![]() ![]() The settlement, related to charging rates of up to 633% on payday loans, would be considered unethical by many, but not all, in the financial industry. Few would argue that ‘unethical’ activities pose a risk, if only to the reputation of a firm, but of course one man’s unethical activity is another’s successful business model.įor example, Cash Converters has recently settled a class action refunding some $23 million to 37,500 of its past clients. Everyone would agree that unlawful behaviour was misconduct but the risk of unlawful activity has been formally monitored by compliance functions for many years. This definition of conduct risk is incredibly broad. But, since the fashion is for conduct risk, we can let that pass. ![]() “Conduct risk can have significant ramifications for an organisation, its shareholders, clients, customers, counter-parties and the financial services industry”.Īt this point, it is picky but necessary to point out that ASIC’s definition is not actually talking about conduct, but instead ‘misconduct’ which is described as “inappropriate, unethical or unlawful behaviour”. “The risk of inappropriate, unethical or unlawful behaviour on the part of an organisation’s management or employees”. This means that a significant number of firms don’t appear to know conduct risk when they see it!īut ASIC is made of sterner stuff and recently unveiled a definition of Conduct Risk for the firms that it regulates as However, a recent report found that some 81% of firms surveyed, including 26% of Systemically Important Financial Institutions (SIFIs), reported that they did NOT have a working definition of conduct risk. The FCA is in many respects similar to ASIC, as some of the FSA’s prudential regulatory functions were hived off to a new Prudential Regulation Authority (PRA), which plays a role similar to APRA.Īlthough the FCA has (some say is burdened by) the word ‘conduct’ in its title, the regulator has famously refused to define the term ‘ conduct risk’ instead saying that “you will know it when you see it”. In the regulatory bloodbath that followed the failures of several UK banks, such as Halifax/Bank of Scotland (HBOS), and the obvious failure of the existing banking regulator, the FSA was replaced by the Financial Conduct Authority (FCA). Recently, an obviously frustrated Greg Medcraft, head of ASIC, mooted a similar regime for Australia. The UK inquiry called for a new criminal offence of “reckless misconduct in the management of a bank”, which was enacted into law in 2013. "Those who should have been exercising supervisory or leadership roles benefited from an accountability firewall between themselves and individual misconduct, and demonstrated poor, perhaps deliberately poor, understanding of the front line”. ![]() The inquiry’s final report, called Changing Banking for Good highlighted that “the financial crisis, and multiple conduct failures, have exposed serious flaws in governance ’. Conduct risk also harks back to the past and is the latest fashion trend in regulation worldwide.Ĭonduct risk became a fashion as a result of the UK Parliament’s inquiry into the failure of the local banking sector. Hipsters are neat, serious, thoughtful, slightly retro and importantly fashionable. Whereas Credit risk is solid and sensible and Market risk is sharp-suited and dodgy, Conduct risk harks back to gentler times, when traditional values were important. Conduct risk is the hipster of the regulatory world. ![]()
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