Article

Conduct

Conduct risk management remains crucially important within financial services, with focus in the areas of customer journeys and assessment of customer affordability. In particular, the treatment of vulnerable customers should remain high on the agenda for all firms and firms should have in place appropriate processes and controls to identify and monitor the different journeys that customers might face.

In addition, in wholesale markets, there have been recent development in conduct codes and standards which provide a common set of guidelines to promote the integrity and effective functioning of the wholesale markets and also provide a helpful framework which IA can use when defining their audit scopes.

Our view of the change in IA focus from prior year to now:

Industry icons

Banking and Capital Markets

Insurance

Investment and Private Equity

5.1 Customer Journeys and Culture

Overview The FCA expects firms to consider the impact on customers throughout the lifecycle of their products and interactions. Firms are expected to evidence customer centricity by implementing business plans, products and controls that are driven by the desire to provide fair customer outcomes.

The FCA has continued to emphasise its focus on the treatments applied to vulnerable customers. Consideration is now being given to how firms establish and monitor the differing journeys these costumers may and should face.
IA's role IA have unique access across firms that facilitate the independent assessment of customer journeys from start to finish and, by focusing on the assessment of customer journeys through end-to-end outcomes testing, the real customer impact can be understood without the limitations of traditional process and controls testing. Outcomes testing often provides invaluable and unique insights into cultural weaknesses and strengths.

In particular, IA should consider:

  • Embedding audits of customer journeys within BAU audit scopes.
  • Reviewing first and second line documentation of customer interaction points and points of potential influence.
  • Identifying and challenging ‘non-standard’ customer journeys, specifically those that have variations due to identified customer vulnerability.

5.2 Retail Conduct – Customer Affordability and Vulnerability

Overview Vulnerability continues to be high on the agenda of the industry and the regulator and whilst progress has been made, there remains room for improvement. Vulnerability is a ‘state’ not a ‘trait’ – many people will experience some form of vulnerability at a point in their lives and firms have to be flexible and forward thinking in their approach to identifying these changing vulnerabilities and have operations that are designed to address them.

In June 2018 the FCA published ‘The financial lives of customers across the UK’, which summarised key findings from a survey carried out in 2017. Findings from this and earlier studies such as the Financial lives of UK Adults (Oct 2017) continue to highlight the necessity for Industry-wide focus on the improved identification and management of vulnerability.

The FCA has acknowledged that creditworthiness and affordability assessments are not an exact science, and that factors outside of normal control, such as a change in the customer’s circumstances or wider economic events, can impact affordability. However, firms are expected to have effective processes in place to eliminate lending that is foreseeably unaffordable, without having been too conservative by declining applications where credit would be affordable.
IA's role Areas of IA focus should include:

  • Assessment of new ‘digital’ channels and customer offerings via remote channels to ensure appropriate consideration of customer designs.
  • Review of business controls designed to enable a reasonable assessment of customers’ ability to repay affordably without this significantly affecting their wider financial situation.
  • Assessment of the treatment of customers through the arrears process.

5.3 Market Conduct

Overview Wholesale market conduct codes and standards have been developed to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale markets. These codes and standards are intended to promote a robust, fair, liquid, open and appropriately transparent market in which a diverse range of market participants are able to confidently and effectively transact at competitive prices that reflect available market information and in a manner that conforms to acceptable standards of behaviour. Reputable firms have been fined in recent years due to misconduct that led to serious impact on confidence in the UK financial system. In order to prevent similar misconduct and allegations in the future and to restore confidence in Fixed Income Currencies and Commodities (FICC) markets, the Financial Conduct Authority (FCA), Bank of England (BOE) and HM Treasury launched the Fair and Effective Markets review (2015); the FICC Markets Standards Board (2015); the UK Money Markets Code (2017); the FX Global Code (2017); and the Precious Metals Code (2017).

The application of wholesale market codes and standards provides a common set of guidelines and does not impose legal or regulatory obligations on market participants. However, in August 2018, the FCA released a policy statement on wholesale market codes of conduct which covers key themes around Governance, Execution, Confirmation & Settlement, Risk Management & Compliance and Information Sharing and how they apply to the FCA Principle 5 under the Senior Manager and Certification Regime (SMCR), where staff ‘‘must observe proper standards of market conduct’’. The SMCR was imposed in order to shift responsibilities of activities onto senior managers and increase the scope to Non-Executive Directors. The SMCR guideline applies to all FCA regulated firms authorised under FSMA and will extend to all investment firms, asset managers, consumer credit firms and mortgage and insurance brokers from 9 December 2019.
IA's role IA should assess whether the firm complies with the Wholesale Market Codes in the following areas:

  • Oversight of governance, lines of accountability, skills and knowledge of staff and involvement of senior management.
  • Review of adherence to relevant codes and standards.
  • Review of controls over confirmation and settlement ensuring post-trade processes are efficient, transparent and risk-mitigating.
  • Review of the robustness of control and compliance frameworks and whether they effectively identify misconduct and/or divergence from market best practice.
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