The new FCA’s focus will be ‘conduct risk’, “that is, the risk that firm behaviour will result in poor outcomes for customers.” Monday’s Retail Conduct Risk Outlook set out the FSA’s analysis of future conduct risks across retail firms, classifying risks into three categories: ‘current issues’, ‘emerging risks’ and ‘potential concerns’ (developing risks or risks the FSA expects to develop).
Last year, the FSA’s Consumer Protection Strategy was for the regulator to be “more pre-emptive, and more interventionist.” Firms therefore need to be aware of the regulator’s assessment of conduct risks.
One emerging risk will be firms’ reward and remuneration practices for commission driven business. Whilst accepting the realities of business, FSA believes there are risks that incentives (both financial and non-financial) could influence staff to the detriment of consumers. The FSA is already examining reward for sales staff, with a focus on tied sales forces, to understand better how firms use sales incentives and whether these increase the risk of mis-selling. Firms should identify the influence of such schemes on staff behaviour and install adequate controls to mitigate such risks. The regulator has already cracked down on mis-selling of PPI. Given the Outlook, supervisors may look closer at other sectors’ practices.
The Outlook is not revelatory but its tone is clear; firms must assess all of the risks identified, and evidence these assessments with appropriate reviews and mitigation plans. We can safely predict that it will be no defence to say, in due course, that the FSA had not foreseen a risk but we can be sure that failure to deal with these identified risks will reflect very badly on a firm if one of the risks eventuates.