Market Conduct Risk – plain sailing or are you heading for the rocks?

Richard Rattue, managing director of Compli-Serve SA.

With regulators around the world including the Financial Services Board championing the fair treatment of customers, it is clear that organisations are going to need strong conduct based risk frameworks in place. The rigid rules based approach to compliance is set to give way to principles, and thus market conduct becomes a key business risk.

This was highlighted in the discussion document “Treating Customers Fairly in the Financial Sector: A Market Conduct Policy Framework for South Africa” which accompanied the Financial Sector Regulation (FSR) Bill late October last year. The document set out a framework for how the proposed Financial Sector Conduct Authority – part of Twin Peaks - will be structured and how it will operate.

The overall objective of the Financial Sector Conduct Authority is to protect financial customers by ensuring that financial institutions treat financial customers fairly; enhancing the efficiency and integrity of the financial system; and providing financial customers and potential financial customers with financial education programs, and otherwise promoting financial literacy and financial capability.

“Once established, financial advisers should expect the FCSA to be a leaner, meaner, more intrusive regulator than the present FSB,” says Richard Rattue, managing director of Compli-Serve SA, a national firm offering regulatory compliance services to the financial services industry. “The new regulator will have a new determination to ensure that the industry is delivering good customer outcomes across the product cycle. There will also be tougher punishments.”

Against this background, Compli-Serve SA has launched a Market Conduct Service, a new offering that is aligned to the changing regulatory landscape. “The compliance environment and the compliance officer role are set to shift in line with the new regulatory model, and financial services providers should thoroughly examine their market conduct risks,” says Rattue.

In a nutshell, market conduct risk is the risk to the delivery of fair customer outcomes or to market integrity. As such, it touches every part of a governance, risk and compliance (GRC) framework.

Five key risk areas

Rattue says when analysing your market conduct five key areas to look at are:

1. Carefully scrutinise your business, operations, product, sales and marketing areas for any conflicts of interest, as these can create intractable barriers to good conduct outcomes. In the UK, the Financial Conduct Authority has found that conflicts remain a huge challenge due to legacy products and business models that are hard to change.

2. Have a long, hard look at your product life cycle. Include conduct risk considerations into new product development; evaluate your sales incentives; ensure that customer on-boarding processes are fully compliant and monitor product suitability at all stages of the client relationship.

3. Watch out for any practices that could be interpreted as market abuse, and be sure to initiate a rigorous system of market abuse checks.

4. Make every effort to ensure that your sales process is fair and equitable to your clients and that what you are selling them is suitable.

5. Finally, build strong controls around your complaints and claims handling, monitor feedback across all channels and act on your learnings.

The winds of change are blowing and it is time to trim our sails accordingly.