Financial Risk Management

CHAPTER 14The Big Picture of Conduct Risk

To tackle the causes and consequences of misconduct, the Financial Stability Board (FSB) published, in April 2018, a toolkit to promote incentives for good behaviour.¹ This work identifies three overarching areas for mitigating misconduct from a financial stability perspective: (1) cultural drivers of misconduct; (2) individual responsibility and accountability; and (3) the “rolling bad apples” phenomenon. To the best of our knowledge, this is the first time the “rolling bad apples” phenomenon has been considered as a factor of misconduct. This represents real progress because it prevents the movement of “bad apples” (employees with a history of misconduct) within or between firms.

Recognizing that firms—while they have a collective identity—are made up of their individuals, the Financial Conduct Authority (FCA) launched, in 2016, the Senior Managers and Certification Regime (SM&CR).² The regime was adopted by the banking sector in 2016, then by insurers and finally extended to around 47 000 FCA‐regulated firms. The certification element of the regime applies to more junior staff who are nonetheless risk‐takers. The FCA explains that the SM&CR “aims to reduce harm to consumers and strengthen market integrity by making individuals more accountable for conduct and competence”.³ The purpose is thus to embed responsibility and accountability. As part of this, the SM&CR aims to:

• Encourage staff to take personal responsibility for their ...