Managing Conduct Risk

Kimon de Ridder

This chapter provides some guidance on managing conduct risk in a way that allows better informed risk management, more effective risk avoidance and more suitable risk transfer by individuals and organisations in the financial services sector.

It is designed as an introduction to the vast and complex subject of managing, reducing, transferring and operationalising an effective approach to conduct risk. While not claiming to be definitive, it does attempt to take some key lessons from the consequences of the financial crisis of 2007/8, and to apply these in a practical context. It also provides some clear and practical suggestions as to how to better manage conduct risk.

UNDERSTANDING AND ACCEPTING CONDUCT RISK

In analysing conduct risk, we start by looking at the landscape in which an organisation operates (eg, markets, geographies, product sets, competitors) and the corporate culture it adopts to navigate through this landscape. The former dictates the inherent risks an organisation faces as a result of its business environment, while the latter embodies the manner in which a business operates and engages with such a risk environment. In this sense, an organisation’s