Financial Risk Management

CHAPTER 15Markers of Conduct Risk

Since the aftermath of the 2008 financial turmoil, there have been numerous instances of financial disasters and wrongdoings. Poor conduct and misbehaviour persist in the financial services industry. This probably explains why the UK Financial Conduct Authority (FCA) aims to reduce and prevent financial crime and fraud from happening in the first place, delivering assertive actions on market abuse.¹

This lack of progress in improving conduct indicates that the risk indicators used are inefficient at predicting such disasters, and traditional actions are unable to avoid their repetition. Each time a new financial scandal occurs, the same risk management platitudes are offered to clean up after the disaster:

• Improve compliance and risk management functions.
• Hire additional resources to ensure sufficient skills and expertise are in place to prevent financial wrongdoings.
• Invest in more effective IT systems for automated transactions monitoring.
• Create committees to improve the board's oversight of compliance issues.
• Overhaul the sanctions screening techniques to better detect suspect accounts and transactions, and so on.

The multi‐faceted nature of conduct risk explains why there is no one‐size‐fits‐all framework that can be implemented to assess if the firm is conducting its business responsibly. Figure 21 illustrates the wide‐ranging nature of conduct risk and describes different types or markers of poor conduct that still plague managements, ...