An organisation is only as good as its people. This is certainly true for firms in service industries, which rely on a positive client perception to build and maintain their business. Financial services are no different. They are built on the strength of their people, and how a firm is perceived can have ramification for its clients, its licence to operate, and even for attracting new talent. The conduct of staff is key to ensuring that a firm not only meets its obligations to its stakeholders but exceeds them. The damage done to the financial services industry both during the crisis and as a result of issues, such as the mis-selling scandals, will take decades to resolve. Given what has happened, there has been a new and continued focus by firms in the area of conduct risk management.

Conduct risk persists as a focus for the regulators. The FCA, for example, continues to see a firm’s culture, governance and behaviours as key to ensuring client confidence and an orderly market. ‘We expect firms to be able to demonstrate that their purpose, leadership, governance arrangements and approach to rewarding and managing staff do not lead to avoidable or unnecessary harm to their customers.’ FCA Business Plan 2018/19.

Traditionally, firms have tackled conduct by setting rules and policing them heavily. This is typically done

by monitoring employee behaviour such as their trading activity. Setting rules and having to police them has a number of downsides: it is expensive to put the monitoring in place; if employees know the rules, they may well circumnavigate them; and, most importantly, the environment fostered is not one that promotes trust between the employee and the firm. Setting rules and monitoring them is not only cost intensive, but also potentially ineffective in preventing misconduct issues. Rules cannot account for every scenario that an employee will encounter, so how to you ensure that someone will do the right thing, when a rule does not prescribe it?

It’s important to take a step back and examine the aim of the conduct agenda. Organisations are looking to ensure that their employees not only look after their clients, but also comply with a number of aspects: the law, regulation, the firm’s values and beliefs, its risk appetite and its strategy. Given advancements in technology, it is now time to take a look at a different approach.

Maybe technology is the answer. Technology is having a huge impact on how we work and communicate, but it also has huge potential in redefining how we manage conduct risk. The new world is characterised by people in disparate locations connected by technology and by large amounts of available data. Machine learning can...

...now be of huge help in spotting patterns and therefore aid in the detection of misbehaviour, given the vast improvements in the data landscape. Even better, predictive analytics can be used to prevent issues happening in the first place. Gathering disparate sources of information such as when someone arrives for work or their activity on social media can be paired with more ‘traditional’ sources of information. We have all seen conduct issues triggered by circumstance and heading these off before they happen is of great potential benefit. That sounds costly, right? Well it can be, but organisations using technology in this way create a huge source of data, which can also be used for commercial purposes, such as revenue generation and improved client service opportunities. Thinking creatively can make this approach not only cost effective, but also able to provide pay back.

However, can technology alone solve conduct issues? We think not. We believe that a strong, consistent organisational culture is also vital. The complexity of organisations makes this increasingly difficult to achieve, but increasingly necessary in order that individuals make the right decisions in relation to their conduct. Many organisations have mission statements and a list of values. But only when an individual feels that everyone in the organisation lives and breathes these consistently will they too adopt the right behaviour. The

phrase ‘do as I say but not as I do’ does not foster the right culture for avoiding conduct issues. Firms need to think about different approaches and there is no silver bullet. However, thinking about complimenting the usual rules with a culture which positively rewards good conduct can help in preventing misconduct issues.

Misconduct is often as a result of personal circumstances which are outside the firm’s control, but having a strong culture which means the individual trusts the organisation to be able to raise these issues and knows they will be supported in resolving them, can also go a long way to preventing issues from occurring. The corporate and social environment of a firm can have great positive or negative impacts on behaviour.

In conclusion, firms that are able to use culture to drive conduct and support this with technology are not only more likely to succeed, but will also be enabling an increased data store that can be leveraged in other ways. Good conduct can either make or break an organisation. ‘Doing the right thing’ was never more relevant in our industry that it is now.

Claire Lincoln-White : Managing Partner
Fraser Hawkes : Director
Matthew Pownall : Business Analyst

The firm’s culture should positively re-enforce good behaviors to encourage employees to take decisions in line with the firm’s values and beliefs, before misconduct arises.

Short term, often financial, successes much be balanced with longer term ethical and cultural achievements. Promotion, personal development and remuneration must be aligned in order to create sustainable, positive, behaviours.

Conflicting objectives may lead staff to act opportunistically, seeking personal incentive and failing to achieve their legal and ethical obligations.

Attitudes towards growth can negatively impact conduct risk and cloud decision making at all levels of the organisation. The ‘grow at all costs’ mentality can lead to friction and lead to misconduct.

Processes perceived as repetitive and without purpose can lead to shortcuts and short- sightedness in their execution. Staff must understand the reasons for, and the outcomes of, the tasks they perform and how those activities relate to the organisational strategy and values

Firms must invest in technology in order to prevent potential misconduct issues, whilst also detecting wrongdoing, and act appropriately and consistently when potential or actual issues are identified.