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Conduct Risk framework: Industry trends and challenges

Financial institutions have become quite advanced in dealing with classical risks, controlling losses and protecting their balance sheet. But contrary to any of the classical risks, Conduct Risk forces a complete change in paradigm, since it requires financial institutions to put themselves in the shoes of their customers or stakeholders, and protect their customers´ balance sheets (in some cases against the financial institution’s own short term interests). Financial institutions now need to concentrate on protecting their indirect assets, i.e. their customers.

Bank structures, technology, organisation and governance were not established and refined to deal with this new paradigm, with this being one of the reasons why the adaptation process is still in its infancy.

This document intends to provide an overview of the main components of a successful Conduct Risk management framework, as well as the agents that shape them.

  • Section 2 contains an overview of those components and how they are related to one another. A more descriptive summary is then provided for some elements, including Conduct Risk definition, organisational structure and functions, policies and procedures, risk appetite, etc.
  • Section 3 provides a more in-depth review of one of the factors that is proving especially difficult to tackle, i.e. that of Conduct Risk effective identification and measurement. This section explores the classical approach to Risk measurement, adapted to Conduct Risk (Risk Appetite, Control model, Risk and Control Self-Assessment, Risk Metrics etc…). In addition, it provides insight on how new technology and new techniques (including Big Data and Advanced Data Analytics) can be used to explore non-obvious potential Conduct Risks in a forward looking, proactive way.

Developing a robust framework for managing Conduct Risk should be a key component of the executives’ agenda. In the words of Tracey McDermott, then acting as Chief Executive of the FCA (2015), “the cost of failing to identify risks to clients, market integrity or fair competition is material. It makes good commercial sense – indeed I would say there is a commercial imperative – to manage these risks as effectively as any other risk on your balance sheet”.

For more information, click here to access the full document in pdf.


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© GMS Management Solutions, S.L., 2017. All rights reserved. The information contained on this publication is of a general nature and does not constitute a professional opinion or an advisory service. The data used in this publication come from public sources. GMS Management Solutions, SL assumes no liability for the veracity or accuracy of such data.