“Embedding the right culture throughout the organisation is so important”: Dealing with Conduct Risk

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Stephen Rosling is Co-founder & Director of UK based  TCF Matters. Taking it beyond his interview of April 14, 2013 with this blog – he highlights the significance of conduct risk which tends to get lost in the dust and din of the marketplace. Conduct risk – a sum of systems, processes and most importantly people – will pose significant challenges to all markets notwithstanding whether or not they have a designated regulator in the market conduct space.

Q: Taking it from where we left it last, a poor consumer outcome amounts to poor delivery?

A: Yes, but poor delivery could be the result of poor product design, poor marketing, poor sales, poor claims handling. Poor delivery in just one of these areas can contribute towards a poor consumer outcome.

Q: Is the conduct merely about “consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products”?

A: Customers expect and deserve to get financial services and products that meet their needs from firms that they can trust. Meeting customers’ fair and reasonable expectations should be the responsibility of firms. If the culture across the financial services “industry” is one where the customer needs are not being met, then the detriment to society is considerable.

However, “access” to the right products is not just about the responsibilities of firms, it also plays into education. Society must educate its people to help them understand how different types of financial products work so they can approach negotiations and discussions from a position of knowledge and understanding and therefore reduce the risk of being manipulated by unscrupulous firms. Education is the responsibility of government.

Q: Is it more to do with the intermediaries and the carriers only vicariously?

A: No – both product manufacturers and distributors have an equal responsibility to customers. Similarly, product manufacturers and distributors have a responsibility towards each other to ensure that they can each provide evidence that customers’ interests are at the heart of their corporate cultures.

Q: Could dis-intermediation in any ways change this situation?

A: Yes and No. The only real way to address issues of poor conduct is to understand the root cause. The root cause may not be the behaviour of the intermediary. Instead, it may be a poorly designed product and literature, or poor product training provided by the product manufacturer, or poor training of claims handling staff. Getting to the root cause is the key.

Q: Could the internet transform this into a “Buyer beware” situation?

A: Yes and No. Distributors and providers remain responsible for ensuring the information they provide on-line is clear, simple to understand and not mis-leading. “Cooling off” periods also apply giving customers the opportunity to re-consider their purchase and cancel if it is not suitable for their needs.

Q: Is conduct risk really a quantum shift of the regulatory process into the qualitative zone or is it merely a justification for the creation of a market conduct supervisory process?

A: I think this is a bit of a “chicken and egg” question….what came first? The increased regulation or the poor conduct? I would argue that increased regulation and more robust market supervisory processes only come about due the uncovering of poor conduct on the part of firms. If firms were behaving in a manner consistent with the principles of fair customer treatment, then you could argue that conduct regulation may not be required. I think the underlying point here is that many observers suggest that the poor behaviour of the “large” few has resulted in more regulation for the small “many.”

Q: Does the conduct risk pose any serious governance and regulatory risk to intermediaries and risk carriers in the insurance industry?

A: This all depends on understanding what governance is already in place and assessing how effective it is. Conduct regulation has not mandated the introduction of new committees over and above those which already exist; however, the focus on conduct has raised the bar in terms of the effectiveness of Risk Committees, Boards, NED’s etc. A key part of effective governance is being able to provide strong, robust evidence to support good conduct – the days of “no news is good news” are long gone.

Q: Does all this overlap with the ethics?

A: Absolutely – ethics, integrity, transparency, are all at the heart of good conduct. Ultimately, the behaviour of a firm reflects on the behaviour of its employees which is why embedding the right culture throughout the organisation is so important – systems, processes, and most importantly, people.