The Financial Conduct Authority’s (FCA) conduct agenda is neither new, nor unprecedented. Regulators today face the growing challenge of rebuilding trust but the encouraging news is that in order to do so, they are placing the customer exactly where they should be – at the heart of the business model, writes Ewen Fleming
Indeed, a raft of customer-centric regulation is a very natural consequence of the systemic failure of the global financial system in which so many customers were adversely affected. Conduct has long been a feature on the regulator’s agenda, for example with the FSA’s consultation paper, ‘Reforming conduct of business regulation’, which later developed into the conduct of business sourcebook focusing on treating customers fairly. However conduct is now back at the top of the regulator’s agenda, which is more behaviourally focused, less perceptible and driven by more personable solutions.
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Getting to grips with the conduct agenda
Firms now face a greater challenge to interpret correctly the requirements of the conduct agenda and ensure they have the suitable measures in place to demonstrate compliance. By nature, elements of a successful framework must be more harmonious in order to define and design a programme that will substantially change a strategic business model.
In recent times, financial institutions have focused on addressing the conduct-related risks associated with providing customers with services and products that meet their needs. The difficulty is that there is no ‘one size fits all’ approach. All conduct solutions must be well thought out, and tailored individually, to produce a framework suited to the company and its customers’ needs.
To achieve this, it is essential that a firm understanding of the dimensions of the conduct agenda is established. The FCA’s increased focus on the conduct agenda has compelled many to take a more proactive approach, with increasing numbers of frameworks being put in place that support organisations through their conduct journey. This is encouraging for customers who can now expect to see better customer conduct and engagement across the industry.
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By GlobalDataThe core components of the conduct agenda
Central to the conduct agenda is the ability to evaluate and measure quantitative and qualitative conduct-related risks, both retrospectively and prospectively, within an environment that holds a customer-centric culture. A typical framework addressing all key areas is as follows:
Frameworks like this ultimately help to ensure that the customer and the integrity of markets are placed at the heart of the business model. Yet it requires more than a framework to satisfy the FCA. A cultural shift that promotes good conduct outcomes is fundamentally required. A higher degree of oversight and governance around the design and innovation of products is also key, as is the assurance that organisations are completely transparent in all engagement with consumers.
The questions that must be asked
Getting to grips with the conduct agenda can be a challenge and it requires an honest evaluation of a firm’s current behavioural and cultural environment. To achieve this there are a number of direct and pertinent questions that must first be asked, in relation to each core component of the conduct agenda. These questions address the culture, customer focus, business control and assurance of the company as well as evidence of conduct initiatives and management structure, and whether preventative actions are in place.
It will be important to demonstrate how the firm has an embedded conduct culture and whether the conduct initiatives that are in place will deliver holistic change to customer outcomes. Focusing on customers, businesses need to be clear on their conduct obligations where products are sold to third parties, and ensure that the complaints handling process addresses causes of future problems.
Companies also need to ensure they have the correct policies and guidelines in place and that when customer feedback comes in, it supports their conduct risk management framework performance.
The start of a long journey
Having to adapt to regulation like this is far from unprecedented, with firms also having to rise to the challenges presented by the FSA’s Treat Customers Fairly initiative. The encouraging news is that those who engaged with the regulator early on that occasion were intimately engaged throughout the TCF journey. Adopting a similar approach here will help to ensure that firms are able to develop their consumer conduct and risk strategies in close association with the FCA’s requirements, something that in itself poses a number of benefits.
The conduct agenda holds much promise for all players in the financial industry and, at its simplest, the overall objective is to ensure financial markets function well and in their customers’ interest. That aside, there is no escaping the fact that there has been a varied response to the conduct agenda across the Financial Services spectrum. While there is no one settled method, history will testify that those acting proactively will obtain a greater ability to affect the evolution of what remains a dynamic agenda.
The very existence of the conduct agenda forces exactly that, a proactive mindset. Organisations can no longer simply wait for further direction from the regulator or simply revisit previous similar initiatives. They must instead either follow a focused review or a strategic ambition to initiate more holistic conduct-related change. Those that started early and are working with the regulator are sure to be the main beneficiaries from this new approach.
Ewen Fleming is financial services partner at Grant Thornton UK LLP
