FCA reviews conduct risk among sell-side brokers

Bovill

Following its review of wholesale banks’ conduct risk frameworks, the FCA is now asking other segments of the wholesale sector, including sell-side brokers, to explain their approach to identifying and mitigating conduct risk. Given the FCA’s longstanding focus on this issue, it may well take enforcement action against firms that have failed to implement appropriate conduct risk frameworks as a result.  

What does the FCA expect?

The FCA has a very broad understanding of conduct risk as any action by an institution or individual that leads to customer detriment or has an adverse effect on market stability or competition. To promote and support internal frameworks for improving conduct, the FCA published five key conduct risk questions in 2015. Having first introduced the questions for wholesale banks and provided feedback on the responses from that segment, the FCA are now asking the same questions of firms in other parts of the wholesale sector, including sell-side brokers. Their responses will likely prove instructive for the FCA’s approach to supervising conduct risk in this part of the market.

The five conduct questions concern:

  1. the steps taken by firms to identify the conduct risks in their businesses
  2. how firms encourage individuals across their organisations to feel and be responsible for managing conduct
  3. the support given by firms to their staff to improve the conduct of their business or function
  4. how the firms’ boards and executive committees gain oversight of the conduct of business within their organisations and how they consider conduct in the strategic decisions that they make
  5. firms’ assessments of whether any other activities undertaken could undermine their strategies for improving conduct.

The FCA expects that the responses to the questions and the wider conduct risk frameworks implemented will differ across sectors and between firms. Indeed, it expects firms to develop their own conduct risk definition and conduct programmes that are tailored to the risks they face and proportionate to their size. The FCA has provided examples of potential indicators and sources of conduct risk to help. These include high return products and services, cyber security arrangements, and employee incentive schemes.

Brokers and other firms that are unable to evidence appropriate conduct risk frameworks will likely to be required to take action by the FCA who has also made clear that it intends to hold senior management to account for conduct risk failings, particularly through the Senior Managers and Certification Regime.

Developing and implementing a conduct risk frameworks

Developing and implementing an effective conduct risk programme is likely to present significant change and challenges for many brokers and other wholesale firms. And while no two frameworks will be the same, any consideration of conduct risk should include: an articulation of what conduct risk means for the firm; an assessment of its exposure to conduct risks, its appetite for those risks, the governance arrangements and controls in place to mitigate them, and the incorporation of conduct risk in its wider business strategy; and an assurance as to the ongoing monitoring and review of the framework.

How Bovill can help

Bovill can help with all aspects of your development and implementation of an effective conduct risk programme. Whether you’re a broker, an insurer or an asset manager we can do anything from helping you manage the whole project to supplying additional technical expertise to complement your own or to speed things up. Our extensive experience of conduct risk identification and management means we can streamline the process and make sure nothing is overlooked.

Get in touch with our conduct experts to find out more.

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