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26 July 2019 10 min read

Our key findings on the Financial Conduct Authority progress report on the 5 Conduct Questions

In May 2019, the Financial Conduct Authority (FCA) released a progress report on the 5 Conduct Questions (5CQ) previously raised in 2015. The purpose of the report is to shine a light on how the industry is progressing at answering these critical questions.

  • The 5 Conduct Questions highlight the following themes:​
  1. Proactive identification of risks
  2. Management of risk
  3. Processes to improve conduct
  4. Senior Management oversight
  5. Activities undermining good Conduct Risk
  • The FCA highlighted the importance for firms to focus on Culture & Governance given the reality that Conduct Risk is not just a regulatory initiative with a defined end date. The report gives the market clear indicators of what is being expected of firms and our blog provides guidance on how best firms should go about translating these findings into their conduct initiatives.

Key Findings – 5CQs

The FCA provided a significant level of detail on how firms should think about answering the key questions presented in its recent report.  

 

FCA 5CQs Take Aways

Baringa Point of View

1.Proactive Identification of Risks

• Combination of top-down and bottom-up approaches to identify risks

• Focus on mitigating good standards of behavior deteriorating over time – especially when not continuously improved

• Renewed focus on spotting risks as part of BAU, including areas which require further review

✔ Tailored risk identification exercises focused on the activities of the business & written in a language commonly understood, practical and sufficiently detailed 

 ✔ Simple & concise risk identification governance processes aimed at ensuring on-going use by the business – as opposed to compliance

2.Management of Risk

• Risk management transcends the entire firm from FO to BO and is becoming more and more front of mind for mid-level senior management

• Accountability of senior management to foster an environment for “speaking up” and inclusiveness amongst staff

• Stronger links to demonstrating conduct values in the remuneration process

 ✔ Streamlined risk capture & reporting tools & processes

 ✔ Clear articulation of risks and reporting processes across all staff levels demonstrated through BAU procedures tailored to the business

3.Processes Improvement

• More frequent, tailored surveys to assess the prevailing views amongst staff

• Employee-driven tools to enable staff to raise concerns and challenge the status quo

• Framing risk appetite statements as a series of expectations of staff and developing metrics around the desired outcomes

 ✔ Interactive surveys, polls and targeted communication / dialogue across business lines / desks with the ability to share results in real-time (and learning best practices wherever they exist in the firm)

 ✔ Inclusion of clients to understand the client experience perspective

 ✔ Focus on assessing behaviours & outcomes as opposed to event activity

4.Senior Management Oversight

• Focus on the firm’s franchise, including instances where positive conduct and behaviors thrive

• Provide clear evidence that conduct risk is a key component of strategic business initiatives in addition to BAU activities

• Focus on consistency and thoroughness of processes aimed at identifying conduct impacts (i.e. new product approvals)

 ✔ “Tone from the top” messaging translated by management to the business and function/desk 

 ✔ Practical evidencing of conduct risk being contemplated at transaction level – based on outputs from the risk ID process

 ✔ Active participation from a rotating group of participants for relevant risk governance forums

5.Undermining Activities

• Focus on “emerging risks” as part of governance arrangements for new business initiatives, product performance & strategic planning initiatives

• Active participation in industry-wide initiatives to help share best practices and industry trends (which can be used to challenge internal strategies which may run counter)

 ✔ Horizon scanning & emerging risk identification which enables senior management to commission a deep-dive on a particular topic / risk

 ✔ Continuous benchmarking across peers

 ✔ Inclusion of a conduct lead / champion across all initiatives in order to embed the core principles during project phases

To further discuss how this impacts your firm please contact Greg Pastore (Greg.pastore@baringa.com), a Director in the Finance Risk & Compliance team.