Conduct risk is a form of business risk that refers to potential misconduct of individuals associated with a firm, including employees, third-party vendors, customers, or agents interacting with the firm. It is the threat of financial loss to an organization caused by the poor judgment of managers and employees. Conduct risk can result in a financial loss for individuals or organizations, and it can manipulate or reduce competition in the markets. The FCA has not yet defined the term conduct risk, but the regulator talks a lot about conduct risk and why boards and senior management should take a closer look at it. Firms are required to rely on their understanding of what good conduct looks like by following the FCA’s statutory objectives: Consumer Protection, Market Integrity, and Effective Competition.
Conduct risk can be present in practically every part of a business, but several risk failures are common across a wide variety of industries. These include lack of communication, individual recklessness, non-existent or inefficient risk assessment, lack of risk management integration, and lack of communication. To battle conduct risk, compliance departments should develop codes of conduct and other mechanisms that reduce the risk of improper behavior. A successful step-by-step conduct risk management approach includes identifying and assessing conduct risk vulnerabilities throughout the organizations departments, developing and monitoring key conduct risk metrics unique to the organizations needs, educating and training staff about their conduct risk avoidance responsibilities, and evaluating employees sales incentives programs and making sure employees are compliant with consumer protection rules when interacting with customers.
