1. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Regulatory Olympics Why Conduct Risk Matters Moderator: Sharon O’Connor-Clarke Director FICO

2. © 2014 Fair Isaac Corporation. Confidential. Regulatory Olympics: Why Conduct Risk Matters The definition of conduct risk is nebulous and specific to each institution. How do we develop industry best practices uniquely for each institution and yet acceptable to multiple regulating entities in a global financial environment? 2

3. Agenda © 2014 Fair Isaac Corporation. Confidential. ► Introduction of Panelists ► Framing the Issue ► Defining Conduct Risk ► Organizational Approach ► Product Design ► Customer Interactions ► Processes and Procedures ► Key Takeaways 3

4. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Panel Andrew Smith Partner Morrison and Foerster Kevin Moss EVP, CRO Consumer Lending Wells Fargo David Malcolm CRO Westpac, New Zealand Anna Napier Director, Presales Consulting FICO

5. © 2014 Fair Isaac Corporation. Confidential. Framing the Issue 5

6. © 2014 Fair Isaac Corporation. Confidential. ► “The risk that firm behavior will result in poor outcomes for customers” ► FSA, 2011 Retail Conduct Risk Outlook ► Product design ► Sales process ► After-sales process ► Culture UK Conduct Risk 6

7. © 2014 Fair Isaac Corporation. Confidential. ► Credit and Deposit Accounts: UDAAP ► Unfair, deceptive, or abusive acts or practices ► Insurance: trade rules and suitability ► Securities: business conduct rules and suitability ► State laws: “unconscionable” business practices US Conduct Risk: Trade Regulations 7

8. © 2014 Fair Isaac Corporation. Confidential. ► A trade practice may be unfair if it ► “Causes or is likely to cause substantial injury to consumers ► “Which is not reasonably avoidable by consumers themselves and ► “Not outweighed by countervailing benefits to consumers or to competition.” Unfairness 8

9. © 2014 Fair Isaac Corporation. Confidential. ► “There must be a representation, omission or practice that is likely to mislead the consumer;” ► “We examine the practice from the perspective of a consumer acting reasonably in the circumstances;” ► “The representation, omission, or practice must be a ‘material’ one.” ► “The basic question is whether the act or practice is likely to affect the consumer's conduct or decision with regard to a product or service.” Deception 9

10. © 2014 Fair Isaac Corporation. Confidential. ► Interferes with consumer understanding ► Takes advantage of: ► A lack of consumer understanding ► The inability of the consumer to protect his or her own interests ► The reliance of the consumer on a financial institution to look after the consumer’s interests ► “Abusiveness” is a new concept ► Little or no guidance has been provided Abusive Practices 10

11. © 2014 Fair Isaac Corporation. Confidential. ► Design ► Add-on products, credit protection, payment protection ► Sales ► Misrepresenting benefits ► Targeting consumers who will not receive a benefit ► Churning or flipping to generate new premium ► After-sales (servicing) ► Unauthorized billing ► Rebuttals, preventing cancellation ► Claims processing ► Culture ► Loss ratios What Practices Might Present Conduct Risk? 11

12. © 2014 Fair Isaac Corporation. Confidential. Defining Conduct Risk “The risk that firm behavior will result in poor outcomes for customers” FSA definition of Conduct Risk (2011) 12

13. © 2014 Fair Isaac Corporation. Confidential. Organizational Approach 13

14. © 2014 Fair Isaac Corporation. Confidential. Product Design 14

15. © 2014 Fair Isaac Corporation. Confidential. Customer Interactions 15

16. © 2014 Fair Isaac Corporation. Confidential. Processes and Procedures 16

17. © 2014 Fair Isaac Corporation. Confidential. Key Takeaways 17

18. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Sharon O’Connor-Clarke sharonoconnorclarke@fico.com Thank You! 18

19. © 2014 Fair Isaac Corporation. Confidential. Learn More at FICO World Related Sessions ► Global Stress Testing Regimes and Capital Allocation ► Ability to Pay and Client Line Management ► Big Data and Global Privacy ► Debt Collection: Staying on Top ► Model Development and Model Management ► Communications: Clearing the Regulatory Hurdles Products in Solution Center ► FICO ® Portfolio Stress Testing ► FICO ® Model Central™ Solution Experts at FICO World ► Sharon O’Connor-Clarke ► Anna Napier White Papers Online ► Satisfying Customers and Regulators; Five Imperatives Blogs ► www.fico.com/blog 19

20. © 2014 Fair Isaac Corporation. Confidential. Please rate this session online! Sharon O’Connor-Clarke sharonoconnorclarke@fico.com 20