RiskTech Forum

Chartis: Conduct risk - What is it, and how is it managed?

Posted: 16 October 2014  |  Author: Philip Mackenzie  |  Source: Chartis


With global fines for conduct-related failures skyrocketing to over $250 billion from 2009-13, firms are attempting to manage both the regulatory and the reputational issues around conduct risk. Financial institutions are attempting to both define and manage this risk by establishing culture and governance processes and implementing new technology programs.

One of the more important lessons to be learned from the establishment of conduct risk management as a discipline is the usage of customer-centric rather than firm-centric views, which place the customer at the center of risk management programs. Strategic and technological frameworks are attempting to ensure that “unfair” outcomes do not happen to their customers: bad outcomes cannot be prevented in their entirety, but they must be explicable, and justifiable

While the primary drivers of conduct risk management have been regulatory, compliance should not be the focus of institutions. Instead this should be looked at within the context of a larger subset of business requirements, based around efficient business processes and the generation of customer trust. In addition, avoiding the regulatory tick-box approach will enable firms to establish flexible systems, which will be able to adjust to the regulations of the future.

Conduct risk management is complex and multi-disciplinary. From a technical perspective, it is managed with process controls, training, incentive, analytics and evidencing. These require the establishment of controls and frameworks - both qualitative and quantitative - for management and measurement. Organizationally, it requires the cultural establishment of good conduct embedded in governance and policies across the enterprise.

As conduct risk management is a relatively immature discipline, there are currently not many out-of-the-box technology solutions which are focusing on this area. However, it is expected that it will only grow in importance and complexity, and that financial institutions and vendors will move towards the creation of integrated frameworks which dynamically link processes, risks, control, rewards and behaviors.

Chartis recently published its first research report into Conduct Risk Management Systems. To obtain the report please click here