01.26.2015
By Terry Flanagan

Conduct Risk on Regulatory Radar

With conduct risk expected to be a focus point for regulators throughout 2015, financial firms need to continue to take tangible steps towards managing and enforcing compliance processes or else face steep penalties and fines.

The Thomson Reuters Conduct Risk Report 2014/15 shows an increased focus by regulators on the behavior of firms and how they conduct their business. Firms have boosted the time and resources devoted to the management of conduct risk, yet there is still a significant gap between awareness and implementation of effective policies across a firm.

“Tone from the Top”, or the need for a firm’s leadership to be seen setting and driving a suitable compliant approach to all aspects of the business, was overwhelmingly the biggest change in the last 12 months, according to the survey. Respondents rated it the number one change in Asia (61%), Europe (42%), the Middle East (50%), the UK (57%) and North America (34%). Over a third of respondents from Australia (36%) said that no changes have been made this year, while over a quarter of respondents from Africa (27%) had the same response.

Some 67% of respondents said the regulatory focus on conduct risk would increase the personal liability of senior managers.

“Perhaps the biggest finding is that about two-thirds of the people who responded thought that the regulatory process on conduct risk – and under the banner of conduct risk I’m including tone at the top, since the language used by regulators does vary by jurisdiction– thought that conduct-risk has actually increased the liability of senior managers,” Susannah Hammond, senior regulatory intelligence expert at Thomson Reuters, told Markets Media. “It’s interesting that they think that the focus on conduct risk, which is all about how you do things, not just what you do, will actually increase their liability.”

She added, “So, there’s a sort of inherent nervousness in there that perhaps they’re not always doing the right things in the right way.”

Thomson Reuters Accelus surveyed more than 200 compliance and risk practitioners from financial services firms across the Americas, Europe, Africa, Asia, Australia, and the Middle East to gain insight into how the industry is defining and responding to conduct risk. Respondents represented firms from across the financial services sector including banks, insurers, and fund managers.

“It’s the second time we’ve done the conduct risk report,” Hammond said. “We kicked it off last year really as a sort of temperature test. Is everyone going to find it terribly simple or is actually everyone, as we suspected, really struggling with this?”

A large majority (81%) of respondents still do not have a working definition of “conduct risk”; only a slight decrease from 2013 when 84% of respondents reported not having firm specific definitions. “That doesn’t mean they haven’t thought about it,” said Hammond. “Our findings at the main board level and the domestic jurisdiction board levels indicate they are having a quite heated debate about what actually conduct risk means to the firm.”

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