It’s all about conduct


Enough time has elapsed post RDR for the UK Wealth Management industry to start taking stock of the long term impacts and ongoing implications. I think it is fair to say that in some areas at least – 18 months – after the new regime came into force many companies are still only just getting to grips with the realities of the post RDR world.

There have been direct impacts felt in increased costs with many firms citing excessive increases in compliance and T&C costs. Charles Stanley for example issued a profits warning earlier this year citing post RDR work and other ‘exceptional professional fees’ as one of the prime culprits.

There is a feeling that the Consultants and the Compliance and Regulatory industry are enjoying a bumper harvest whilst Wealth Management firms are struggling to meet the associated costs – which include higher remuneration costs for more and in-demand Compliance T&C professionals and investment in external consulting and IT to manage and control T&C. This on top of having to replace income streams with professional fees has had something of a double whammy effect and we have seen consolidation of firms in the IFA markets and generally a decline in the number of Advisers working in the industry. To compound that further the FCA significantly upped the ante with their switch to a judgement (ie relatively subjective) based approach to regulation which has resulted in increased enforcement and fines. The industry has had to cope with a lot and faces continued regulatory tightening that might well have throttled other less robust industries and leaves many wondering whether the general bashing that the financial services sector in this country has taken in recent times can actually get any worse. The general consensus is that the FCA won’t be backing off anytime soon and indeed their focus at the moment seems to be all about conduct risk.

Like me your inbox has no doubt been filling up with invitations to seminars, briefings and the like on this subject.  In short Conduct Risk is well and truly trending – and yet this is a perfect example of the challenges that most firms face in controlling and managing such risk.

The FCA already has very big teeth indeed and likes baring them on a regular basis. Since its formation in April last year it has really hit the ground running with vast increases in enforcements, fines and bans. Closer inspection of recent enforcement reveals that conduct is a leading subject for enforcement. The FCA couldn’t be clearer by its intentions and actions that conduct is to be a key focus area and yet in terms of providing clear and relevant guidelines it often is very much less than clear.

I would argue that Conduct is a clear subset of Competence – just a further element that needs to be managed monitored and assessed

The single most important challenge for Compliance/Risk, HR and Senior Management is to create the appropriate conduct and governance model – including the processes by which conduct is managed and standards enforced – and at a higher level embeds the appropriate culture that puts compliance and conduct at the heart of the business model.

So in the absence of clear steers from the FCA regarding this where do Senior Management go next?

Tracey McDermott (the FCA’s Head or Enforcement) suggest that we focus on recent enforcement against others and learn from their mistakes. The only problem being that many examples of enforcement are at the best rather vague. Remember the FCA don’t actually have to prove that a customer has actually been misled or mis-sold to – or that an action has actually caused an instance market abuse – it is enough for them to judge that the actions or indeed the lack of actions of individuals or organisations in their judgement could have led to such outcomes. For example in the mis-selling of PPI – by no means all of those claiming compensation  – through the feeding frenzy law firms that have thrived on this (and whose woeful conduct and tactics in attracting ‘customers’ are presumably not being regulated by anyone?) – could ever actually prove individually they were mis-sold a plan. It’s perfectly believable that most people were fully aware of what they were buying. It is enough that the product and or the way it was presented could have been misleading – for the FCA  to make a sweeping class action style judgement covering all sales of such products. In the case of market abuse – recent cases have seen enforcement against traders including bans and huge fines for market abuse relating to trader conduct. In some of these instances few, if any, in the industry can truly identify what was actually wrong.

For example in a recent case the FCA notice focused on a trader’s conduct, mainly because there was little actual quantitative evidence relating to the trading impropriety that allegedly took place. There are references to the fact that he acquired too much of a particular bond and accounted for a large percentage of the trading turnover, yet there are no comparative quantum caps imposed in market abuse regulations.

Instead, the FCA makes reference to ‘particularly egregious‘ conduct which fell far below the standards of integrity expected of FCA approved persons. Yet there is no definition of what this actually means nor do they expand upon this. There are no quantitative benchmarks of the expected levels of conduct integrity expected by the FCA. Instead, there appear to be only subjective judgements.

So how does the management of Conduct risk fit within the broader T&C scheme policy and process of a firm. In one of the many aforesaid seminars I have attended recently on Conduct Risk a speaker identified the following distinction between Conduct and Competence.

If they knew it was wrong but did it anyway – it’s a Conduct issue

If they did it but didn’t know they shouldn’t – it’s Competence.

Of course the reality is that not knowing is no defence and the further problem with this definition is that it doesn’t define who ‘they’ are. The responsibility for the conduct and competence of individuals is being shifted to settle not only on the individual but on the senior management of any firm in which the individual operates. The new proposed Regulatory Framework FCA CP14/13 – along with a further consultation paper from the PRA proposes amongst other things:

  • A new Senior Managers regime for the most senior individuals in affected firms
  • A certification regime affecting a wider population of risk takers who could harm the firm, its customers or markets – pretty much everyone?
  • A new set of Conduct Rules divided between those which apply to all non-ancillary staff within a firm and others which apply only to senior management

The result of this will be senior managers being held to account for conduct failings within the businesses they control – a clear reversal of the burden of proof in the case of regulatory misconduct.

Coming back to the comparison of competence and conduct – I would argue that Conduct is a clear subset of Competence – just a further element that needs to be managed monitored and assessed – with the associated training – as are all other elements of a T&C scheme. The setting therefore of effective KPI’s the benchmarking measurement and assessment of these are central to managing Conduct. There is an argument that Conduct (ie the output) is not quantifiable – but the elements (the KPI’s) the make up the knowledge and cultural attitudes of individuals (ie the inputs) that lead to the outputs – one of which being conduct – are every bit as quantifiable as any other KPI’s relating to T&C.

Effective control – monitoring and ongoing assessment of these is therefore essential with good quality MI highlighting shortfalls – areas where potential conduct risks lie. Management should seek technology solutions and consulting advice – where appropriate – to implement these processes. They should not be afraid of RAG style monitoring that drives the need for actions to be taken and – just as importantly recorded – to correct bad behaviours or poor competence. Only then can they rest assured that they have ‘taken reasonable steps’ to avoid conduct risk. Ironically though this may continue to drive up the very costs lamented at the outset of this article but it will be money well spent – after all what price peace of mind?


About Author

Avatar photo

Neil Herbert is CEO at HRComply. The firm was founded in 2009, capitalising on many years spent assisting financial institutions in delivering T&C and conduct solutions under FCA supervision. As new regulatory regimes have been introduced, HRComply has worked with its clients to develop the software to its current four-solution structure. Our focus is delivering products, content processes and support that are individually tailored to our customers’ needs. All of our development work has been conducted in collaboration with our clients, designed to meet their business requirements and address their regulatory risks Neil can be contacted by calling 020 31767 859 or emailing

Leave A Reply