UK Retail Conduct Risk — A Brief History
Background
This note provides some regulatory resources to assist you with your retail conduct risk programme.
Conduct risk has been the foundation of the Financial Conduct Authority’s (FCA) regulatory approach since it took over supervision of consumer protection from the Financial Services Authority (FSA).
What is conduct risk?
The FCA itself has referred to conduct risk in the context of ‘consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products’.
It is important that firms understand the drivers of conduct risk. The FCA first highlighted these in their 2013 Risk Outlook.
These are:
1. Inherent factors: A combination of supply-side market failures (e.g., poor provision of information by firms) and demand-side weaknesses (e.g., biases), which are often exacerbated by low financial capability among consumers.
2. Structures and behaviours: Structures, processes and management (including culture and incentives) that have been designed into, and become embedded in, the financial sector, allowing firms to profit from systematic consumer shortcomings and from market failures.
3. Environmental factors: Long-running and current economic, regulatory and technological trends and changes that affect decisions made by firms and consumers
This video provides a reminder of poor conduct:
Helpful Resources from the FCA
Conduct risk is a journey and it will continue to evolve. The links below will be incredibly useful to really understand conduct risk.
Where possible I have tried to keep this in a structured chronological order so that you can see evolution in progress.
2013 — Inception
The FCA began its focus on conduct risk in this paper.
https://www.fca.org.uk/publication/business-plans/fca-risk-outlook-2013.pdf
Behaviour Economic
The FCA then published an Occasional Paper on behavioural economics. This focuses on the inherent factors and how these influence consumer decisions in buying financial services products.
2014 — Evolution of Retail Conduct Begins…
Retail Insurance
The findings of the market study confirmed that selling a product as an add-on often leads to consumers purchasing products that were of poor value and not what they needed as well as finding that the value of general insurance products is not always clear.
The FCA then followed this up with a consultation on the GAP insurance market.
This resulted in the following policy statement in June 2015
https://www.fca.org.uk/publication/policy/ps15-13.pdf
Credit Cards
The FCA were concerned that credit cards were complex products where consumers did not understand and were not able to compare the costs of products across the market.
The following year, the FCA published its interim report.
The FCA’s work then continued to look at cash savings and retirement income.
Conclusion
The above occasional papers and the market studies carried out by the FCA demonstrate practically how and what the FCA consider poor market and consumer outcomes in relation to financial services products. The FCA’s approach in this area continues to evolve.
Conduct Risk Mission?
If you need help with Conduct Risk please visit: www.theconductmind.com
or email me personally at tyler.woollard@theconductmind.com
