The Model Office Blog

The FCA's new era of accountability and 5 conduct risk questions

[fa icon="calendar"] Jul 3, 2018 5:58:15 PM / by Chris Davies

Terminology is everything we hear, as the financial services industry seems to enjoy loading up on acronyms and jargon for simple processes. Just think of AER, CREST, Dematerialisation, Dirty price, FRNS, HICP – I could go on, so since the RDR (another one) we have been called to the transparency table. So where pricing and charges are concerned, for example, we have a need for clear and unambiguous charging delivered in simple terms.

That’s all to the good, but people tend to have different understandings and filters when it comes to interpretation of data or information plus marketers can use behavioural economics to make certain pricing strategies more attractive, take Starbuck’s coffee pricing board for example. So this is where the whole transparency agenda can fall short. 

With this in mind, The FCA is now moving to an era of high accountability, where there is no hiding place for retail investment, wealth, asset management firms or platforms. Market participants now need to showcase they are taking full ownership for their commercial behaviour and have a firm finger on their conduct, culture and propositions.

The Asset Management, and imminent Platform review plus The Senior Managers and Certification Regime (SM&CR) are clear examples of how firms now need to ensure they raise their accountability standards.

To do so firms now need to self-regulate and audit their business and take a root and branch review of how they operate. They need to ensure there are no conflicts of interest at play and also take heed of The FCA’s ‘5 conduct risk questions[1]that give a strong barometer to understanding how to identify, measure and improve conduct across all operations, systems, propositions and services. They are:

  1. What pro-active steps do you take to identify inherent conduct risks within the your business?
  2. How do you encourage individuals who work across front, middle and back office, control and support functions to feel and be responsible for conduct
  3. What support does the firm put in place to enable staff to improve the firm’s conduct?
  4. How do the board and senior management gain oversight of conduct and consider the conduct implications of the strategic decisions they make?
  5. Has the firm assessed whether there are any other activities that it undertakes that could undermine current strategies to improve conduct? 

Indeed The FCA note that it is those forms who showcase high accountability for their conduct across their business, client and stakeholder relationships who also gain significant competitive advantage against their peers who do not.

We also have the potential break up of the big 4 consultancy’s in the UK as a clear example of this new accountability regime. No longer can they audit firms and provide advice at the same time, if they do a classic conflict of interest occurs and can lead to advice obfuscation something all retail investment service firms need to avoid like the plague.

So what can firms now do?

The SM&CR is a good place to start, already adopted by the banks, but as this becomes an industry wide regime in ’19 all firms should address its three components.

Firstly the conduct rules need to be embedded into the heart of the firm’s governance. They are: 

  • You must act with integrity
  • You must act with due care, skill and diligence
  • You must be open and cooperative with the FCA, the PRA and other regulators
  • You must pay due regard to the interests of customers and treat them fairly
  • You must observe proper standards of market conduct

Secondly, the Senior Managers responsibilities should provide oversight for:

  • Reviewing roles and responsibilities and ensure reporting lines are clear, defined and understood
  • Ensuring systems and controls are aligned to roles and responsibilities
  • Apply good governance principles for sense checking, challenge and avoidance of status quo bias are applied
  • Provide Responsibility for transparency of services and costs are such that all service propositions and costs distributed in plain English
  • Employing Regulation Technology (RegTech) to ensure back office data covering KYC /AML and Management Information (MI) meet all compliance and risk management thresholds

Finally the certification rules need to be understood and applied.

The FCA used Arnold Schwarzenegger in their recent media advertising to promote PPI miss-selling claims (well his head anyway) they should now adopt the immortal line from Mel Gibson’s Mad Max film, ‘You can run but you can’t hide’ for those who require enforcement. For those practicing good conduct they can move beyond a fear based culture and showcase how high accountability can provide high compliance, engaged staff and clients plus a professional and profitable business.

[1]‘5 Conduct Questions’ The FCA April 2018

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Topics: Financial regulation, Financial business development, fintech, regtech, Risk management, practice management, FCA, advice, HMT, suitability, FAWG, FAMR, Fitbit, MiFIDII, Data, GDPR, Chatbot, Culture, Enforcement, supervision, audit, Conduct, AI, Risk,, Accountability

Chris Davies

Written by Chris Davies

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