Grill your firm on conduct before the FCA does

What proactive steps can firms take to identify the conduct risks inherent within their business?

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Jan 09, 2020
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In my last article I touched on the ‘five conduct questions’ the FCA is asking firms to consider as part of their overall conduct strategy and risk appetite. These questions cover identification of inherent risks with the business, encouragement to manage conduct throughout the organisation and to improve, senior management consideration of conduct in the strategic decisions they make, and activities that could undermine their overall approach to good conduct. 

Over the past few weeks, reporting of regulatory fines and commentary from FCA around concerns over conflict of interests in the advice process is focusing attention on conduct behaviour, as well as the culture of firms that allow poor behaviour to go unchallenged.

There have been a number of recent fines, some dating back to misconduct that took place almost 10 years ago, so would it be fair to say that such behaviour is a thing of the past? Not necessarily, as the mini-bond issue shows, with the regulator stepping in to effectively ban financial promotions for such products. 

A recent FCA speech, aimed at advisers and focusing on advice, demonstrates the ongoing concerns of the regulator. “We expect you to adhere to your regulatory and professional duty, to give suitable advice to clients by identifying those conflicts of interest and managing it,” was the message spelled out by the FCA. 

The conflict of interest arises when a firm is putting its own interests ahead of its customers through charging structures or providing advice services that the client may not need. It is apparent that the FCA is expecting a better grasp of these conflict issues from firms. These issues are not just about misconduct. It can go to the heart of the firm’s business model, which may be predisposed to considering the bottom line without necessarily considering the risk that the model inherently brings.

Identifying inherent risks

So what proactive steps do firms take to identify the conduct risks inherent within their business?

For instance, the regulatory permissions a firm holds, such as managing investments or advising on complex/unregulated products, are likely to require a greater degree of governance and specialist expertise than for an adviser/arranger firm. So do such firms have a more robust approach to quality assurance? Is the level of competency within the organisation appropriate for the services that the firm promotes?

It is clear from a recent FCA stock-take with some of the banks that the approach to assessing competency is not sufficiently bespoke to the individual roles and responsibilities. How effective the compliance function is at challenging the quality of advice is often a key determining factor in flagging conduct concerns.

How are individuals within a firm supported and encouraged to feel and be responsible for managing the conduct of their business? The new conduct rules being introduced this month by the Senior Managers and Certification Regime should certainly have an impact across all staff members of a firm with a requirement to act with due skill, care and diligence, and treat customers fairly.

While teaching customers fairly has been a business principle since 2001, hardwiring the same requirement into an individual conduct rule should begin to have an impact on those advisers who continually let down their profession. Weeding out the ‘rolling bad apples’ should also be assisted by the introduction of regulatory references requiring firms to be clear about any misconduct, whether financial or not, that calls into account an individual’s fitness and propriety. 

Gaining oversight

So how does the board or appropriate senior management gain oversight of the conduct of business within their organisation and, equally importantly, how do they consider the conduct implications of the strategic decisions that they make?

Financial advisory and wealth management firms are continually evolving, whether as a result of technology, regulatory change, client and customer lifecycles, and political dynamics. So firms are being asked by the regulator to proactively consider the impact of their decisions.

The underlying issue seems to be the ability of firms to be able to demonstrate the value of their services and that this represents value for money overall. The landscape for the new year is likely to be challenging, but then what is new in financial services?

Simon Collins is managing director of regulatory at Konexo, a division of Eversheds Sutherland 

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