How Does Conduct Risk Manifest and What Are Its Root Causes?

Annie Searle

Ethics, policy, practice and law all play a part in a firm’s culture and its conduct. We review the challenges for both UK and US banking, identifying the three top root causes of conduct risk. How conduct risk manifests in banking and finance is presented using the example of the author’s previous employer, Washington Mutual Bank. Finally, we make recommendations on reducing misconduct by improving conditions for all employees.

INTRODUCTION

We are still on shaky ground when banking and financial institutions concern themselves with conduct risk and a single definition or a comprehensive set of standards. Despite fines, new regulations and additional training of employees, outsize risks continue to be taken, and bonuses are maintained or increased. Boards of directors have begun to see conduct risk as a large threat, though there is no one definition of it. After the 2007/8 financial crisis exposed large ethical and cultural fissures that drove high risk behaviours, more attention began to be paid to conduct risk. The Financial Services Authority (FSA) “Retail Conduct Outlook 2011” (Financial Services Authority 2011) defined it as “the risk that firm behaviour will result in

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