The first regulatory fine issued under the UK’s senior managers regime (SMR) by the Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority (PRA) has highlighted importance of addressing conduct risk. Industry opinion on this subject was gauged by the Thomson Reuters’ fifth annual survey of more than 600 compliance and risk practitioners.
- Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority (PRA) issued a fine of 1.1 million pounds for misconduct.
- A Thomson Reuters survey of global compliance and risk practitioners discovered that 70 percent believe there will be a greater focus on senior managers’ misconduct.
- Surveys reveal that a lack of training programs within companies is a significant factor that increases conduct risk.
In May 2018, following a year-long investigation, the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority issued the first fine under Britain’s new senior managers regime (SMR) for a combined 1.1 million pounds ($1.5 million) for misconduct.
Highlighting the importance of conduct risk in today’s business environment, the FCA stated the individual failed to act in accordance with “the standard of due skill, care and diligence expected of a CEO in a regulated firm.”
Global search for whistleblower’s identity
The regulatory charges stemmed from apparent attempts by the CEO in question to determine who wrote letters expressing concerns about a senior bank employee.
As the letters originated in the U.S., investigators claim the CEO sent a copy of an envelope of one of the letters to a U.S.-based bank employee “who engaged with their contacts in the U.S. to try and identify the author.”
Information passed back to the CEO gave them the date, time and location from which the whistleblower purchased postage for the letter. Thereafter, the CEO unsuccessfully used bank security to try to obtain video recordings of the individual who purchased the postage.
CEO’s actions undermined conduct risk efforts
According to the FCA, the CEO “acted unreasonably in proceeding in this way and, in doing so, risked undermining confidence in [the bank’s] whistleblowing policy and the protections it afforded to whistleblowers.”
This statement is illustrative of the importance regulators place on proper conduct and the “risk” inappropriate behaviors can place on an organization.
Broadly defined to include any action that results in harm to customers or adversely affects the financial markets, properly managing conduct risk requires that organizations implement measures to foster appropriate behaviors within the organization’s overall culture to minimize harmful outcomes to customers and/or financial markets.
Conduct risk high on corporate agendas
Such conduct risk was the focus of Thomson Reuters’ fifth annual survey of more than 600 compliance and risk practitioners around the world.
Seventy percent of respondents see regulatory focus on culture/conduct risk, such as the FCA’s scrutiny seen above, as increasing potential personal liability for senior managers.
Three-quarters of them consider conduct risk factors when discussing business strategy, with the top three key components of conduct risk reported as culture/ethics/integrity (54 percent), corporate governance/tone from the top (44 percent) and conflicts of interest (41 percent).
Training and conduct risk
Nonetheless, researchers voiced concern over the continuing number of firms who have yet to implement training programs on conduct risk, despite acknowledging the need to do so.
Likewise, three-quarters (76 percent) of respondents in yet another survey did not feel the skills currently available were at the same level as those required for compliance.
Thomson Reuters researchers point out that organizations should take heed of such findings, given that regulators view training as a key indicator that a firm is serious about its compliance obligations and has maintained and updated its staff’s knowledge and skill sets of all staff as needed.
Training on conduct to minimize risk
Organizations can help stem regulatory scrutiny with Thomson Reuters’ Conduct Risk Suite. This online training is an easy and effective way to ensure all organizational staff understand the importance of minimizing conduct risk.
Its eight courses familiarize employees with the various areas of a firm’s culture and operations that present conduct risk and explain how to mitigate such risk. Such training reduces conduct risk by encouraging ethical behavior from all individuals within the organization at all stages of business operations.