Conduct Risk

Interest in the idea grew after the 2008 financial crisis, when mis-selling, rate rigging and poor treatment of customers cost firms and the public heavily, even where capital and credit were sound. Conduct risk is not tied to a single rule. It covers the many ways behaviour can go wrong: selling products that do not fit the buyer, pressure from sales incentives, hiding fees, mishandling complaints, manipulating benchmarks or abusing inside information. Drivers include pay structures, targets, culture and weak product design. Firms manage it through incentive design, product governance, monitoring of sales and complaints, training and personal accountability. Supervisors in the UK, Australia and elsewhere review it directly. Left alone, an incentive scheme that rewards the wrong sales can produce a redress bill years after the bonuses were paid.

A broker pays its advisers a bonus tied to selling a single in-house investment fund. Complaints from retirees about unsuitable advice start to rise. The compliance team's monitoring shows 70% of advised clients now hold that fund, whatever their risk profile. Management replaces the bonus with one based on client outcomes, reviews past sales and refunds clients who were poorly served.