The transition from IBORs to ARRs is one of the most significant and challenging developments the financial services industry has seen. Our recent paper, which you can download below, focuses on a critical aspect of the transition: conduct risk.
The Financial Conduct Authority (FCA) in the UK refers to conduct risk as “the risk that firm behaviour will result in poor outcomes for customers”. However, conduct risk may also result in significant repercussions for firms themselves. For example, misconduct may lead to financial loss, reputational damage, significant decline in market capitalisation, heightened scrutiny from the regulators and supervisors, and potential constraints on business growth.
Since the global financial crisis, there has been a significant focus on restoring the trust and integrity in financial markets, and one decade later, conduct risk is still at the top of regulators’ agendas. While the industry has made significant strides in restoring trust, firms still haven’t developed a proactive, comprehensive and cost-effective approach to identify, monitor and manage conduct risk across sprawling global operations.
EY anticipates the challenges to oversee conduct risk throughout IBOR transition, and the heightened focus on conduct to persist, making it imperative that firms develop sound mitigation strategies to avoid negative repercussions.
Firms should address seven key risk drivers when assessing, and addressing, conduct risk through IBOR transition:
As we can see from this list, conduct risk can arise throughout the customer journey, with product development, sales, execution and reporting being the primary risk areas. Because of this, it’s critical for firms to take a business-driven approach to identify conduct risk across the value chain.
We anticipate regulators will continue to focus on conduct risk throughout the transition, so firms must be proactive in identifying, measuring and managing conduct risk. To that end, having considered responses to their “Dear CEO” letter, the FCA published feedback noting that:
The strongest responses considered a range of conduct risks, including management of potential asymmetries of information and the potential for conflicts of interest, when forming and reviewing their transition plans.”
Please download the article below to explore this theme in further and reach out with any questions.