1. ED GOODA FCII SIRM Fenchurch Training Limited
CONDUCT RISK
ED GOODA FCII SIRM
Fenchurch Training Limited
Fenchurch Training Limited

2. Fenchurch Training Limited
CONDUCT RISK
Objectives:
Understand the significance of conduct risk
Understand the FCA’s current regulatory priorities
Understand how to manage conduct risks in a compliant manner
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3. Fenchurch Training Limited
CONDUCT RISK
Welcome
Introductions
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4. Fenchurch Training Limited
CONDUCT RISK
What are we going to cover today?:
What is Conduct Risk?
Sources of Conduct Risk
FCA objectives
Current risks
Obligations of insurers and brokers
How to manage Conduct Risk within your organisation
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5. Fenchurch Training Limited
CONDUCT RISK
What is Conduct Risk?
‘Conduct Risk is any action of a financial institution that leads to customer detriment or negatively impacts market stability’ Philip Cooper, BBA Conduct Risk Seminar 2013
‘The risk that the firm’s behaviour will result in poor outcomes for customers’ FSA, 2012
‘Something that we are not exactly sure about but we are probably doing anyway!’ Anon, Gib, 2019
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6. Fenchurch Training Limited
CONDUCT RISK
Our regulators:
The Bank of England
The Prudential Regulation Authority – PRA - (primarily responsible for solvency and capital issues)
The Financial Conduct Authority – FCA - (primarily responsible for conduct)
But both the PRA and FCA are interested in insurers, brokers, MGAs and others in the fair treatment of customers
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7. Fenchurch Training Limited
CONDUCT RISK
What is Conduct Risk?
Firm Specific Definitions (Thomson Reuters, Conduct Risk Report, 2014)
‘The risk that detriment is caused to our customers, clients, counterparties and their employees because of inappropriate judgement in the execution of our business activities’
‘The risk of customer detriment due to inappropriate culture’
‘The risk of unfair outcomes to the end consumer and subsequent damage to the reputation of the firm and to the achievement of its strategic objectives’
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8. Fenchurch Training Limited
CONDUCT RISK
What is Conduct Risk?
The ingredients of efficient and fair markets:
1. Consumers
2. Competition
3. Confidence
If we do not conduct ourselves appropriately then we risk upsetting and losing our customers to competitors as confidence of our organisation is lost
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9. Fenchurch Training Limited
CONDUCT RISK
What are the sources of Conduct Risk?
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10. Fenchurch Training Limited
CONDUCT RISK
What are the sources of Conduct Risk?
These fall into 3 categories:
1. Inherent
2. Structures and Business conduct
3. Environmental
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11. Fenchurch Training Limited
CONDUCT RISK
What are the sources of Conduct Risk?
These fall into 3 categories:
1. Inherent
- Information asymmetries
- Biases, rules and thumb and mental shortcuts
- The growing importance of financial capability
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12. Fenchurch Training Limited
CONDUCT RISK
What are the sources of Conduct Risk?
These fall into 3 categories:
2. Structures and Business conduct
- Market structures
- Culture and incentives
- Conflicts of interest
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13. Fenchurch Training Limited
CONDUCT RISK
What are the sources of Conduct Risk?
These fall into 3 categories:
3. Environmental
- Policy and regulation
- Technological
- Economic and market
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14. Fenchurch Training Limited
CONDUCT RISK
What are the FCA Objectives?
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CONDUCT RISK
What are the FCA Objectives?
Before we move on to this let’s consider:
FSA – Treating customers fairly
FCA – Fair treatment of customers
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CONDUCT RISK
What are the FCA Objectives?
Strategic Objective: To ensure that the relevant market functions well.
Operational Objectives:
1. To secure an appropriate degree of protection for consumers
2. To protect and enhance the integrity of the UK financial system
3. To promote effective competition in the interests of consumers
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What are the key current risks stated by the FCA?
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What are the key current risks stated by the FCA – See FCA Risk Outlook:
Pressure on business model sustainability and strategies
Pressure to balance profitability, shareholder returns, cost base and financial soundness with good consumer outcomes
Misalignment of expectations with underlying fundamentals
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19. Fenchurch Training Limited
CONDUCT RISK
Pause for thought…
…what about the PRA…
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20. Fenchurch Training Limited
CONDUCT RISK
PRA statutory objectives:
A general objective to promote the safety and soundness of the 1,500 firms that it regulates
An objective specific to insurance firms, to contribute to the securing of an appropriate degree of protection for those who are or may become insurance policyholders
A secondary objective to facilitate effective competition
…these are the minimum requirements…
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21. Fenchurch Training Limited
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PRA also has Threshold Conditions for which the PRA is responsible – these are designed to promote safety and soundness of firms:
The firm’s head office and management must be in the UK
The business must be conducted in a prudent manner and the firm must maintain appropriate financial and non financial resources
The firm must be fit and proper and appropriately staffed
The firm must be capable of being effectively supervised
The firm must meet Threshold Conditions
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22. Fenchurch Training Limited
CONDUCT RISK
PRA and FCA require firms:
To efficiently utilise and economically use their resources
To act with proportionality: this means responsibly to consumers; and transparently
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The FCA Mission: See FCA, Our Mission 2017
Enhancing trust in markets
Improving how markets operate
Delivering benefits by a common approach to regulation
Working to prevent harm from occurring
Helping putting things right when things go wrong
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24. Fenchurch Training Limited
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The FCA approach to supervision: See FCA Mission – our approach to supervision – 2018
Principles based
Considers:
The firm’s strategy and business models
The firm’s culture and governance
Individual as well as firm accountability
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25. Fenchurch Training Limited
CONDUCT RISK
The FCA Risk Framework is based on three pillars:
1. Firm Systematic Framework
2. Event-driven work
3. Issues and products
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26. Fenchurch Training Limited
CONDUCT RISK
The FCA Risk Framework is based on three pillars:
1. Firm Systematic Framework
This assesses the firms’ conduct risk by asking the question ‘are the interests of customers and market integrity at the heart of how the firm is run?’
This entails business model and strategy analysis, embedding of the fair treatment of customers principles including governance and culture, product design, sales and transaction process, and post-sales service
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27. Fenchurch Training Limited
CONDUCT RISK
The FCA Risk Framework is based on three pillars:
2. Event-driven work
This is supervisory activity in response to issues that are emerging or have recently happened
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28. Fenchurch Training Limited
CONDUCT RISK
The FCA Risk Framework is based on three pillars:
3. Issues and products
FCA may review issues and products as they take place
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The FCA powers:
Early intervention. This includes banning products, withdrawing promotions and the publication of enforcement action
Market intelligence. The FCA invest in gathering market intelligence
FCA authorises and approves firms and individuals
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30. Fenchurch Training Limited
CONDUCT RISK
The FCA works with the PRA – they seek to assess that applicants have a good understanding of how to ensure good outcomes through:
Corporate Culture
Conduct Risk Management; and
Product Design
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31. Fenchurch Training Limited
CONDUCT RISK
The FCA promotes:
Accountability
Engagement with customers
Transparency
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32. Fenchurch Training Limited
CONDUCT RISK
FCA priorities for 2019 / 2020:
- Firms’ culture and governance
- Financial crime and anti money laundering
- Data security and resilience
- Outsourcing
- Innovation, big data, technology and competition
- Treatment of existing customers
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33. Fenchurch Training Limited
CONDUCT RISK
FCA Handbook and PRA Rulebook
These detail the rules with which you need to comply!
Contains rules and guidance on operational and conduct matters including:
High Level Standards
Senior Management Arrangements, Systems and Controls
Business Standards
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34. Fenchurch Training Limited
CONDUCT RISK
FCA has published:
The Responsibilities of Providers and Distributors of the Fair Treatment of Customers Handbook
This is of particular relevance to insurers outsourcing key functions
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35. Fenchurch Training Limited
CONDUCT RISK
The law
Insurance Act 2015
The Enterprise Act 2016
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36. Fenchurch Training Limited
CONDUCT RISK
What does this mean for insurers?
Insurers must have a properly implemented customer centric strategy which produced sustainable profit
Insurers must have a board led culture which supports the customer centric strategy and good consumer outcomes
Insurers must develop products in the interests of customers and use behavioural techniques to ensure that those customers also understand them
Insurers must take a prospective view on the products that they sell, stress testing and ensuring appropriateness for their customers
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37. Fenchurch Training Limited
CONDUCT RISK
How to manage Conduct Risk. Consider:
Culture
Corporate governance
Conflicts of interest
Reputation
Sales practices
External economic factors
Technological influences
Competitors
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38. Fenchurch Training Limited
CONDUCT RISK
Quote from The Salz review of Barclays 2012 (following the global economic crisis):
‘Regulation alone cannot address the fundamental underlying causes that led to business practices that are in the spotlight – the cultural shortcomings we found’
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39. Fenchurch Training Limited
CONDUCT RISK
Regulation is fine but inherent respect for Conduct Risk and the way that your business treats customers is good business practice.
The Amazon example – putting customers at the heart of all key decisions.
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40. Fenchurch Training Limited
CONDUCT RISK
San Francisco earthquake 1906.
Cuthbert Heath said ‘pay all policyholders irrespective of the terms and conditions of their policies’
What would the regulator think of that today?
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41. Fenchurch Training Limited
CONDUCT RISK
My Aviva story…
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42. Fenchurch Training Limited
CONDUCT RISK
Think of 2 Conduct Risk issues within your business that would make the regulator smile!
Think of 2 Conduct Risk issues within your business that would make the regulator grumpy!
What are you going to do about them?
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43. Fenchurch Training Limited
CONDUCT RISK
Case Study – Motor Insurance
Mr Patel is a policyholder of yours, living in Bradford, UK. He has reported an accident where he has driven into a lamppost, allegedly injuring 4 passengers in his vehicle. This is the third such claim he has reported in as many months. Your firm is investigating his first 2 claims for possible fraud.
How are you going to respond?
Are you going to breach any Conduct Risk rules?
Are you going to pay a fraud claim?
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44. Fenchurch Training Limited
CONDUCT RISK
Is there anything that you can do to promote Conduct Risk within your business to make your firm stronger?
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45. Fenchurch Training Limited
CONDUCT RISK
Any questions?
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46. Fenchurch Training Limited
CONDUCT RISK
If you have any problems or concerns then please contact me!
LinkedIn
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