The rise of culture and conduct risk as drivers for personal liability

The importance of culture in financial services has been widely acknowledged in recent years following recognition across the industry that the financial crisis was as much a conduct crisis as it was a prudential one. Ever since the crisis, the role of culture has continued to be a critical feature in the findings published by regulators around the world. High-profile events from PPI mis-selling to LIBOR manipulation have shown culture to be at the root of scandals and abuses of the system. The incentivising of misconduct and excessive risk-taking through remuneration have reinforced a culture where poor standards, practices and outcomes became the norm.

‘A firm’s culture is the key driver behind the behaviour of those in it. In many cases, where things have gone wrong in a firm, a cultural issue is at the heart of the problem.’

Source: Chairman’s foreword, Financial Conduct Authority Business Plan 2015/16

The financial and operational impact on firms which result from regulatory enforcement action, ranging from stratospheric financial penalties to customer redress and remediation programmes, should in themselves be a huge disincentive to prevent further misconduct. However, the continued waves of systemic misconduct have led to the recognition by regulators that for the issue to be taken seriously within firms it must be made personal. That means having individuals within firms held personally accountable for their (in)actions and is the driver for new Senior Managers and Certification Regime which the UK regulators have targeted, directly, at the culture of firms.

Personal Liability

The potential for personal liability associated with the regulatory focus on culture and conduct risk is seen to be substantive as shown by the findings of the Thomson Reuters Regulatory Intelligence fifth annual survey on culture and conduct risk.

Metrics, measurement and evidence

Management information requires continuing attention and firms have more work to do on metrics for conduct risk. Metrics will also need to continually evolve as conduct risks change and employee behaviour adapts in response to what is being measured. In general, quantitative measures are usually easily repeatable and require limited context to deliver their findings.

This is not the case with qualitative measures, which need extensive evidence and documentation on parameters, assumptions and data sets to ensure that the resulting management information is fit for purpose. An example is complaints analysis: a simple quantitative measure would be the number of complaints received. The assessment of culture and conduct risk in terms of complaints is an entirely different data set covering everything from timeliness of response, customer satisfaction, product governance issues, review of sales process, training needs and compensation implications.

There is no single measure of conduct risk and culture which requires firms to monitor, collate and assess a wide range of indicators from a variety of sources. The sources of information that firms are relying on include feedback from the Thomson Reuters Regulatory Intelligence fifth annual survey on culture and conduct risk.

Conduct and Accountability in Financial Services: A Practical Guide is aimed primarily at senior managers and practitioners in financial services firms operating in, from, or into, the UK. It provides a deeply practical, plain English overview of evolving regulatory expectations, obligations and resulting potential liability which will be of benefit to all staff in financial services firms. In particular, it sets out practical insight as to what senior individuals can and should do to identify, mitigate and manage their own personal regulatory risk.

Specifically, the guide is not by, or for, lawyers, rather it focuses on the qualitative aspects relating to personal liability and accountability.

Overall, the book demystifies and takes the undue complexity out of the seemingly profound changes arising from not only the roll-out of the SM&CR but also the evolving wider conduct expectations in financial services.

The authors, Stacey English and Susannah Hammond, are experienced compliance and risk professionals with the best part of 50 years of practical experience between them as practitioners in regulated firms, advisers and regulators.

Written by Ellie MacKenzie

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