct risk frameworks: adapting to change
Conduct risk management remains central to the FCA’s agenda. It is an essential part of a firm’s ongoing risk management, of equal importance to effective financial controls in promoting the FCA’s statutory objectives. Notwithstanding that the FCA’s conduct programme was not highlighted in the FCA’s 2021/2022 business plan, there is no doubt it will remain a key focus of supervisory dialogue between the FCA and regulated firms. Indeed, Nikhil Rathi’s recent speech on transforming the FCA to being a more proactive and forward looking regulator warned that “firms should expect us to be even more rigorous on upholding high standards – especially on governance, conflicts of interest and conduct”.
This post explores the FCA’s 5 Conduct Questions Programme with a specific focus on the key themes arising out of the most recent industry feedback. Although the latest industry feedback is based on observations relating to wholesale banks and is no longer new (having been published in September 2020), we expect this programme will remain the starting point for the FCA’s expectations on conduct risk management.
The FCA’s 5 Conduct Questions
FCA Industry Feedback
Whilst the 5 Conduct Questions and associated guidance will be familiar to all firms, there are no specific rules setting out how firms must apply these questions to their business. Firms are therefore left to interpret guidance and expectations set out in publications and feedback from the FCA and adapt such guidance to the nature, scale and complexity of their businesses. We explore below a handful of key themes arising out of the most recent FCA industry feedback. If they haven’t already, firms should consider and make any adjustments necessary to their approach to conduct risk before the FCA’s “more rigorous” approach to conduct standards begins to bite.
- More dynamic conduct risk training: whilst the FCA applauded the efforts of firms who had taken steps to ensure staff were aware of conduct risk issues, the FCA found that staff still had a shallow understanding of conduct risks, and in particular the day to day conduct risks that are likely to arise within an individual’s business unit. The FCA encouraged firms to continue to tailor conduct training to individual business and support units and, importantly, take steps to ensure conduct training is self-led to enable staff to “self-discover” those conduct risks that are likely relevant to their area. The FCA notes: “firms take a risk when placing unquestioned reliance on old, possibly stale lists of possible risks prepared by staff (or third parties) with perhaps inadequate familiarity with a specific business or operational unit.”
- Better conduct discussions: the FCA was concerned with the irregularity of conduct-related discussions taking place across firms. Conduct risk is a dynamic concept that may change and adapt according to the environment and will be different as between a front office trader compared to a manager in back office functions. The FCA saw as good practice conduct risk raised as a standing agenda item on departmental weekly team meetings, across all teams, which encouraged discussion across teams as to those conduct risks that were arising and how they were being managed.
- Promoting examples of good conduct behaviour: It is clear from the feedback that the FCA wants to see some evidence of promoting exemplary behaviour, on the basis that this should encourage higher standards. In addition to ensuring that stories of good conduct and behaviours are shared across the organisation, the FCA suggests that firms should think about whether one off financial or ‘soft’ incentives could be used as a mechanism for encouraging good conduct.
- Speak Up Culture: the FCA’s overall impression is that issues get stalled, lost or “watered down” in middle management escalation processes and it was queried whether this deters people from raising issues. Firms should therefore focus on making the channels for escalating conduct issues “safe” for individuals and demonstrate that, when issues are raised, they are heard. Evidence of good practice in this area highlighted by the FCA is having managers “partner” with staff to ensure speak up issues are adequately addressed and appointing “conduct ambassadors” who are trained to support individuals raising concerns.
- Corporate Purposes, Principles and Values: the FCA noted that there was confusion between corporate purpose, principles and values among some participants. Firms should therefore focus on ensuring that staff better understand the corporate purpose and how their roles fit into it, including through team-level discussions focussed on how individual roles and responsibilities fit into the broader corporate purpose and exploring the alignment between personal sense of purpose of staff members and that of the firm.
How can we help
We regularly advise firms on their culture and conduct frameworks both in the context of firms seeking to improve their conduct risk framework and advising firms in the enforcement context where shortcomings have been identified by the FCA in a firm’s approach to conduct risk management. We provide tailored advice and training on how firms can adapt their frameworks to take account of the changing FCA expectations and market practice. If you would like to find out more about how Linklaters can help you, please feel to get in touch with any of the key contacts listed.