Conduct Risk Management

Transcription

1 Conduct Risk Management e xperience e xcellence e xpertise e xecution

2 marks the sp t. Those that embrace conduct risk will see benefits across all of their customer relationships and drive beneficial.02 change through their organisation.

3 Conduct Risk in Wealth Management e Conduct Risk in Wealth Management can be defined as the potential for an investment firm to cause detriment to their clients or to the industry as a whole. Activities around anti-money laundering and sanctions checking, client suitability and portfolio risk monitoring, client operations and data security fall into this category of risk. The regulatory focus on conduct risk from the FCA is not just that certain risks exist, but that firms are not necessarily geared up to defend clients or the reputation of the industry against these risks. The concern from the regulator is that business strategies are not necessarily devised with good client outcomes as integral pillars of the model and in some cases conflict directly with the interests of clients. The FCA expects the industry to be demonstrating trustworthy behaviour in their day to day conduct towards clients. There are multiple related factors that may challenge individual firms in their attitude towards the mitigation of this kind of risk including; Culture The active mitigation of conduct risk is a cultural issue for many firms particularly where strong customer focused behaviour is not woven into the fabric of the business. To what extent does the executive of the firm encourage client centric behaviour? Is the notion of treating customers fairly embedded in the culture of the organisation? In other words does the firm even believe in the value of investing in a sound conduct risk framework? Compensation A specific area of cultural focus is around the compensation of client management professionals. This is particularly relevant where individuals or teams are compensated purely on asset gathering or fee generation. The FCA are rightly concerned about corporate cultures that drive compensation solely or principally around these areas. It would be wise for Wealth Managers and Retail Investment firms to base a relevant level of compensation and remuneration around KPI s that relate to the client relationship. It is critical when deploying this approach that firms have the necessary technology in place to measure the performance of individuals, teams and branches with regards to client centric KPI s. Sustainability The lack of sustainable profitability could significantly impact the treatment of clients. Some business models may not support a strategy that tends towards an increase in the cost / income ratio and the execution of a sound conduct risk framework may not be perceived as a priority in the face of falling revenues during periods of market downturn. Can the firm adequately support essential costs in oversight and systems when revenues come under pressure? Infrastructure The capacity of systems and people to implement strong processes and procedures may be insufficient and too costly to address. Firms that have not invested sufficiently in up to date appropriate IT solutions and infrastructure may simply find it impossible to execute against a conduct risk framework albeit with the best intentions. This discussion will look at these three factors and.03 how a well architected client management solution should be implemented to support the integrity of a conduct risk mitigation strategy. It seems to be widely accepted that wealth and investment management firms should have a framework for conduct risk mitigation and fit and proper systems to manage and monitor all activity that has the potential to adversely impact clients. This will require in many cases additional investment in systems and quality personnel to achieve a robust and effective client management capability. 03

4 experience The FCA expects the industry to be demonstrating trustworthy behaviour in their day to day conduct towards clients 04 As part of this strategy, firms need to identify the various ways in which conduct risk applies to their business, devise processes and procedures that mitigate those risks and determine the key performance indicators that allow the mitigation of conduct risk to be measured and demonstrated. The execution and measurement of this strategy must be efficient and cost effective. What components of client management are crucial to implementing effective conduct risk mitigation? AML Most organisations recognise their obligations around anti-money laundering and their dealings with politically exposed or sanctioned persons. This aspect of client management is often performed as a stand-alone activity with highly manual procedures, relying heavily on an oversight function to check that it has been executed appropriately. AML, PEP and sanctions checking is a key aspect of onboarding new business and the ongoing review of the client relationship. It should be a core feature of any client management solution. Invariably wealth and investment management firms are ill equipped to handle this core business requirement efficiently particularly when the legacy of most industry leading technology solutions have been designed to support transaction processing and portfolio valuations (the traditional drivers of commission and fee based revenue) to the detriment of a true understanding of what client management represents. AML and sanctions checking has typically been tacked on to existing systems or as a manual process to keep the regulator happy rather than as an inherent business obligation. For AML to be handled effectively firms need to automate the process of statutory verification, sanctions and PEP checking and report the outcomes on a daily basis direct from their client master system without employing a small army of staff to execute the checks and cobble together operational report packs which then have to be merged with other operating activities using difficult to maintain end user computing solutions so that compliance can tick a box. Client Suitability Client suitability remains a challenge to the industry and many organisations have tried to address the key requirements as a stand-alone feature in the absence of a core client management capability. Suitability is primarily about understanding the needs of clients and demonstrating that investment advice given takes the needs and circumstances of the client into account. As more client money moves to discretionary mandates the problem is acute for firms that do not have the technology in place to support the ongoing suitability dialogue which is at the heart of new business onboarding and periodic client review. Again as with other regulatory chores, client suitability has often been rushed in as a point solution to pre-empt any potential sanctions resulting from a surprise visit from the FCA. Rarely is this key pillar of the investment process addressed as part of the foundation of the client management function. What is often missed in this approach is that the FCA is looking for more than just a robotic checklist and a confirmation from the responsible manager that everything is OK. Technology solutions need to support the integrity of the client relationship without simply taxing the responsible manager with additional administration..04 The demands of assessing suitability need to be met in a sustainable way which doesn t conflict with the firm s value proposition to the detriment of the process and the client.

5 excellence Wealth and investment management firms are ill equipped to handle this core business requirement efficiently Client Operations Most firms provide payment request services and are obviously responsible for ensuring that appropriate protection is given to client money particularly where remittances are made to third parties. Client instructions of all kind including authorisations to make payments, execute trading decisions, take instructions from 3rd parties and when and to whom to communicate sensitive information all demand a level of operational control to ensure that instructions are carried out without error or subsequent loss. In many organisations, while back office procedures may be implemented rigorously, the communication and evidencing of instructions via front office relationship managers is at best cumbersome. All client service requests should be routed through a client management solution so that front office operations can effect client instructions without generating paper or having to consult offline client files, demonstrate that internal policies on verification have been followed (for the protection of the client) and monitor the outcome which should be both accurate and timely. Client Data Data Management remains a major challenge for the industry. Data is often poorly managed, fragmented across multiple unsecure end user computing applications and is difficult to use creating unnecessary cost, inefficient processes and poor service levels as well as increasing the risk that sensitive client information is lost or exposed to unauthorised sources. This is a major brake on some organisation s ability to manage conduct risk even if the culture and the business model support it. Every distinct source of client data exacerbates this challenge and every time a new regulatory requirement arises, building another point solution which further duplicates data and procedure extends this vicious cycle. Accurate client data that is secure but easily accessible to the right person at the right time is not some unrealistic holy grail, it is a core foundation of any client centric business model. Handling client instructions using manual processes or even generic offline workflow tools misses a great opportunity to rationalise the entire client relationship from a single client master solution where client communications inbound and out, comprehensive client data and documentation is all consolidated into one efficient mechanism..0505

6 expertise It is difficult to see how a firm could execute their duty of care towards clients without a tailored client management solution 06 Technology To continue the themes referred to above, many wealth management systems utilise end of life technologies and create inefficiencies in client centric procedures. The inability of many technology solutions to handle basic workflows and modern client communications without huge cost is a serious challenge to the industry in a world where digital client interaction is increasingly important and expected by a growing proportion of the client base. Solution architects need to be brought into the conduct risk discussion and given a mandate to address these challenges from board level. Any firm that takes conduct risk seriously and enshrines superior client outcomes as a central tenet of the business needs to invest in the measurement, monitoring and execution of all client interactions while retaining profitability and operational efficiency. This can only be achieved with appropriate technology which provides the following key capabilities; A centralised client master file designed with the right data model which correctly distinguishes the person or body corporate as the legal entity that advice is being given to or from whom instructions are received A user interface that provides a single point of access to all relevant client information in the context of the specific relationship in support of giving the best advice at all times Integrated contact and activity management providing efficient communication to and from authorised persons Open architecture allowing seamless integration with core transactional and accounting systems, document management and communications infrastructure A flexible approach to data capture and form design that allows each organisation to define the right level of detail appropriate to its clients and service offerings A flexible approach to process definition and workflow enabling the efficient collaboration of tasks and data capture in the right place at the right time A powerful document generation tool to produce client facing letters, proposals and review forms so that client documentation is included in the evidence trail efficiently and securely A powerful Management Information platform that allows KPIs to be defined and measured A low risk modern technical platform and skilled resource availability Conclusion In a competitive and diversified market, customer profiles and product offerings will naturally vary between firms. Each organisation must address the specific risks associated with poor client outcomes from their actions and these risks will vary in scale and focus depending on their business model. It cannot be true that one standard client management solution would support every business model when it comes to a detailed understanding of the client relationship..06 The FCA requires that firms not only manage and monitor that risk but actively implement strategies that will mitigate against poor client outcomes. Firms need to demonstrate how they are doing this and provide evidence of how their mitigation strategy improves client outcomes. Conduct risk is not just a Risk and Compliance oversight issue. The FCA expects it to be ingrained in the culture of the organisation rather than an after the fact operation. It is difficult to see how a firm could understand or execute their duty of care towards clients without a tailored client management solution at the heart of its operation and a set of specific processes which encourage awareness of the inherent conduct risk in each business activity.

7 execution The FCA requires that firms not only manage and monitor conduct risk but actively implement strategies that will mitigate.07 against poor client outcomes.

8 hits the sp t. Wealth Dynamix Curtain Road Shoreditch London EC2A 3AR (0) e xperience e xcellence e xpertise e xecution